IARCP Newsletter Discusses ECB Letter Seeking Clarification on Dodd-Frank Act

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

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

Welcome to the April 2012 edition of the International
Association of Risk and Compliance Professionals (IARCP)
newsletter
Dear Member,

The European Central Bank (ECB) tries hard to understand the
Dodd Frank Act (so do we).

We start from an interesting “we would therefore
appreciate some clarification from you” letter from
the European Central Bank to the US Commodity
Futures Trading Commission.

The part of the letter I like: “We therefore
respectfully ask the Commissions to
exercise their definitional authority…” 

_____________________________________________________________

What is the letter about?

The point?

“We are therefore concerned about how Title VII of the Dodd-Frank Act
will apply to the official operations of the ECB and the Eurosystem, and
we would therefore appreciate some clarification from you in this regard.

To the extent that your agency is preparing implementation rules to the
Dodd-Frank Act, we would with all due respect seek from you due
consideration to the above arguments, as well as to international comity,
so that the case of International Organizations (such as the ECB) and of
foreign central banks are addressed in the final regulations in a manner
fitting with their official status and tasks.

In that direction, please note that the ECB's -and the Eurosystem's-
mandate requires them to perform public tasks that are broadly
comparable to those attributed in the United States to the Federal Reserve
System, which necessarily require the ECB to conduct operations in the
financial markets, including OTC derivatives.

These are activities that would, if conducted by a private sector entity,
necessarily fall within the ambit of Title VII of the Dodd-Frank Act.
_____________________________________________________________

In contrast, we note that if those same transactions were entered into by
the Federal Reserve System, they would be expressly excluded from the
definitions of "swap" and "security-based swap" contained in the
Dodd-Frank Ad.

We set out attached some considerations on the ECB and its mandate,
and its status under U.S. Law.

The point on which we seek regulatory clarification is whether official
transactions such as those entered into by the ECB and by the national
central banks of the Eurosystem would be captured by the definitions
of "swap" and "security-based swap" contained in the Dodd-Frank Act.

Clearly, our practice to date has been to transact with private sector
entities on market standard documentation for swaps, but given that we
have so far and would in the future only be entering into such transactions
purely in execution of our public mandate - and it is to be noted that we
are not authorised to enter into such transactions on any other basis - we
suggest that the transactions that we enter into should not be interpreted
and legally defined in the same way as otherwise similar transactions
entered into by private commercial entities:

• First, the considerations involved in the management of foreign reserves
are not amenable to control and supervision in the same way as
private-sector profit-maximising transactions.

Indeed, as an institution of the European Union, we are not subject to
supervision or licensing requirements and suggest' that it would be
inappropriate to be subjected to supervisory requirements by a non-EU
authority in respect of a part of our activities.

In particular, we are concerned that external control of our activities
might not be sufficiently sensitive to the practice of managing foreign
reserves and could thus frustrate the ECB's performance of the mandate
that it has been given by the TFEU.

_____________________________________________________________

• Second, performance of our mandate can require us to act confidentially
in certain circumstances.

Please note that in certain occasions central banks market activities, if
subject to public disclosure and external supervision, may cause
signalling effects to other market players and finally hinder the policy
objectives of such actions (the CCP itself would also have a privileged
view on the whole set of cleared central bank transactions).

This is probably the reason behind the exemption given by Dodd-Frank
Act to the Federal Reserve System (a similar exemption to the ECB and
other central banks and comparable international institutions is foreseen
in the proposed draft EU Regulation on Central Clearing of OTC
derivatives in course of definition in Europe).

Certain of the requirements of the Dodd Frank Act, if applicable to the
ECB, could compromise the ECB's ability to take such actions.

In this regard, it is noted that the ECB has worked closely with the
Federal Reserve System in responding to the financial crisis, and should
not be compromised by implementation of the Dodd-Frank Act in its
ability to respond similarly in the future.

• Third, the specificity of role and functions of central banks make their
use of CCPs, and other private financial market infrastructures for that
matter, a very sensitive issue, particularly in times of crisis.

For instance, if a central bank were to become a clearing member of a
CCP it would need to contribute to the CCP default procedures.

In case of crisis, this could force a central bank to eventually absorb other
participants' and possible the CCP's losses, thereby raising sensitive
moral hazard issues.

