Monday December 31 2012 - Top 10 Risk Management News

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International Association of Risk and Compliance
Professionals (IARCP)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.risk-compliance-association.com

Top 10 risk and compliance management related news stories
and world events that (for better or for worse) shaped the
week's agenda, and what is next

Dear Member,

I wish you every success for 2013. Success
defined by what you achieve in the
workplace, measured in financial terms, and
of course success in your family life.

I hope your longs will keep going up and your shorts will keep coming
down 

We are in 1013… we have the Basel iii deadline… or not?

The 11 jurisdictions that will be implementing Basel III from January 1
are: Australia, Canada, China, Hong Kong, India, Japan, Mexico, Saudi
Arabia, Singapore, South Africa and Switzerland.

The 7 jurisdictions that have issued draft regulations and are working
towards final versions are: Argentina, Brazil, the European Union,

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International Association of Risk and Compliance Professionals (IARCP)
www.risk-compliance-association.com

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Indonesia, Korea, Russia and the United States.

Turkey will issue its draft regulation early next year.

Read more at Number 6 below.

Welcome to the Top 10 list.

Joy to All

With themes like, "Joy to All", "Shine,
Give, Share" and "Simple Gifts", the
holiday customs celebrated by the
Obama family in the White House.

Opinion of the European Banking Authority

The recommendations of the High-level
Expert Group on reforming the structure
of the EU banking sector

Opinion of the European Insurance and
Occupational Pensions Authority

Interim measures regarding Solvency II

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Capital Adequacy Framework
Prudential Supervision Department,
Document BS2A
Issued: December 2012

Interesting pictures from the Basel iii implementation in New Zealand

How can financial institutions achieve the
goal of early and effective internal triggers, while avoiding
negative market reaction to recovery actions taken?

Comments received on the FSB consultative document on Recovery and
Resolution Planning.

Implementation of the Basel III Framework

At its meeting on 13-14 December, the Basel Committee
on Banking Supervision discussed the progress of its
members in implementing the capital adequacy reforms
within Basel III.
The Basel Committee has been actively monitoring on a
continuing basis the progress of members in implementing the Basel III
package of regulatory reforms, as well as the implementation of Basel II
and Basel 2.5.

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Dollar Funding and Global Banks
Governor Jeremy C. Stein
At the Global Research Forum, International Finance
and Macroecomomics, Sponsored by the European
Central Bank, Frankfurt am Main, Germany

PCAOB Auditing Standard No. 16,
Communications with Audit Committees,
and Amendments to other PCAOB
Standards Approved by SEC

Effective for Fiscal Years Beginning On or After Dec. 15, 2012
Washington, D.C., Dec. 20, 2012

Report to Congress on
Assigned Credit Ratings
As Required by Section 939F of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act

Interesting Parts

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Can you program a radio to
dominate the spectrum?

New DARPA challenge is looking
for innovative approaches to
adaptive, software-based radio
communications

Radios are used for a wide range of tasks, from the most
mundane to the most critical of communications, from
garage door openers to military operations.

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Joy to All

With themes like, "Joy to
All", "Shine, Give, Share"
and "Simple Gifts", the
holiday customs celebrated
by the Obama family in the
White House.

Visitors during the holiday
season have been enchanted by the
representations of the First Dog, Bo, who has
been recreated using pipe cleaners, trash bags,
buttons, pompoms and even chocolate.

Statement by the President on the Fiscal Cliff

THE PRESIDENT: Good afternoon, everybody.

Over the last few weeks I've been working with leaders of both parties on
a proposal to get our deficit under control, avoid tax cuts -- or avoid tax
hikes on the middle class, and to make sure that we can spur jobs and
economic growth -- a balanced proposal that cuts spending but also asks

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the wealthiest Americans to pay more; a proposal that will strengthen the
middle class over the long haul and grow our economy over the long haul.

During the course of these negotiations, I offered to compromise with
Republicans in Congress.

I met them halfway on taxes, and I met them more than halfway on
spending.

And in terms of actual dollar amounts, we're not that far apart.
As of today, I am still ready and willing to get a comprehensive package
done.

I still believe that reducing our deficit is the right thing to do for the
long-term health of our economy and the confidence of our businesses.

I remain committed to working towards that goal, whether it happens all
at once or whether it happens in several different steps.

But in 10 days, we face a deadline.

In 10 days, under current law, tax rates are scheduled to rise on most
Americans.

And even though Democrats and Republicans are arguing about whether
those rates should go up for the wealthiest individuals, all of us -- every
single one of us -- agrees that tax rates shouldn’t go up for the other 98
percent of Americans, which includes 97 percent of small businesses.

Every member of Congress believes that.

Every Democrat, every Republican.

So there is absolutely no reason -- none -- not to protect these Americans
from a tax hike.

At the very least, let’s agree right now on what we already agree on. Let’s
get that done.
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I just spoke to Speaker Boehner and I also met with Senator Reid.

In the next few days, I've asked leaders of Congress to work towards a
package that prevents a tax hike on middle-class Americans, protects
unemployment insurance for 2 million Americans, and lays the
groundwork for further work on both growth and deficit reduction.

That's an achievable goal.

That can get done in 10 days.

Once this legislation is agreed to, I expect Democrats and Republicans to
get back to Washington and have it pass both chambers.

And I will immediately sign that legislation into law, before January 1st of
next year. It’s that simple.

Averting this middle-class tax hike is not a Democratic responsibility or a
Republican responsibility.

With their votes, the American people have determined that governing is
a shared responsibility between both parties.

In this Congress, laws can only pass with support from Democrats and
Republicans.

And that means nobody gets 100 percent of what they want. Everybody
has got to give a little bit, in a sensible way.

We move forward together, or we don't move forward at all.

So, as we leave town for a few days to be with our families for the holidays,
I hope it gives everybody some perspective.

Everybody can cool off; everybody can drink some eggnog, have some
Christmas cookies, sing some Christmas carols, enjoy the company of
loved ones.

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And then I'd ask every member of Congress while they’re back home to
think about that.

Think about the obligations we have to the people who sent us here.

Think about the hardship that so many Americans will endure if Congress
does nothing at all.

Just as our economy is really starting to recover and we're starting to see
optimistic signs, and we've seen actually some upside statistics from a
whole range of areas including housing, now is not the time for more
self-inflicted wounds -- certainly not those coming from Washington.

And there’s so much more work to be done in this country -- on jobs and
on incomes, education and energy.

We're a week away from one of the worst tragedies in memory, so we’ve
got work to do on gun safety, a host of other issues.

These are all challenges that we can meet.

They’re all challenges that we have to meet if we want our kids to grow up
in an America that’s full of opportunity and possibility, as much
opportunity and possibility as the America that our parents and our
grandparents left for us.

But we’re only going to be able to do it together.

We’re going to have to find some common ground.

And the challenge that we’ve got right now is that the American people
are a lot more sensible and a lot more thoughtful and much more willing
to compromise, and give, and sacrifice, and act responsibly than their
elected representatives are. And that’s a problem.

There’s a mismatch right now between how everybody else is thinking
about these problems-- Democrats and Republicans outside of this town
-- and how folks are operating here.
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And we’ve just got to get that aligned. But we’ve only got 10 days to do it.

So I hope that every member of Congress is thinking about that.

Nobody can get 100 percent of what they want.

And this is not simply a contest between parties in terms of who looks
good and who doesn’t.

There are real-world consequences to what we do here.

And I want next year to be a year of strong economic growth.

I want next year to be a year in which more jobs are created, and more
businesses are started, and we’re making progress on all the challenges
that we have out there -- some of which, by the way, we don’t have as
much control over as we have in terms of just shaping a sensible budget.

This is something within our capacity to solve.