• Fourth, this may introduce inconsistency between EU and US
legislation concerning the central bank obligations to use designated
CCPs
_____________________________________________________________

The abovementioned arguments apply mutatis mutandis to the national
central banks of the Eurosystem.

As you of course know, Congress has vested the Commissions with the
rulemaking authority to further define certain terms, including "swap"
and "security-based swap, and such joint rulemaking on the definition of
the terms "swap" and "security-based swap" is to be done in
consultation with the Board of Governors.

In light of the above, we therefore respectfully ask the Commissions to
exercise their definitional authority under the Dodd-Frank Act to define
the terms "swap" and "security-based swap", as used in the Commodity
Exchange Act and Securities Exchange Act, respectively, to exclude any
agreement, contract or transaction a counterpatty of which is a Public
International Organisation such as the ECB, or indeed a national central
bank of a market economy.

We stand ready to elaborate on any of the matters raised above, including
with respect to the size and risk management of our US dollar interest rate
derivatives portfolio activities to the extent that this would be helpful to
you.”

_____________________________________________________________

Cayman Islands – An Overview

The three Cayman Islands, Grand Cayman, Cayman Brac and Little
Cayman, are located in the western Caribbean about 150 miles south of
Cuba, 460 miles south of Miami, Florida, and 167 miles northwest of
Jamaica.

George Town, the
capital, is on the
western shore of
Grand Cayman.

Grand Cayman, the
largest of the three
islands, has an area of about 76 square miles and is approximately 22
miles long with an average width of four miles.

Its most striking feature is the shallow, reef-protected lagoon, the North
Sound, which has an area of about 35 square miles. The island is
low-lying, with the highest point about 60 feet above sea level.

Cayman Brac lies about 89 miles northeast of Grand Cayman.
It is about 12 miles long with an average width of 1.25 miles and has an
area of about 15 square
miles.

Its terrain is the most
spectacular of the three
islands.

The Bluff, a massive
central limestone
outcrop, rises steadily
along the length of the island up to 140 ft. above the sea at the eastern end.

Little Cayman lies five miles west of Cayman Brac and is approximately
ten miles long with an average width of just over a mile.
_____________________________________________________________

It has an area of about 11 square miles. The island is low-lying with a few
areas on the north shore rising to 40 ft. above sea level.

There are no rivers on
any of the islands. The
coasts are largely
protected by offshore
reefs and in some places
by a mangrove fringe
that sometimes extends
into inland swamps.

Geographically, the Cayman Islands is part of the Cayman Ridge, which
extends westward from Cuba. The Cayman Trench, the deepest part of
the Caribbean at a depth of over four miles, separates the three small
islands from Jamaica.

The islands are also located on the plate boundary between the North
American and Caribbean tectonic plates.

The tectonic plates in Cayman’s region are in continuous lateral
movement against each other.

This movement, with the Caribbean plate travelling in an eastward
direction and the North American plate moving west, limits the size of
earthquakes and there has never been an event recorded of more than
magnitude 7.

It is not unusual for minor tremors to be recorded. Many residents don’t
even notice them. However in December 2004 a quake of 6.8 magnitude
rocked Grand Cayman and everyone noticed. The earthquake, short in
duration, opened some small sinkholes but otherwise didn’t cause any
damage.

Christopher Columbus first sighted Cayman Brac and Little Cayman on
10 May 1503. On his fourth trip to the New World, Columbus was en route
to Hispaniola when his ship was thrust westward toward "two very small
_____________________________________________________________

and low islands, full of tortoises, as was all the sea all about, insomuch
that they looked like little rocks, for which reason these islands were
called Las Tortugas."

A 1523 map show all three Islands with the name Lagartos, meaning
alligators or large lizards, but by 1530 the name Caymanas was being used.
It is derived from the Carib Indian word for the marine crocodile, which is
now known to have lived in the Islands.

Sir Francis Drake, on his 1585-86 voyage, reported seeing "great serpents
called Caymanas, like large lizards, which are edible."

It was the Islands' ample supply of turtle, however, that made them a
popular calling place for ships sailing the Caribbean and in need of meat
for their crews. This began a trend that eventually denuded local waters of
the turtle, compelling local turtle fishermen to go further afield to Cuba
and the Miskito Cays in search of their catch.

The first recorded settlements were located on Little Cayman and
Cayman Brac during 1661-71.

Because of the depredations of Spanish privateers, the governor of
Jamaica called the settlers back to Jamaica, though by this time Spain had
recognised British possession of the Islands in the 1670 Treaty of Madrid.

Often in breach of the treaty, British privateers roamed the area taking
their prizes, probably using the Cayman Islands to replenish stocks of
food and water and careen their vessels.

The first royal grant of land in Grand Cayman was made by the governor
of Jamaica in 1734.

It covered 3,000 acres in the area between Prospect and North Sound.
Others followed up to 1742, developing an existing settlement, which
included the use of slaves.
On 8 February 1794, an event occurred which grew into one of Cayman's
favourite legends -- The Wreck of the Ten Sail.
_____________________________________________________________

A convoy of more than 58 merchantmen sailing from Jamaica to England
found itself dangerously close to the reef on the east end of Grand
Cayman.

Ten of the ships, including HMS Convert, the navy vessel providing
protection, foundered on the reef. With the aid of Caymanians, the crews
and passengers mostly survived, although some eight lives were lost.

The first census of the Islands was taken in 1802, showing a population on
Grand Cayman of 933, of whom 545 were slaves. Before slavery was
abolished in 1834, there were over 950 slaves owned by 116 families.

Though Cayman was regarded as a dependency of Jamaica, the reins of
government by that colony were loosely held in the early years, and a
tradition grew of self-government, with matters of public concern decided
at meetings of all free males. In 1831 a legislative assembly was
established.

The constitutional relationship between Cayman and Jamaica remained
ambiguous until 1863 when an act of the British parliament formally made
the Cayman Islands a dependency of Jamaica.

When Jamaica achieved independence in 1962, the Islands opted to
remain under the British Crown, and an administrator appointed from
London assumed the responsibilities previously held by the governor of
Jamaica

The constitution currently provides for a Crown-appointed Governor, a
Legislative Assembly and a Cabinet.

Unless there are exceptional reasons, the Governor accepts the advice of
the Cabinet, which comprises three appointed official members and five
ministers elected from the 15 elected members of the Assembly.

The Governor has responsibility for the police, civil service, defence and
external affairs but handed over the presidency of the Legislative
Assembly to the Speaker in 1991.
_____________________________________________________________

Cayman Islands, Banking Statistics

Overview

There were a total of 234 banks
under the supervision of the
Banking Supervision Division at
the end of December 2011.

The fundamentals of the banking
sector remain sound and the
industry in general has been
relatively resilient in a very challenging market environment.

Banks continue to consolidate and restructure in search of cost
efficiencies, and improvements in operational risk management and
governance.

As of September 2011, total assets were reported at US$1.607
trillion down from the same period of the previous year where total assets
stood at US$1.725 trillion.

_____________________________________________________________

The Cayman Islands is recognised as one of the top 10 international
financial centres in the world, with over 40 of the top 50 banks holding
licences here.

Over 80 percent of more than US$1 trillion on deposit and booked through
the Cayman Islands, represents inter-bank bookings between onshore
banks and their Cayman Islands branches or subsidiaries.

These institutions present a very low risk profile for money laundering.

Basel II
The Cayman Island Monetary Authority (CIMA) is implementing the
Basel II Framework.
The Basel II Framework describes a more comprehensive measure and
minimum standard for capital adequacy that seeks to improve on the
existing Basel I rules by aligning regulatory capital requirements more
closely to the underlying risks that banks face.
The Framework is intended to promote a more forward looking approach
to capital supervision that encourages banks to identify risks and to
develop or improve their ability to manage those risks.
As a result, it is intended to be more flexible and better able to evolve with
advances in markets and risk management practices.
A key objective of the revised Framework is to promote the adoption of
stronger risk management practices by the banking industry.
Banks to Which Basel II Applies
The Basel II Framework applies to banks that are locally incorporated in
the Cayman Islands (Category A and B banks), all home regulated banks
and host regulated banks (subsidiaries of foreign banks), with or without
a physical presence.

Branches of foreign banks operating the Cayman Islands, will not be
required to maintain a separate capital requirement, and as such will be
excluded from the local Basel II requirements.
_____________________________________________________________

However, these foreign banks including the operations of the Cayman
Islands branches must maintain the minimum capital adequacy
requirements as stipulated by their home jurisdictions.
Implementation Phases
CIMA proposes to apply the Basel II Framework in two
phases leveraging a practical measured approach.