It doesn’t take that much work. We just have to do the right thing.

So call me a hopeless optimist, but I actually still think we can get it
done.

And with that, I want to wish every American a merry Christmas. And
because we didn’t get this done, I will see you next week.

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“This year’s theme is ‘Joy to All.’

It celebrates the many joys of the
holiday seasons: the joy of giving
and service to others; the joy of
sharing our blessings with one
another; and, of course, the joy of
welcoming our friends and families
as guests into our homes over these
next several weeks.”

First Lady Michelle Obama

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Opinion of the European Banking
Authority on the recommendations of the
High-level Expert Group on reforming
the structure of the EU banking sector

Introduction and legal basis

1. The High-level Group on reforming the structure of the EU banking
sector was set up by the European Commission in February 2012 with a
mandate to determine whether, in addition to ongoing regulatory
reforms, structural reforms of EU banks would strengthen financial
stability and improve efficiency and consumer protection, and if that is
the case, to make recommendations as appropriate.

2. On 2 October 2012, the Group published its final report (“the Report”)
which recommends actions in the five following areas:

a. Mandatory separation of proprietary trading and other high-risk
trading activities when these activities are material within a group

b. Possible additional separation of activities conditional on the recovery
and resolution plan

c. Possible amendments to the use of the bail-in instruments as a
resolution tool

d. Review of the capital requirements on trading assets and real estate
related loans

e. Strengthening banks’ governance and controls

3. The EBA competence to deliver an opinion is based on Article 34(1) of
Regulation No 1093/2010 of the European Parliament and of the Council
of 24 November 2010 establishing a European Supervisory Authority
(European Banking Authority) amending Decision No 716/2009/EC and
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repealing Commission Decision 2009/78/EC1. In accordance with
Article 14(5) of the Rules of procedure of the EBA, the Board of
Supervisors has adopted this opinion.

General comments

4. The EBA welcomes the contribution of the Report to the discussion on
possible initiatives to strengthen the regulatory framework of the EU.

The introduction of structural measures to complement the existing and
forthcoming regulatory reform is being considered in several Members
States.

The EBA emphasises the need to ensure consistency across the Single
Market in order to foster level playing field and to avoid regulatory
arbitrage.

Otherwise, there is a risk that the development of structural measures at
the national level ends up supporting a ring fencing of national
establishments and contributes to a segmentation of the Single Market.

The EBA stands ready to contribute to the design of an EU framework
and to monitor possible flexibility left to national authorities.

5. The EBA emphasises the need to strike an appropriate balance in the
trade off between preserving the core features of the traditional European
model of universal banking and strengthening the resilience of the
financial sector by segregating riskier capital market business into a
separate legal entity.

The proposals put forward by the High Level Group are mindful of
balancing these two objectives by preserving the benefits of universal
banking thanks to a separate legal entities approach within a single
banking group rather than by adopting a complete separation of
activities.

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However, only a thorough impact assessment could provide an evaluation
of the potential benefits of such measures on the European banking
sector and on the real economy and to compare them with their costs.

In conducting this impact assessment, the EBA suggests that particular
attention should be devoted to the impact of the increase in the cost of
capital and funding for trading firms to assess whether this would be
commensurate to the objectives of the reform and would not create
unintended adverse consequences.

The possible consequences on the structure of the market for investment
banking services in the EU should also be assessed.

6. The EBA would also like to stress the need to maintain full consistency
between the legislation on bank recovery and resolution and any
additional structural measures.

As the draft Directive on Bank Recovery and Resolution already provides
strong incentives to modify business models away from complex firm
structures, which would not allow for a smooth management of a crisis,
the assessment of additional structural measures should focus on the
incremental net benefit of a legal obligation to segregate trading
activities.

Within this framework, it will be appropriate to consider that in the
absence of a legal segregation, as proposed by the High Level Group, it
might be extremely difficult for a supervisory authority to exercise its
discretionary judgment and impose a break up of a universal bank,
especially if other competent authorities are not responding with similarly
harsh measures in comparable cases.

Some common, EU-wide legal constraints could be helpful in supporting
the supervisory work on bank resolvability.

This consideration, however, also points to the need to maintain an
appropriate sequencing and coordination of the different legislative
measures.

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7. Implementation of any structural measures, such as a legal separation
of risky financial activities from deposit-taking within a group, would
need to be reasonably enforceable by competent authorities.

Clear and fair criteria must be established in order to determine situations
where this separation is mandatory, bearing in mind that the purpose of
this breakdown is to protect the socially most vital parts of the banking
group and to limit the taxpayers’ stake in the trading parts of the group.

8. Any structural measure should not be viewed as a substitute for
adequate supervision.

The crisis showed that any form of banking business carries a high
potential for systemic risk.

This is true for liquidity and maturity transformation in traditional
banking as well as for complex derivatives transactions conducted on
banks’ accounts in the trading book.

All types of activities generating systemic concerns should be subject to
intensive supervision.

The fact that certain business is done on wholesale markets, between
parties who should be able to properly assess the risks stemming from the
transactions, and does not entail an immediate impact on retail business
and payment activities is not a sufficient reason to reduce supervisory
coverage.

During the past 20 years, major operational losses faced by individual
institutions occurred from activities considered non-risky, where risk
management was inadequate.

9. These measures should be accompanied by review clauses and
macro-prudential monitoring.

Since structural measures are easily eroded via financial innovations, they
should be accompanied by arrangements for swift review, while
macro-prudential authorities should be requested to closely monitor the
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migration of risks to non regulated financial intermediaries and the
overall effect on the build up of risks in the financial system as a whole.

One should avoid that such structural breakdown unintentionally feeds
the development of the shadow banking system.

10. Beyond such structural measures, the Report also “strongly supports
the use of designated bail-in instruments within the scope of the BRR
Directive, as it improves the loss-absorbency of the bank”.

It calls for a clear definition of the position of bail-in instruments in the
hierarchy of commitments, which would facilitate the pricing and trading
of such instruments and the resulting market discipline and monitoring.

11. The EBA also considers that there is a need to further develop the
bail-in framework in the BRR Directive in order to improve its
predictability.

As already expressed in the 3 March 2011 Opinion on “Technical Details
of a Possible EU Framework for Bank Recovery and Resolution”, the
EBA would rather support a two tier regime where bail-in requirements
would be applied explicitly first to a certain category of debt instruments
(targeted approach) and, if this proved insufficient, only in a second stage
and within a proper administrative procedure for resolution to the
remaining classes of debtors (comprehensive approach).

Bail-in needs to be carefully designed in order to ensure legal and
operational certainty and prevent the risk that its implementation impair
the pricing mechanism of banks’ liabilities and cause unintended
consequences, triggering destabilising effects on other financial
institutions and the financial stability as a whole.

In the absence of a targeted approach, there is a risk that a wide ex ante
scope of bail-in instruments turns out to be limited once the resolution
occurs.

12. As noted in the abovementioned EBA Opinion, requiring credit
institutions to issue and hold a minimum percentage of their liabilities as
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“bail-inable” debt instruments, besides ensuring a minimum
loss-absorbing capacity, has also the advantage to create large market
volumes, which in turn will provide market participants with an incentive
to standardise contracts, and rating agencies to focus properly on rating
such debt instruments.

13. The EBA believes that clear requirements for a minimum amount of
loss-absorbing liabilities, calibrated according to a thorough impact
assessment and combined with a comprehensive statutory approach to
bail-in would ensure strict adherence to creditors’ hierarchy and would be
appropriately targeted, while preserving the essential features of a
comprehensive statutory approach.

Specific comments

14. On the mandatory separation of proprietary trading activities and
other significant trading activities’ proposal of the Report, significant
work on the calibration of the trigger for mandatory separation will need
to be carried out before any translation into the EU regulatory framework.

The Report adopts a two-stage approach based firstly on trading book
and available for sale-related quantitative indicators to set a preliminary
view on which banks can be subject to separation and secondly, a
supervisors’ assessment based on more complex criteria which would
eventually determine the need for separation.

The EBA stands ready to contribute to possible Commission’s work on
the calibration of the threshold to be applied by National supervisors in
order to ensure a clear identification of the banks for which a ring-fence of
trading activities is relevant.

As a preliminary remark, it should be underlined that some of the assets
which are referred to for the first threshold may be similar to the assets
required for the Liquidity Coverage Ratio, which may not be satisfactory,
if one wants to avoid conflicting regulations.

Therefore, the EBA suggests that available for sale components of
liquidity portfolios are excluded from the first threshold calculation.
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To ensure a consistent application of these thresholds in the Single
Market, there should be a need for technical standards to adopt a
common definition and accounting framework.

Moreover, the EBA could provide some mediation at the EU level to
ensure consistent application across the EU.

15. Regarding the activities to be ring-fenced, the Report introduces some
exceptions by stating that “the provision of hedging services to
non-banking clients which fall within narrow position risk limits in
relation to own funds, to be defined in regulation, and securities
underwriting and related activities do not have to be separated”.

To ensure a consistent application of such exceptions across the EU, the
EBA stands ready to contribute to the definition of these hedging
services.

16. According to the Report, “transfer of risks or funds between the
deposit bank and the trading entity within the same group would be on
market-based terms and restricted according to the normal large
exposures rules on interbank exposures”.

In such organisation, there will be a need for clear rules on the transfer of
risks between the “deposit bank” and the “trading entity” in a bank
holding company.

However, the abovementioned restriction according to the normal large
exposures rules on interbank exposures is not applicable in the current
framework since the treatment of credit institutions’ intra-group
exposures is not harmonised.

Article 113 (4)(c) of the 2006/48 Directive offers Member States the
possibility to “fully or partially exempt exposures, including
participations or other kinds of holdings, incurred by a credit institution
to its parent undertaking, to other subsidiaries of that parent undertaking
or to its own subsidiaries, in so far as those undertakings are covered by
the supervision on a consolidated basis to which the credit institution
itself is subject”.
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An update of the large exposures regulation – which is foreseen in the
Report – will therefore be necessary to implement these rules on risk
transfer between a deposit bank and a trading entity within a group.

17. Moreover, any financial support between the deposit bank and the
trading entity will have to be ruled by clear and transparent principles that
would go beyond simple reference to market price.

The EBA stands ready to provide its expertise in setting up such
standards and monitor their correct application throughout the EU.

18. The EBA also underlines that the draft Directive establishing a
framework for the recovery and resolution of credit institutions and
investment firms (“BRR” Directive) introduces measures on intra-group
financial support.

Thus, Institutions operating within the same group should be able to
enter into agreements to provide financial support to other entities within
the group experiencing financial difficulties.

Such release of the legal restrictions for intra-group financial support
within a group would have to be implemented consistently with
intra-group financing restrictions between “deposit” and “trading”
institutions.

19. Regarding additional functional separation of activities in the context
of recovery and resolution plans, the EBA stands ready to promote a
consistent application of recovery and resolution plans’ content and
assessment across the EU.

To fulfil this objective, the EBA should set binding technical standards to
be applied by national supervisors (including the ECB) and resolution
authorities.

The EBA should then have a mandate to conduct a rigorous review to
check that consistency has been achieved.

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To ensure a consistent application of these standards on recovery and
resolution, such ex post review will be a crucial component.

20. As already mentioned in the general comments, the Report suggests
possible amendments to the use of the bail-in instrument as a resolution
tool.

The EBA agrees that “such debt should be held outside the banking
system” which would require appropriate mechanisms in order to prevent
the acquisition of such securities by the banking sector (e.g. introducing
a particular risk-weight for such debt).

Moreover, the EBA welcomes the suggestion to use bail-in instruments

(i) In remuneration schemes for top management and

(ii) By introducing a mandatory share of variable remuneration into
bail-in bonds.

Such measures could be adopted in a swift manner and may efficiently
contribute to the overall efforts to reduce moral hazard and restore
confidence between the public and the banking system.

21. As regards the recommendations to improve the robustness of the
trading book capital requirement by

i) Setting an extra, non-risk based, capital buffer requirement for all
trading book assets; and/or by

ii) Introducing a strict floor risk-based requirement, the EBA understands
that the Group’s initiative is brought to the general review of the capital
requirements in the trading book conducted under the aegis of the Basel
Committee which would bring a global answer to this particular issue.

The EBA considers that such extra capital buffer may be justified with
reference to market risk and operational risk, but one should underline
that a major driver for bringing down banks during the crisis (or at least

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generating systemic risk that justified public bail-outs) has been
counterparty risk, especially in derivatives transactions.

Any additional capital requirement related to trading assets should,
therefore, also refer to counterparty risk and explicitly mention derivatives
transaction together with trading operations in order to capture the
underlying risk generated by these activities.

22. Finally, the Report calls for a consistent application of loan-to-value
and loan-to-income ratio in all member states, which is strongly
supported by the EBA.

To ensure this consistency, ex post monitoring should be conducted by
microprudential and/or macroprudential authorities across the EU.

This opinion will be published on the EBA’s website.

Andrea Enria
Chairperson
For the Board of Supervisors

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Opinion of the European Insurance and
Occupational Pensions Authority of on
interim measures regarding Solvency II

Legal Basis

1. This opinion is issued under the provisions of Article 29(1) (a) of
Regulation (EU) No 1094/2010 of the European Parliament and of the
Council of 24 November 2010 (hereafter the ‘Regulation’) in conjunction
with Directive 2009/138/EC of the European Parliament and the Council
of 25 November 2009 on the taking-up and pursuit of the business of
Insurance and Reinsurance (hereafter Solvency II Directive).

2. As established in Article 29(1) (a) of the Regulation, EIOPA shall play
an active role in building a common Union supervisory culture and
consistent supervisory practices, as well as in ensuring uniform
procedures and consistent approaches throughout the Union.

3. As established under Article 1 (6) of the Regulation EIOPA shall
contribute to improving the functioning of the internal market, including
in particular a sound, effective and consistent level of regulation and
supervision, (Art. 1(6)(a)) preventing regulatory arbitrage and promoting
equal conditions of competition (Art. 1(6)(d)). EIOPA shall also
contribute to enhancing consumer protection (Art. 1(6)(f)).

4. As established under Article 8 (1) of the Regulation EIOPA’s task is to
contribute to the establishment of high quality common regulatory and
supervisory standards and practices (Art. 1(6)(a)) and to contribute to the
consistent application of legally binding Union acts ensuring consistent,
efficient and effective application of the acts referred to in Art. 1 (2) of the
Regulation (Art. 1(6)(b)).

The fact that the Solvency II Directive has entered into force, means that
it is considered “Union law”, but it will not have legally binding effect
until after the date of its application, which is currently set to 1
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January 2014 in accordance with the ("Quick Fix") Directive 2012/23/EU
of 12 September 2012.

5. This opinion is addressed to the national competent authorities
represented in EIOPA’s Board of Supervisors.

Context

6. During the Board of Supervisors (BoS) meeting of September 2012,
Members expressed their strong concerns with respect to the current
status of the OMNIBUS II negotiations which might further delay the
application of the Solvency II Directive.

7. In its explanatory memorandum to the Proposal for the Solvency II
Directive the European Commission states:

“The present solvency rules are outdated.

They are not risk sensitive, they leave too much scope to Member States
for national variations, they do not properly deal with group supervision
and they have meanwhile been superseded by industry, international and
cross-sectoral developments.