First Phase
The first phase of the implementation was completed on December 31,
2010 and comprised the following Pillar 1 approaches:
• Credit Risk – Standardized
• Market Risk – Standardized
• Operational Risk – Basic Indicator Approach and The Standardized
Approach

The first phase of the Basel II implementation includes Pillar 2 –
Supervisory Review Process and Pillar 3 - Market Discipline.

Second Phase
The second phase of the CIMA Basel II implementation will be
considered for implementation after 2012.
It will include considering the implementation of advanced approaches,
specifically Pillar 1 – Credit Risk – Advanced Approaches (IRB),
Operations Risk – Advanced Measurement Approaches (AMA) and
Market Risk – Internal Risk Management Models.
Industry Input
Since the majority of banks impacted by the application of the Basel II
Framework are members of the Cayman Island Bankers Association
(CIBA), CIMA has established a joint CIMA/CIBA Basel II Working
Committee.
The primary objective of the working committee is to provide banks and
CIMA a forum for consultation, discussion and agreement on Basel II
_____________________________________________________________

related issues. CIMA proposes to obtain the majority of feedback on Basel
II related issues from the CIBA/CIMA Basel II Working Committee.
CIMA also proposes to communicate directly with those banks that are
not members of CIBA or those banks that have principal agents that are
not members of CIBA.
However, these banks will not have the benefit of consultation or
participation in discussions on Basel II issues with the majority of
impacted banks.
Banks wishing to participate in the CIBA consultations and discussions
should contact CIBA directly.
Basel iii
This is the next step, but we have no timeline yet.
According to Reina Ebanks, Head of Banking Supervision, Cayman
Islands Monetary Authority at the Opening of the FSI & CGBS Seminar -
Regional Seminar on Capital Adequacy & Basel III George Town, Grand
Cayman, Cayman Islands February 22-24, 2011:
“It is good that so many of our colleagues from regulatory bodies in the
Caribbean region have seen the value of this seminar and have seized this
opportunity to participate.

I also appreciate the involvement of our local industry partners who will
serve as presenters.

We all have experiences to share, and by sharing those experiences we
will learn from each other.

The Cayman Islands Monetary Authority believes strongly in the
necessity and benefits of professional training.

We have always sought to ensure that our own staff members have every
opportunity to enhance the skills that are necessary for the Authority to
effectively carry out its role.

_____________________________________________________________

The regulatory reform package of the Basel Committee addresses
identified weaknesses of the pre-crisis banking sector and outlines several
measures to promote a more resilient banking sector.

The objective of the reforms is to improve the banking sector’s ability to
absorb shocks arising from financial and economic stress, thus reducing
the risk of spill over from the financial sector to the real economy.

The new global standards referred to a “Basel III” cover both
firm-specific and broader, systematic risks. At this 3 day seminar our
presenters who are experts in their field are expected to cover specific
aspects of Basel III.

One of the things you learn quickly as a regulator is how rapidly changes
occur within today’s financial systems and how interconnected and
interdependent they are.

The international financial crisis underscored this forcefully, but it is not
going to change it.

Products will continue to evolve; markets will continue to change; ways of
doing business will continue to be constantly challenged by new
innovations despite the new regulations and standards put in place as a
result of the crisis.
However, one of the strong lessons which it has taught us as regulators is
that, in order to stay ahead of the curve, we must expand our knowledge
of the markets and products we are charged with regulating and the role
of the different jurisdictions, large and small, that are part of the global
marketplace.
We must apply that knowledge efficiently in our day-to-day operations.
We must cooperate as regulators at the organizational level.
We must engage in dialogue and we must take joint action.
This is necessary if we are to regulate effectively without stifling
legitimate business and economic growth.”
_____________________________________________________________

Remarks before the Institute of International Bankers, Annual
Washington Conference
Commissioner Jill E. Sommers, March 5, 2012
Important parts
I would like to touch on a few developments and give my thoughts on the
current state of derivatives regulation both here in the US and abroad.
Since September of 2010, the Commission has held 24 public meetings to
vote on various Dodd-Frank matters and has issued nearly 60 proposed
rules, notices, or other requests seeking public comment, and has
completed 28 final rules, interim final rules, and exemptions.
I think we are about at the half-way mark with at least twenty more rules
to go, including the most significant rules like definitions of a swap dealer
and swap.
We have one meeting scheduled for March and four more meetings
scheduled for April and May.
The Process
When it comes to the rulemaking process, I believe a reasonable,
measured approach is critical.
Swap markets developed without our involvement, and we have little
experience with these markets. The truth is we don’t know what the full
impact of our rules will be, and we don’t know whether the assumptions
we operate under are valid.
_____________________________________________________________