This is the reason why a new solvency regime, called Solvency II, which
fully reflects the latest developments in prudential supervision, actuarial
science and risk management and which allows for updates in the future
is necessary.”

8. In addition, in the absence of a final agreement on Solvency II,
European supervisors may be forced to develop national solutions in
order to ensure sound risk sensitive supervision.

Instead of reaching consistent and convergent supervision in the EU,
different national solutions may emerge to the detriment of a good
functioning internal market.

9. The BoS mandated the Chair of EIOPA to write to the OMNIBUS II
trialogue parties setting out its concerns.
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In his letter, dated 4 October 2012, the Chair not only expressed the need
for a stable and reliable time plan but also the need to reflect on an earlier
implementation of some Solvency II elements.

{Note: Do you remember the letter?}

Undertakings which are well-governed and which, in particular, measure
correctly, mitigate and report the risks which they face will be more likely
to be prepared for the new regulatory framework and act in the interests of
policyholders.

10. In that regard it is of key importance that there will be a consistent and
convergent approach with respect to the preparation of Solvency II.

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In the run-up to the new system the following key areas of Solvency II
need to be addressed in order to ensure proper management of
undertakings and to ensure that supervisors have sufficient information at
hand.

These are the system of governance, including risk management system
and a forward looking assessment of the undertaking's own risks (based
on the ORSA principles), pre-application of internal models, and
reporting to supervisors.

11. EIOPA sets out below its expectations for the national competent
authorities.

These actions are consistent with EIOPA’s obligation to foster
supervisory convergence.

12. EIOPA will, taking into account its objective under Article 1 Para 6
and its tasks and powers under Article 8 of the Regulation, contribute to
the consistent efficient and effective preparation of supervisors and
insurance and reinsurance undertakings for the application of the
Solvency II Directive.

13. As a follow-up to the opinion, and by making use of its powers under
Article 16 of the Regulation, EIOPA will publish guidelines addressed to
national competent authorities on how to proceed in the interim phase
leading up to Solvency II.

14. Within 2 months of the issuance of the guidelines, each national
competent authority shall confirm whether it complies or intends to
comply with the guidelines.

In the event that a national competent authority does not comply or does
not intend to comply, it shall inform EIOPA, stating its reasons.

15. EIOPA will publish the fact that a national competent authority does
not comply or does not intend to comply with that guideline.

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Proposed actions by national competent authorities
16. As part of the preparation for Solvency II, national competent
authorities should put in place, starting on 1 January 2014 certain
important aspects of the prospective and risk based supervisory approach
to be introduced in order to address the concerns set out above.

17. National competent authorities are expected to ensure that insurance
and reinsurance undertakings have in place an effective system of
governance which provides for sound and prudent management of the
undertaking and an effective risk management system including a
forward looking assessment of the undertaking's own risks (based on the
ORSA principles).

18. National competent authorities are expected to ensure that insurance
and reinsurance undertakings have in place an effective risk-management
system comprising strategies, processes and reporting procedures
necessary to identify, measure, monitor, manage and report, on a
continuous basis the risks, at an individual and at an aggregated level, to
which they are or could be exposed, and their interdependencies.

19. National competent authorities are expected to review and evaluate
with respect to the undertakings concerned the system of governance, the
assessment of the risks which those undertakings face or may face and
the assessment of the ability of those undertakings to assess those risks
taking into account the environment in which the undertakings are
operating.

20. Through internal model pre-application processes, national
competent authorities engaged in pre-application of internal models
should continue to work with undertakings to form a view on
undertakings’ degree of readiness for internal model applications, and
should also follow subsequent evolutions to the internal model
framework.

21. National competent authorities are encouraged to request all the
information necessary for applying a prospective and risk based
supervisory approach.
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22. National competent authorities are expected to ensure that the
requirements mentioned above are applied in a manner which is
proportionate to the nature, scale and complexity inherent in the business
of the insurance and reinsurance undertaking.

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Capital Adequacy Framework
(Standardised Approach)
Prudential Supervision Department,
Document BS2A,

Interesting pictures from the Basel iii implementation in New Zealand

Introduction to framework

This document sets out the methodology to be used by locally
incorporated registered banks that have adopted the standardised
approach for calculating capital requirements.

This methodology is to be used for the purposes of determining these
banks’ compliance with conditions of registration relating to capital and
for disclosing information about capital.

Starting from reciprocal cross holdings…

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SPVs…

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Only 3 credit rating agencies…

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Securitization…

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Capital Adequacy Framework (Internal Models Based
Approach)
Prudential Supervision Department, Document BS2B

This document sets out the methodology to be used by locally
incorporated registered banks that have been accredited to use the
internal models based approaches to calculating capital ratio
requirements.

This methodology is to be used for the purposes of determining these
banks’ compliance with conditions of registration relating to capital and
for disclosing information about capital.

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How can financial institutions achieve the
goal of early and effective internal triggers, while avoiding
negative market reaction to recovery actions taken?

Comments received on the FSB consultative document on Recovery and
Resolution Planning

On 2 November 2012, the Financial Stability Board (FSB) published its
consultative document on Recovery and Resolution Planning. Interested
parties were invited to provide written comments by 7 December 2012.

Some of these comments to the question: How can financial institutions
achieve the goal of early and effective internal triggers, while avoiding
negative market reaction to recovery actions taken? are available below.

UBS

As part of regular risk management,
firms should have early warning signals
which, when breached, could trigger the initiation of preventive actions.

These early warning indicators serve to monitor disruptions (minimum to
severe) and ensure appropriate management attention and action before
going in a recovery situation.

The use of early warning signals will allow firms to respond to threats
prior to them becoming so severe as to trigger a formal recovery response.

With respect to recovery measures, senior management of firms and
regulators need to ensure that communication is sufficiently forthcoming,
factual, clear and transparent to avoid unwarranted reactions by market
participants.

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Credit Suisse

It is essential that triggers are viewed as
'soft' triggers, i.e. trigger breaches lead to
predetermined escalation and information
process up to senior management level within the firm.

Recovery triggers should not lead to automatic, compulsory reactions as
this may jeopardize flexibility to develop a discretionary response in
accordance with the specifics of the situation and is counterproductive
in a stress scenario.

We also agree that this can also help avoid awkward situations where an
ill-timed public disclosure might be forced by the existence of hard
triggers, which could exacerbate distress.

British Bankers’ Association
It is important that the recovery plan and its
trigger framework enable the G-SIFI to identify
the need to take action before the market does.

The metric escalation governance and escalation
process must also be supported by a realistic communication plan that
seeks to avoid unhelpful reputational impacts in the markets that may
exacerbate the situation, and that remedial action is implemented fully
and without delay.

It is absolutely vital however that the recovery programme and its
associated metrics should be treated as highly confidential by all those
party to the information therein and that neither the bank nor any of the
authorities with access to it should disclose it in any way.

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Deutsche Bank

The question should be focused on the execution
of recovery actions rather than triggers.

Internal triggers documented within an
institution’s recovery plan – whether they are
early warning indicators or triggers as to invoke
recovery governance procedures – should be
subject to strict confidentiality.

Confidentiality provisions should apply to the preparation and
implementation of any aspect of the recovery planning process.

There should be no expectation that the process of recovery planning
affects the criteria or level of expectation used to apply listing and market
disclosure rules.

Interesting parts from Deutsche Bank’s Response to FSB
Consultative Document on Recovery and Resolution Planning:
Making the Key Attributes Requirements Operational

Triggers vs. early warning indicators:
It should be very clear that there is a difference between recovery triggers
and early warning indicators.