Given this knowledge gap, it makes sense to start with a broader, more
flexible approach, and become narrower and more restrictive only as
necessary and after we have sufficient experience and data to make these
decisions.
Unfortunately the Commission has not taken this sensible approach.
By way of example, last month the Commission held an open meeting to
consider a final rule related to business conduct standards and a proposed
rule related to block trading.
Dodd-Frank mandates that the Commission specify the criteria for
determining what constitutes a large notional swap transaction—or block
trade— for particular markets and contracts.
In determining appropriate block trade sizes, Congress has directed that
the Commission take into account whether public disclosure of
transactions will reduce market liquidity.
This requires a balancing act—if the block threshold is set too low, there
will be reduced transparency in the market.
If the block threshold is set too high, there will be reduced liquidity in the
market.
Setting block sizes for swaps is not an easy task, and absent robust data,
comprehensive analysis, and the benefit of market experience, we could
severely harm liquidity at this critical regulatory juncture where we seek
to bring more swaps onto swap execution facilities.
The proposal, which passed by a 3-2 vote, recommends utilizing a
formula to determine block size whereby only the largest 6% of all interest
rate swaps and credit default swaps would be block trades.
This proposal ignores Congress’ mandate that we take into account the
impact of public disclosure on liquidity.
We now run the risk of sacrificing liquidity at the altar of transparency.

_____________________________________________________________

More troubling, the rule writing team only had access to 3 months’ worth
of transaction data, and that transaction data dates back to the summer of
2010.
In writing these rules we are relying on stale data, and far too little of it.
This is just one instance where we have proposed rules without sufficient
data, robust analysis, and complete knowledge of their impact.
Extraterritoriality
I am guessing that the issue first and foremost on many of your minds is
extraterritoriality.
As everyone in this room knows, the swaps market is a global market.
Harmonizing our rules to the greatest extent possible with the SEC, other
US regulators and our foreign counterparts is absolutely crucial for
ensuring that we accomplish the overall global objectives of reducing
systemic risk and limiting opportunities for regulatory arbitrage.
As required by Dodd-Frank, and in keeping with the commitments
reached by the G-20 leaders in Pittsburgh in September of 2009,
Commission staff has been in constant contact with our counterparts in
London, the European Union and Asia.
These issues are very complex, and the possibility of divergent views
among international regulators is very real.
The challenge lies in building a consistent philosophy for how the
regulatory frameworks of many nations fit together to ensure cross-border
swap activities are not disrupted.
In Dodd-Frank Congress expressed intent for the statute to apply to
activities abroad in certain circumstances, but was not crystal clear on the
parameters.
While the statute gives us some direction, the Commission is considering
how broadly or narrowly it intends to interpret the scope of this limitation.

_____________________________________________________________

Setting the precise scope of Dodd-Frank with respect to the cross-border
activities of foreign entities is necessary to preserve the continuity of
global business operations and the risk management tools that swaps
provide.
To that end, I expect the Commission to issue proposed guidance on this
issue in the coming weeks; however, it is my understanding the scope of
the guidance will only speak to who will be required to register as a US
swap dealer or major swap participant.
The Commission intends to tackle other issues such as clearing and
market infrastructure in subsequent guidance.
I am deeply concerned that there has not been adequate coordination
with the SEC and the international regulatory community.
Of even greater concern to me is that the Commission appears to be
considering a piecemeal approach to issues of extraterritoriality by
proposing guidance in stages rather than by proposing one
comprehensive rule that will give market participants some degree of
certainty and the entire framework we are considering.
I cannot imagine the global consequences of an inconsistent approach to
these issues by the SEC and CFTC.
I have spoken to many foreign entities and foreign regulators who are
very interested in how far the CFTC intends to reach into the operations
of entities located overseas.
I believe this is one of the single most important issues the Commission
will address during the implementation of Dodd/Frank.
There has been an enormous amount of congressional interest and if we
do not get this one right, I am confident Congress will step in. I would
like to see the CFTC propose a joint rule or at the least a coordinated rule
with the SEC.
The CFTC has a long history of international cooperation and recognition
for comparable foreign regulatory regimes.