We contend that some of the quantitative triggers listed on page 8 should
be considered to be early warning indicators rather than recovery triggers
since they don’t reflect the financial health of an institution.

Examples include GDP forecasts and three-month LIBOR.

When considering the appropriateness of triggers, on page 9 the FSB has
pointed out that some firms do not have specific recovery triggers and
also mentions that between three and seven triggers are the norm.

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It is not necessarily the case that there will be an ideal number of triggers
which can be identified for the industry as a whole and therefore trying to
determine this may be counterproductive.

Triggers and the link to risk management:
The proposed guidance mentions that triggers should be aligned but
shouldn’t be limited to existing triggers, which we take to mean those
already embedded within the bank’s risk management framework - for
example those linked to the bank’s risk appetite and regulatory
requirements.

We recommend that instead the guidelines should refer to situations
“where existing triggers are not sufficient” in order to reflect the work
that has already been done and to avoid the assumption that there must
be a suite of separate triggers.

Assuming authorities have reviewed the arrangements and consider that
the firm is able to take into account the various warning signs and
indicators, the firm should not automatically be expected to have a certain
number of supplementary triggers over and above those already being
used.

The focus of the assessment should be to understand how triggers are
combined and supported by high quality management information.

Group-level planning:
We recommend the FSB include in the guidance the explicit expectation
that recovery planning is done at group level and that there should not be
a proliferation of local level requirements.

In the proposed guidance there is no clear statement about the
appropriateness of local frameworks.

If these are ultimately implemented, there is a need for guidance about
how authorities and firms should coordinate.

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Scenario design:
We support the approach taken by the FSB and consider the elements
listed on page 9 to be comprehensive.

We agree that conceptually the practice of reverse stress-testing may
provide a helpful perspective and is good practice within risk
management.

Any requirements for reverse stress-testing should be in this context and
used to support recovery planning, but should not be a mandatory part of
the framework.

Definition of triggers:
We believe trigger definition should be at the discretion of the institution
and that supervisors should work with them to identify the right metrics
for each bank.

This is highly dependent on the risk management framework and risk
profile of the institution and so should be considered on a firm-specific
basis.

Recovery triggers should reflect the institution’s financial health in terms
of sufficient liquidity and capitalisation in order to prevent a near-default
or default situation of the firm.

Examples of such recovery triggers are the Common Equity Tier 1 ratio,
the stressed net liquidity position as well as the firm’s economic capital
adequacy.

These universally apply to all types of financial institutions irrespective of
their portfolio composition.

To identify triggers, we have employed guiding principles and this type of
approach may be helpful to reflect in the guidance.

We believe that appropriate triggers should be:
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- integrated into standard risk management practices;
- transparent, with unambiguous definitions and good internal
understanding;
- related to the bank’s stress-testing processes with metrics embedded
in that process; and
- relevant to the Recovery Plan and viability of the firm.

Quantitative triggers:
Referring to the potential quantitative triggers listed we would make the
following observations:
- The proposed guidance refers to the renewal of wholesale funding and
withdrawal of deposits and other funding.
We recommend considering these risk types separately.
For example, in the case of liquidity risk, rather than looking purely at
renewal of wholesale funding or deposit activity (which would be very
bank-specific in terms of relevance) supervisors should be
encouraged to ensure that a bank’s recovery trigger is aligned with its
approved Liquidity Risk Management framework.
Where possible a stressed net liquidity position should be used as the
recovery trigger (therefore incorporating inflows and outflows,
including deposits and wholesale funding) until such time as the
Liquidity Coverage Ratio (LCR) is implemented.
The LCR should subsequently become the trigger.
- Some of the suggested triggers are based on external factors such as
LIBOR, GDP, etc.
These may be considered more appropriate for scenario planning or
as early warning indicators.

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Early warning indicators:
A firm-specific approach should also be encouraged for early warning
indicators which need to be portfolio - and therefore institution - specific,
in order to ensure an effective monitoring and default prevention process.

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Implementation of the Basel III Framework
At its meeting on 13-14 December, the Basel Committee
on Banking Supervision discussed the progress of its
members in implementing the capital adequacy
reforms within Basel III.
The Basel Committee has been actively monitoring on
a continuing basis the progress of members in implementing the Basel
III package of regulatory reforms, as well as the implementation of Basel
II and Basel 2.5.

To date, it has published three progress reports and two reports to the
G20.

The number of member jurisdictions that have published the final set of
Basel III regulations effective from the start date of 1 January 2013 is 11.

These include Australia, Canada, China, Hong Kong SAR, India, Japan,
Mexico, Saudi Arabia, Singapore, South Africa and Switzerland.

Seven other jurisdictions - Argentina, Brazil, the European Union,
Indonesia, Korea, Russia and the United States - have issued draft
regulations, and have indicated they are working towards issuing final
versions as quickly as possible.

Turkey will issue draft regulations early in 2013.

Stefan Ingves, Chairman of the Basel Committee and Governor of the
Sveriges Riksbank, said "While some jurisdictions have not been able to
meet the planned start date, a large number will be ready to begin
introducing the new capital requirements as planned on 1 January 2013."

Mr Ingves also said, "The globally agreed timeline includes a number of
milestones from 2013 to 2019, designed to provide for a gradual phasing in
of the new capital requirements.
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It is expected that as remaining jurisdictions finalise their domestic
regulations during 2013, they will incorporate all the remaining
transitional deadlines in line with the original global agreement, even
where they have not been able to meet the 1 January 2013 start date.

Hence, by the end of 2013, almost all Basel Committee jurisdictions will
be implementing Basel III in accordance with the agreed timetable.

This is an absolutely critical step towards strengthening the resilience of
the global banking system."

"Furthermore", Mr Ingves added, "even though there are delays in
implementing the regulations, national supervisors are ensuring that
internationally active banks are, where necessary, making steady progress
in strengthening their capital base in accordance with the Basel III
framework."

All Basel Committee members have reiterated their commitment to
implement the globally-agreed reforms, and several members are due to
undergo a peer review of the consistency of their final regulations during
2013.

At the conclusion of this set of peer reviews, all jurisdictions that are the
home regulator for global systemically important banks (G-SIBs) will
have been subject to a peer review of their Basel III implementation.

Other jurisdictions will be subject to peer reviews shortly thereafter.

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Governor Jeremy C. Stein
At the Global Research Forum,
International Finance and
Macroecomomics, Sponsored by the
European Central Bank, Frankfurt am
Main, Germany
Dollar Funding and Global Banks

Thanks very much. It's a pleasure to be part of this panel on the future of
financial globalization.

I will focus my remarks on one important aspect of this issue--namely, the
growing use of wholesale dollar funding by global financial institutions.

I'll begin by briefly discussing research I've been doing, along with my
coauthors Victoria Ivashina and David Scharfstein, which examines some
of the consequences of this funding model during times of market stress.

I'll then touch on the policy implications of this and related work. But
first, the usual disclaimer:

The views that follow are my own and do not necessarily reflect the
thinking of my colleagues on the Federal Open Market Committee.

By way of background, the dollar liabilities of foreign banks have grown
rapidly in the past two decades and now stand at about $8 trillion, roughly
on par with those of U.S. banks.

A significant proportion of foreign banks' dollar liabilities are raised via
U.S. branches, most of which are legally precluded from raising deposits
insured by the Federal Deposit Insurance Corporation.

The main source of funding for these branches, therefore, comes from
uninsured wholesale claims such as large time deposits, making the cost
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and availability of such dollar funding highly sensitive to changing
perceptions of these banks' creditworthiness.

In our work, we asked how shocks to the ability of foreign banks to raise
dollar funding might lead to changes in their lending.

We began with a simple conceptual model: Imagine a European bank
that lends in euros to European firms and in dollars to U.S. firms.

To finance its euro-denominated lending, it funds itself by issuing
insured euro deposits to its local retail deposit base.

By contrast, to finance its dollar-denominated lending, it raises funds in
the wholesale dollar market.

Because the bank's dollar liabilities are uninsured, an adverse shock to
the bank's perceived creditworthiness will result in a spike in its dollar
funding costs.

At the same time, the cost to the bank of funding in euros is unchanged to
the extent that its euro deposits are insured.

So we might expect such a shock to induce the bank to shift its funding
away from the U.S. wholesale market and toward the European deposit
market.

But what are the consequences of this adjustment, both for the
geographic distribution of its lending and for the functioning of foreign
exchange (FX) swap markets?

Note that if the bank wants to maintain the volume of its dollar-based
lending, it will have to tap its insured deposit base to raise more euros and
then swap these euros into dollars using the FX swap market.

However, if the induced funding realignment is big enough, and if
arbitrageurs have limited capacity to take the other side of the trade, this
large swap demand can cause a breakdown in the usual

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overed-interest-parity (CIP) relationship--a breakdown of the sort that we
have seen during times of extreme market stress.

In this case, the direction of the deviation would be such that the cost of
synthetic dollar borrowing--in other words, euro borrowing combined
with an FX swap--would go up and would approach that of the
now-elevated cost of funding directly in the wholesale dollar market.

And given that any method of dollar funding--direct or synthetic--has
become more expensive relative to euro funding, it then follows that an
adverse shock to a global bank's perceived creditworthiness leads to a
decline in its dollar-denominated lending relative to its euro-denominated
lending.

So, two principal effects of the dollar funding shock are intimately
connected: a widening of the so-called CIP basis in the FX swap market,
and a reduction in credit supply to firms that borrow in dollars.

To test the model's implications, my coauthors and I focused on events in
the second half of 2011, when the credit quality of a number of large
euro-area banks became a concern and U.S. prime money market funds
sharply reduced their lending to those banks.

In a span of four months, the exposure of money funds to euro-area banks
fell by half, from about $400 billion in May to about $200 billion in
September.

Coincident with this contraction in dollar funding, the CIP basis widened
in the direction predicted by our model, increasing the cost of obtaining
synthetic dollars via the FX swap market.

We used data from the international syndicated loan market to test the
model's predictions about the reaction of lending to this type of funding
stress.

We found that dollar-denominated lending by euro-area banks fell relative
to their euro-denominated lending, while this result did not hold for U.S.
banks.
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We also found that, even holding fixed the identity of the borrowing firm,
a syndicate formed to make a dollar-denominated loan during this period
was less likely to include euro-area banks, while the same was not true of
syndicates making euro-denominated loans.

Finally, euro-area banks that relied most on funding from U.S. money
market funds also cut back most sharply on their dollar-denominated
lending.

This last result is similar to one in recent work by my Fed colleagues
Ricardo Correa, Horacio Sapriza, and Andrei Zlate.

They documented that the U.S. branches of foreign banks that
experienced the most shrinkage in their dollar-denominated large time
deposits--funding that had been mostly provided by money market funds
prior to mid-2011--cut their U.S.-based commercial and industrial lending
by more than banks that fared better on this score.

Taken together, these findings have two types of policy implications: one
for central bank responses to dollar funding pressures and another for
measures to regulate foreign banking firms that rely heavily on short-term
wholesale funding.

This analysis underscores that the Federal Reserve's temporary dollar
liquidity swap lines with the European Central Bank and other central
banks are an effective response to stresses in dollar funding markets.

Last week, the FOMC approved the extension of these swap lines through
February 1, 2014.

These lines have helped avert fire sales of dollar assets and maintain the
flow of credit to U.S. households and firms.

Although we documented cutbacks in dollar lending in the latter half of
2011 by foreign banks reliant on wholesale dollar funding, those cutbacks
likely would have been more pronounced in the absence of the swap lines

I will now turn to regulation.
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It is useful to bear in mind that our current regulatory regime evolved
during a period when the U.S. operations of foreign banks were largely
net recipients of funding from their parents.

However, their reliance on less stable, short-term wholesale funding
increased significantly in the decade leading up to the financial crisis,
when U.S. branches of foreign banks began borrowing large volumes of
dollars to send to their foreign parents.

Such activity increases the vulnerabilities I described earlier.

And it may not only pose the risk of a cutback in lending, but could also
threaten the safety and soundness of the foreign banks themselves--and of
the U.S. entities exposed to those banks.

The regulation of U.S. branches of foreign banks has changed little over
the past decade, even in the face of these significant changes in the global
banking landscape.

However, last week, the Federal Reserve Board proposed new rules for
foreign banking organizations that would address some of the concerns
that I've discussed and thereby mitigate the attendant risks to U.S.
financial stability.

These proposed rules apply enhanced prudential standards to foreign
banking organizations and are designed to increase their resiliency.

Importantly, the rules will not disadvantage foreign banks relative to
domestic U.S. banking firms, but rather the rules seek to maintain a level
playing field.

To avoid or mitigate potential disruptions in wholesale dollar funding
markets, the proposed rules require foreign banking organizations to hold
sufficient high-quality liquid assets to meet expected near-term net
outflows in a stress scenario.

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These rules should reduce the pressure on foreign banks that rely heavily
on short-term dollar funding to either sell illiquid dollar assets or cut back
on dollar lending in times of financial stress.

By helping to alleviate disruptions in dollar funding markets the rules
should also reduce the reliance on swap lines in a future stress episode.

Finally, the central role played by money market funds in the 2011
episode is a reminder of the fragility of these funds themselves--and of the
risk created by their combination of risky asset holdings, stable-value
demandable liabilities, and zero-capital buffers.

The events following the Lehman Brothers bankruptcy in 2008 provide
even starker evidence of the risks that money market funds pose for the
broader financial system.

In light of these vulnerabilities, I welcome the recent proposed
recommendations by the Financial Stability Oversight Council for further
money market fund reforms.

To conclude: Financial globalization undoubtedly brings with it
substantial benefits.

At the same time, it creates important challenges for financial stability
and for the appropriate design of regulation.

The research discussed in conferences such as this one will help us better
understand and respond to these challenges.

Thank you, and I look forward to your questions.

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PCAOB Auditing Standard No. 16,
Communications with Audit Committees,
and Amendments to other PCAOB
Standards Approved by SEC
Effective for Fiscal Years Beginning On or After Dec. 15, 2012
Washington, D.C., Dec. 20, 2012

The Public Company Accounting Oversight Board announced that the
Securities and Exchange Commission approved Auditing Standard No.
16, Communications with Audit Committees, and amendments to other
PCAOB standards.

The new standard and related amendments are effective for public
company audits of fiscal periods beginning on or after Dec. 15, 2012.

Additionally, the SEC determined that the standard and related
amendments will apply to audits of "emerging growth companies" under
the Jumpstart Our Business Startups Act of 2012.

"AS 16 supports the critical role of auditors and audit committees in
financial reporting," said PCAOB Chairman James R. Doty.

"The standard moves the auditor's communication with the audit
committee away from compliance checklists, and decisively in the
direction of meaningful, effective interchange."

The standard establishes requirements that enhance the relevance and
timeliness of the communications between the auditor and the audit
committee, and is intended to foster constructive dialogue between the
two on significant audit and financial statement matters.

The standard supersedes the Board's interim auditing standards AU sec.
310, Appointment of the Independent Auditor, and AU sec. 380,

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Communication with Audit Committees, and amends other PCAOB
standards.

The PCAOB adopted the new standard on Aug. 15, 2012.

The SEC approved the standard on Dec. 17, 2012.