_____________________________________________________________

This is not the time for us to abandon policies that have worked well for
us over decades of international practice.
Volcker
I am also going to guess that the other important issue on your mind is
the much discussed “Volcker rule”.
The CFTC waited until January of this year to put out its Volcker
proposal, notwithstanding the fact that other US regulators put out their
version of Volcker last October.
The proposal is lengthy and extremely complex and I do not think we
spent sufficient time to fully consider all of its implications. I am troubled
that this is the path the Commission has chosen.
Given that we waited until January to propose our version of Volcker, well
after other regulators issued proposals and received comments, we had a
unique opportunity to take into consideration the comments filed with
those other agencies.
Unfortunately, even with the lag time and the benefit of comment letters
we proposed a rule that is virtually identical to the other agencies’
proposed Volcker rule.
I had concerns about what the CFTC would do if other agencies
re-propose their rules.
I hope we will be prepared to withdraw our proposal and join a
re-proposed Volcker Rule with the other agencies.
Otherwise, it seems as if we have put ourselves on a separate track, which
I fear will needlessly complicate an already convoluted and likely
unworkable set of rules.
Central bankers and regulators from around the world have expressed
concern that the rule, which as proposed would apply to the US
operations of foreign banks, may also extend to a firms’ operations
outside the US.

_____________________________________________________________

Many countries in Europe and Asia have weighed in, and many industry
bodies such as yours have filed helpful comment letters too.
In fact, the CFTC, Treasury and other regulators received over 17,000
comment letters. We have seen these concerns voiced by high ranking
officials, such as Bank of Canada Governor Mark Carney, EU Financial
Services Commissioner Michel Barnier, and FSA chairman Lord Adair
Turner.
For example, the UK and Japanese finance ministers weighed in saying
that, without an exemption from the rule, their governments’ borrowing
costs would rise.
Japan and Britain have called on the US to rewrite the Volcker rule given
concerns that it could reduce liquidity in sovereign debt markets at a
crucial moment for some European governments.
Japanese Finance Minister Jun Azumi and his British counterpart George
Osborne pointed out that Volcker may be the "wrong prescription," with
unintended consequences.
Of particular concern to other nations is the fact that, while the new rule
may adversely impact market liquidity in stocks and corporate and
government bonds, there is an exemption that allows the banks to buy US
government securities -- but not other sovereign debt instruments.
As a consequence, explained Azumi and Osborne, "it could reduce
liquidity in non-US sovereign markets, making it more difficult, costlier
and riskier for countries to issue and distribute debt."
Government debt and related obligations are a major part of the banking
sector’s liquid assets.
I believe that we need to really consider, especially at this troubled time in
the sovereign debt markets, whether this exclusion should be applied in a
broad manner that allows banks, especially those outside the US, to
engage in liquidity management using assets accepted as liquid reserves
such as foreign sovereign debt.

_____________________________________________________________

Second, after reviewing the many critical comments we should
re-evaluate the foreign banking entities exemption.
I do not believe this exemption should be narrower than is required by
Dodd-Frank.
At a minimum, we could clarify that use of US financial infrastructure
(e.g. clearing, settlement, and trade facilitation) would not make the
transaction subject to the rule.
It is critical for US regulators to come together and form a reasonable
approach to the many difficult issues included in the prohibitions and
restrictions on proprietary trading.
The implications of this rule will most definitely be felt around the globe.
International Update
As you know, I chair the Commission’s Global Markets Advisory
Committee and have participated for the last three years in the Technical
Committee meetings of IOSCO and so am particularly sensitive to
international regulatory issues.
As a quick recap on other jurisdictions, we continue to monitor the
progress of the European Market Infrastructure Regulation (EMIR), the
Markets in Financial Instruments Directive (MIFID) and the related
Markets in Financial Instruments Regulation (MIFIR), as well as the
proposed revisions to the Market Abuse Directive (MAD) and the Basel
Committee on Banking Supervision and IOSCO joint working group on
margin requirements for uncleared derivatives.
A political agreement on EMIR was reached last month; however, an
official version has yet to be released publicly.
Based on conversations with our European Commission (EC)
counterparts, EMIR will come into force on January 1, 2013, but will not
be applied until later in 2013.

_____________________________________________________________

More specifically, authorization of CCPs will not occur until mid-2013 and
we do not have an estimated date for when trade repositories will enter
into force.
With regard to MiFID and MiFIR, we expect that the European
Parliament will consider them at some point this summer.
All three of these proposals are the EU’s responses to the commitments
made by G-20 leaders in 2009 to address less regulated parts of the
financial system, such as OTC derivatives, and to improve the oversight
and transparency of commodity derivative markets.
MAD/MAR: The European Commission has also proposed regulations
to increase the number of commodity derivatives and OTC derivatives
that are covered by the market abuse regime.
The proposals extend the market manipulation prohibition to
instruments whose value relates to exchange traded instruments.
So for instance, an OTC derivative referenced to a contract traded on ICE
Futures Europe would fall within the new Directive.
These updated regulations now include prohibitions against attempted
manipulation, where the old rules only covered actual manipulation.
I should also point out that the new regulation gives the member states
more enforcement tools and criminalizes certain insider trading and
market manipulation offenses.
We expect these proposals will also be taken up by the European
Parliament this summer.
The IOSCO Task Force on OTC derivatives (TF) has been busy. Here’s a
sense of where various work is in the pipeline:
- the report on requirements for mandatory clearing;
- the TF’s “Follow on analysis to the report on trading”; and

_____________________________________________________________

- the report on OTC Derivatives Data Reporting and Aggregation
Requirements, which is the joint work of the TF and the Committee
on Payment and Settlement Systems (CPSS)
were all approved before or during the Feb. 2012 Tokyo Technical
Committee Meeting.
The last report left for the task force to take up, the report on OTC
Derivatives Market Intermediaries’ oversight, is nearly finished and likely
to be approved at the May IOSCO Annual meeting in Beijing.
Lastly, on the international front, I would like to report that the Basel
Committee on Banking Supervision and IOSCO has established a joint
working group on margin requirements for uncleared derivatives.
The group includes representatives from more than twenty regulatory
authorities, including the CFTC, and has held two in-person meetings
and numerous conference calls.
The topics discussed have included:
- the purposes of margin;
- the instruments subject to margin;
- entities subject to margin;
- categorization of counterparties;
- calculation of margin;
- eligible collateral;
- segregation of collateral;
- treatment of affiliates; and
- cross-border issues.
The group is working toward issuing a consultative paper mid-year.
US regulators will coordinate with the international effort, and my hope is
that US regulators will not take up the final rulemaking on margin
_____________________________________________________________

requirements for uncleared derivatives until after the international
standards have been settled.
Finally, I will turn to recent developments in Asia.
Japan
The Japanese legislature passed the Amendment to the Financial
Instruments and Exchange Act (“FIEA”) in May 2010.
This amendment gave the Japanese financial regulator, the JFSA, the
authority to regulate OTC derivatives.
The JFSA expects the implementing cabinet ordinance and other
measures to be finalized by November 2012.
Hong Kong
The Hong Kong Monetary Authority (“HKMA”) and Hong Kong
Securities and Futures Commission (“SFC”, together with the HKMA,
the “Hong Kong Authorities”) released a consultation paper on their
proposed OTC regulatory regime in October 2011.
The Hong Kong Authorities propose amending the Securities and
Futures Ordinance to set out a general framework for the regulation of the
OTC derivatives market, which includes providing relevant rulemaking
powers to the HKMA and SFC.
Hong Kong is working to adopt these regulations by the end of 2012.
Singapore
On February 13, 2012 the Monetary Authority of Singapore (“MAS”)
published a consultation paper with proposals to meet the G20 mandate
on the trading, clearing and reporting of OTC derivatives.
To implement the recommendations of the international standard setting
bodies, MAS proposed to expand the scope of the Securities and Futures
Act (“SFA”) to mandate central clearing and reporting of OTC derivatives
contracts, as well as regulate market operators, clearing facilities, trade
repositories and market intermediaries for OTC derivatives contracts.
_____________________________________________________________