Auditing Standard No. 16
Communications with Audit Committees

Introduction

1. This standard requires the auditor to communicate with the
company's audit committee regarding certain matters related to the
conduct of an audit and to obtain certain information from the audit
committee relevant to the audit.

This standard also requires the auditor to establish an understanding of
the terms of the audit engagement with the audit committee and to record
that understanding in an engagement letter.

2. Other Public Company Accounting Oversight Board ("PCAOB")
rules and standards identify additional matters to be communicated to a
company's audit committee.

Various laws or regulations also require the auditor to communicate
certain matters to the audit committee.

The communication requirements of this standard do not modify or
replace communications to the audit committee required by such other
PCAOB rules and standards, and other laws or regulations.

Nothing in this standard precludes the auditor from communicating
other matters to the audit committee.

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Objectives

3. The objectives of the auditor are to:

- Communicate to the audit committee the responsibilities of the
auditor in relation to the audit and establish an understanding of the
terms of the audit engagement with the audit committee;

- Obtain information from the audit committee relevant to the audit;

- Communicate to the audit committee an overview of the overall audit
strategy and timing of the audit; and

- Provide the audit committee with timely observations arising from the
audit that are significant to the financial reporting process.

Note: "Communicate to," as used in this standard, is meant to encourage
effective two-way communication between the auditor and the audit
committee throughout the audit to assist in understanding matters
relevant to the audit.

Appointment and Retention - Significant Issues Discussed with
Management in Connection with the Auditor's Appointment or
Retention

4. The auditor should discuss with the audit committee any significant
issues that the auditor discussed with management in connection with
the appointment or retention of the auditor, including significant
discussions regarding the application of accounting principles and
auditing standards.

Establish an Understanding of the Terms of the Audit

5. The auditor should establish an understanding of the terms of the
audit engagement with the audit committee.

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This understanding includes communicating to the audit committee the
following:

- The objective of the audit;

- The responsibilities of the auditor; and

- The responsibilities of management.

6. The auditor should record the understanding of the terms of the
audit engagement in an engagement letter and provide the engagement
letter to the audit committee annually.

The auditor should have the engagement letter executed by the
appropriate party or parties on behalf of the company.

If the appropriate party or parties are other than the audit committee, or
its chair on behalf of the audit committee, the auditor should determine
that the audit committee has acknowledged and agreed to the terms of
the engagement.

7. If the auditor cannot establish an understanding of the terms of the
audit engagement with the audit committee, the auditor should decline to
accept, continue, or perform the engagement.

Obtaining Information and Communicating the Audit Strategy
Obtaining Information Relevant to the Audit

8. The auditor should inquire of the audit committee about whether it is
aware of matters relevant to the audit, including, but not limited to,
violations or possible violations of laws or regulations.

Overall Audit Strategy, Timing of the Audit, and Significant
Risks
9. The auditor should communicate to the audit committee an overview
of the overall audit strategy, including the timing of the audit,7/ and

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discuss with the audit committee the significant risks identified during
the auditor's risk assessment procedures.

Note: This overview is intended to provide information about the audit,
but not specific details that would compromise the effectiveness of the
audit procedures.

10. As part of communicating the overall audit strategy, the auditor
should communicate the following matters to the audit committee, if
applicable:

- The nature and extent of specialized skill or knowledge needed to
perform the planned audit procedures or evaluate the audit results
related to significant risks;

- The extent to which the auditor plans to use the work of the
company's internal auditors in an audit of financial statements;

- The extent to which the auditor plans to use the work of internal
auditors, company personnel (in addition to internal auditors), and
third parties working under the direction of management or the audit
committee when performing an audit of internal control over financial
reporting;

- The names, locations, and planned responsibilities of other
independent public accounting firms or other persons, who are not
employed by the auditor, that perform audit procedures in the current
period audit; and

Note: The term "other independent public accounting firms" in the
context of this communication includes firms that perform audit
procedures in the current period audit regardless of whether they
otherwise have any relationship with the auditor.

The basis for the auditor's determination that the auditor can serve as
principal auditor, if significant parts of the audit are to be performed by
other auditors.

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11. The auditor should communicate to the audit committee significant
changes to the planned audit strategy or the significant risks initially
identified and the reasons for such changes.

Results of the Audit - Accounting Policies and Practices,
Estimates, and Significant Unusual Transactions

12. The auditor should communicate to the audit committee the
following matters:

Significant accounting policies and practices.
(1) Management's initial selection of, or changes in, significant
accounting policies or the application of such policies in the current
period; and

(2) The effect on financial statements or disclosures of significant
accounting policies in

(i) controversial areas or

(ii) areas for which there is a lack of authoritative guidance or consensus,
or diversity in practice.

Critical accounting policies and practices.

All critical accounting policies and practices to be used, including:

(1) The reasons certain policies and practices are considered critical;
and

(2) How current and anticipated future events might affect the
determination of whether certain policies and practices are considered
critical.

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Critical accounting estimates.

(1) A description of the process management used to develop critical
accounting estimates;

(2) Management's significant assumptions used in critical accounting
estimates that have a high degree of subjectivity; and

(3) Any significant changes management made to the processes used
to develop critical accounting estimates or significant assumptions, a
description of management's reasons for the changes, and the effects of
the changes on the financial statements.

Significant unusual transactions

(1) Significant transactions that are outside the normal course of
business for the company or that otherwise appear to be unusual due to
their timing, size, or nature; and

(2) The policies and practices management used to account for
significant unusual transactions.

Note: If management communicates any of these matters, the auditor
does not need to communicate them at the same level of detail as
management, as long as the auditor:

(1) Participated in management's discussion with the audit committee,

(2) Affirmatively confirmed to the audit committee that management has
adequately communicated these matters, and

(3) With respect to critical accounting policies and practices, identified
for the audit committee those accounting policies and practices that the
auditor considers critical.

The auditor should communicate any omitted or inadequately described
matters to the audit committee.

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Auditor's Evaluation of the Quality of the Company's Financial
Reporting

following matters:

Qualitative aspects of significant accounting policies and
practices.

(1) The results of the auditor's evaluation of, and conclusions about,
the qualitative aspects of the company's significant accounting policies
and practices, including situations in which the auditor identified bias in
management's judgments about the amounts and disclosures in the
financial statements; and

(2) The results of the auditor's evaluation of the differences between

(i) estimates best supported by the audit evidence and

(ii) estimates included in the financial statements, which are individually
reasonable, that indicate a possible bias on the part of the company's
management.

Assessment of critical accounting policies and practices.

The auditor's assessment of management's disclosures related to the
critical accounting policies and practices, along with any significant
modifications to the disclosure of those policies and practices proposed
by the auditor that management did not make.

Conclusions regarding critical accounting estimates.

The basis for the auditor's conclusions regarding the reasonableness of
the critical accounting estimates.

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Significant unusual transactions.

The auditor's understanding of the business rationale for significant
unusual transactions.

Financial statement presentation.

The results of the auditor's evaluation of whether the presentation of the
financial statements and the related disclosures are in conformity with the
applicable financial reporting framework, including the auditor's
consideration of the form, arrangement, and content of the financial
statements (including the accompanying notes), encompassing matters
such as the terminology used, the amount of detail given, the
classification of items, and the bases of amounts set forth.

New accounting pronouncements.

Situations in which, as a result of the auditor's procedures, the auditor
identified a concern regarding management's anticipated application of
accounting pronouncements that have been issued but are not yet
effective and might have a significant effect on future financial reporting.
Alternative accounting treatments.

All alternative treatments permissible under the applicable financial
reporting framework for policies and practices related to material items
that have been discussed with management, including the ramifications
of the use of such alternative disclosures and treatments and the
treatment preferred by the auditor.

Other Information in Documents Containing Audited Financial
Statements
14. When other information is presented in documents containing
audited financial statements, the auditor should communicate to the
audit committee the auditor's responsibility under PCAOB rules and
standards for such information, any related procedures performed, and
the results of such procedures.
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P a g e | 60

Difficult or Contentious Matters for which the Auditor
Consulted

15. The auditor should communicate to the audit committee matters
that are difficult or contentious for which the auditor consulted outside
the engagement team and that the auditor reasonably determined are
relevant to the audit committee's oversight of the financial reporting
process.

Management Consultation with Other Accountants

16. When the auditor is aware that management consulted with other
accountants about significant auditing or accounting matters and the
auditor has identified a concern regarding such matters, the auditor
should communicate to the audit committee his or her views about such
matters that were the subject of such consultation.

Going Concern
17. The auditor should communicate to the audit committee, when
applicable, the following matters relating to the auditor's evaluation of the
company's ability to continue as a going concern:

If the auditor believes there is substantial doubt about the company's
ability to continue as a going concern for a reasonable period of time, the
conditions and events that the auditor identified that, when considered in
the aggregate, indicate that there is substantial doubt;

If the auditor concludes, after consideration of management's plans, that
substantial doubt about the company's ability to continue as a going
concern is alleviated, the basis for the auditor's conclusion, including
elements the auditor identified within management's plans that are
significant to overcoming the adverse effects of the conditions and events;

If the auditor concludes, after consideration of management's plans, that
substantial doubt about the company's ability to continue as a going
concern for a reasonable period of time remains:

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P a g e | 61

(1) The effects, if any, on the financial statements and the adequacy of
the related disclosure; and

(2) The effects on the auditor's report.

Uncorrected and Corrected Misstatements

18. The auditor should provide the audit committee with the schedule of
uncorrected misstatements related to accounts and disclosures that the
auditor presented to management.

The auditor should discuss with the audit committee, or determine that
management has adequately discussed with the audit committee, the
basis for the determination that the uncorrected misstatements were
immaterial, including the qualitative factors considered.

The auditor also should communicate that uncorrected misstatements or
matters underlying those uncorrected misstatements could potentially
cause future-period financial statements to be materially misstated, even
if the auditor has concluded that the uncorrected misstatements are
immaterial to the financial statements under audit.

19. The auditor should communicate to the audit committee those
corrected misstatements, other than those that are clearly trivial, related
to accounts and disclosures that might not have been detected except
through the auditing procedures performed, and discuss with the audit
committee the implications that such corrected misstatements might
have on the company's financial reporting process.

Material Written Communications

20. The auditor should communicate to the audit committee other
material written communications between the auditor and management.

Departure from the Auditor's Standard Report
following matters related to the auditor's report:
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P a g e | 62

When the auditor expects to modify the opinion in the auditor's report,
the reasons for the modification, and the wording of the report; and

When the auditor expects to include explanatory language or an
explanatory paragraph in the auditor's report, the reasons for the
explanatory language or paragraph, and the wording of the explanatory
language or paragraph.

Disagreements with Management

22. The auditor should communicate to the audit committee any
disagreements with management about matters, whether or not
satisfactorily resolved, that individually or in the aggregate could be
significant to the company's financial statements or the auditor's report.

Disagreements with management do not include differences of opinion
based on incomplete facts or preliminary information that are later
resolved by the auditor obtaining additional relevant facts or information
prior to the issuance of the auditor's report.

Difficulties Encountered in Performing the Audit

23. The auditor should communicate to the audit committee any
significant difficulties encountered during the audit.

Significant difficulties encountered during the audit include, but are not
limited to:

- Significant delays by management, the unavailability of company
personnel, or an unwillingness by management to provide
information needed for the auditor to perform his or her audit
procedures;

- An unreasonably brief time within which to complete the audit;

- Unexpected extensive effort required by the auditor to obtain
sufficient appropriate audit evidence;

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P a g e | 63

- Unreasonable management restrictions encountered by the auditor
on the conduct of the audit; and

- Management's unwillingness to make or extend its assessment of the
company's ability to continue as a going concern when requested by
the auditor.

Note: Difficulties encountered by the auditor during the audit could
represent a scope limitation, which may result in the auditor modifying
the auditor's opinion or withdrawing from the engagement.

Other Matters

24. The auditor should communicate to the audit committee other
matters arising from the audit that are significant to the oversight of the
company's financial reporting process.

This communication includes, among other matters, complaints or
concerns regarding accounting or auditing matters that have come to the
auditor's attention during the audit and the results of the auditor's
procedures regarding such matters.

Form and Documentation of Communications

matters in this standard, either orally or in writing, unless otherwise
specified in this standard.

The auditor must document the communications in the work papers,
whether such communications took place orally or in writing.

Timing
26. All audit committee communications required by this standard
should be made in a timely manner and prior to the issuance of the
auditor's report.

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P a g e | 64

The appropriate timing of a particular communication to the audit
committee depends on factors such as the significance of the matters to
be communicated and corrective or follow-up action needed, unless other
timing requirements are specified by PCAOB rules or standards or the
securities laws.

Note: An auditor may communicate to only the audit committee chair if
done in order to communicate matters in a timely manner during the
audit.

The auditor, however, should communicate such matters to the audit
committee prior to the issuance of the auditor's report.

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P a g e | 65

Report to Congress on
Assigned Credit Ratings
As Required by Section 939F of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act

Interesting Parts

This is a study by the Staff of the Division of Trading and Markets of the
U.S. Securities and Exchange Commission.

The Commission has expressed no view regarding the analysis, findings
or conclusions contained herein.

December 2012

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank Act”) into law.

Title IX, Subtitle C of the Dodd-Frank Act (“Title IX, Subtitle C”),
“Improvements to the Regulation of Credit Rating Agencies,” among
other things, established new self-executing requirements applicable to
nationally recognized statistical rating organizations (“NRSROs”),
required certain studies, and required that the Commission adopt rules
applicable to NRSROs in a number of areas.

Under section 939F of Title IX, Subtitle C (“section 939F”), the U.S.
Securities and Exchange Commission (“Commission”) must submit to
the Committee on Banking, Housing, and Urban Affairs of the Senate
and the Committee on Financial Services of the House of
Representatives, not later than 24 months after the date of enactment of
the Dodd-Frank Act, a report containing:

(1) the findings of a study on matters related to assigning credit ratings for
structured finance products; and
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P a g e | 66

(2) any recommendations for regulatory or statutory changes that the
Commission determines should be made to implement the findings of the
study.

In particular, section 939F provides that the Commission shall carry out a
study of the following:

(1) The credit rating process for structured finance products and the
conflicts of interest associated with the issuer-pay and the subscriber-pay
models;

(2) The feasibility of establishing a system in which a public or private
utility or a self regulatory organization (“SRO”) assigns NRSROs to
determine the credit ratings for structured finance products, including:

(a) An assessment of potential mechanisms for determining fees for
NRSROs for rating structured finance products;

(b) Appropriate methods for paying fees to NRSROs to rate structured
finance products;

(c) The extent to which the creation of such a system would be viewed as
the creation of moral hazard by the Federal Government; and

(d) Any constitutional or other issues concerning the establishment of
such a system;

(3) The range of metrics that could be used to determine the accuracy of
credit ratings for structured finance products; and

(4) Alternative means for compensating NRSROs that would create
incentives for accurate credit ratings for structured finance products.

Section 939F also provides that, after submission of the report to
Congress containing the findings of the study, the Commission shall, by
rule, as the Commission determines is necessary or appropriate in the
public interest or for the protection of investors, establish a system for the

_____________________________________________________________

Monday December 31 2012 - Top 10 Risk Management News

Monday December 31 2012 - Top 10 Risk Management News

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