Generally there is a fair amount of consistency between jurisdictions. Of
course there are some areas where coordination and cooperation are
essential.
I know the concept of indemnity in the context of swap data repositories
is an issue, as well as the desire by some for a central bank exemption
from the registration, public reporting and clearing requirements of
Dodd-Frank.
There is also a conflict regarding the open access to CCP’s rules which we
finalized in October of last year.
The rules prohibit a DCO from setting a minimum adjusted net capital
requirement of more than $50million for any person that seeks to become
a clearing member in order to clear swaps.
This very low number has generated concern from other authorities.
As you all know very well, market regulators around the globe are working
diligently to respond to the commitments made at the G-20 level.
Considering the scope of the work for all of these jurisdictions, I think the
progress made up to this point has been remarkable.
We will continue our efforts at the Commission coordinating with our
global counterparts and will probably be working to establish appropriate
rules and regulations for many years to come.
Conclusion
In closing, I would like to convey my persistent grief regarding the
process the Commission is using to finalize these very important rules.
I believe we should be crafting all of our regulations in a way that will
allow them to stand the test of time and to not favor one market segment
over another.
I believe that it is crucial for the marketplace and for market participants
that we get these rules right and that we finalize them in a way that is
reasonable and to not politicize them.

_____________________________________________________________

It would not be a good outcome if we are re-writing most of these rules in
the next couple of years because the rules do not reflect the useful input
we have received from the market.
We consistently reject reasoned comments from industry professionals
with little justification in our cost benefit analysis to support those
rejections.
I have been hopeful for the past year that things would change when we
started finalizing rules, and especially the rules that are so integral to the
new regulatory framework, but things have not changed.
I am no longer optimistic; I do not believe that these rules have a chance
of withstanding the test of time but instead believe that this Commission
will be consumed over the next few years using our valuable resources to
rewrite rules that we knew or should have known would not work when
we issued them.

_____________________________________________________________

Proposed Rules to Help Prevent and Detect Identity Theft, from
the Securities and Exchange Commission
The Securities and Exchange Commission announced a rule proposal to
help protect investors from identity theft by ensuring that broker-dealers,
mutual funds, and other SEC-regulated entities create programs to detect
and respond appropriately to red flags.
The SEC issued the proposal jointly with the Commodity Futures
Trading Commission (CFTC).
Section 1088 of the Dodd-Frank Act transferred authority over certain
parts of the Fair Credit Reporting Act from the Federal Trade
Commission (FTC) to the SEC and CFTC for entities they regulate.
The proposed rules are substantially similar to rules adopted in 2007 by
the FTC and other federal financial regulatory agencies that were
previously required to adopt such rules.
The rule proposal would require SEC-regulated entities to adopt a written
identity theft program that would include reasonable policies and
procedures to:
Identify relevant red flags.
Detect the occurrence of red flags.
Respond appropriately to the detected red flags.
Periodically update the program.
The proposed rule would include guidelines and examples of red flags to
help firms administer their programs.
The proposal will be published in the Federal Register with a 60-day
public comment period.
Summary
The Commodity Futures Trading Commission (“CFTC”) and the
Securities and Exchange Commission (“SEC,” together with the CFTC,

_____________________________________________________________

the “Commissions”) are jointly issuing proposed rules and guidelines to
implement new statutory provisions enacted by Title X of the
Dodd-Frank Wall Street Reform and Consumer Protection Act.

These provisions amend section 615(e) of the Fair Credit Reporting Act
and direct the Commissions to prescribe rules requiring entities that are
subject to the Commissions’ jurisdiction to address identity theft in two
ways.

First, the proposed rules and guidelines would require financial
institutions and creditors to develop and implement a written identity
theft prevention program that is designed to detect, prevent, and mitigate
identity theft in connection with certain existing accounts or the opening
of new accounts.

The Commissions also are proposing guidelines to assist entities in the
formulation and maintenance of a program that would satisfy the
requirements of the proposed rules.

Second, the proposed rules would establish special requirements for any
credit and debit card issuers that are subject to the Commissions’
jurisdiction, to assess the validity of notifications of changes of address
under certain circumstances.

DATES: Comments must be received on or before May 7, 2012.

All comments must be submitted in English, or if not, accompanied by an
English translation.

Proposed Identity Theft Red Flags Rules
Sections 615(e)(1)(A) and (B) of the FCRA, as amended by the
Dodd-Frank Act, require that the Commissions jointly establish and
maintain guidelines for “financial institutions” and “creditors” regarding
identity theft, and prescribe rules requiring such institutions and creditors
to establish reasonable policies and procedures for the implementation of
those guidelines.
_____________________________________________________________

The Commissions have sought to propose identity theft red flags rules
and guidelines that are substantially similar to the Agencies’ final identity
theft red flags rules and guidelines, and that would provide flexibility and
guidance to the entities subject to the Commissions’ jurisdiction.

To that end, the proposed rules discussed below would specify:

(1) Which financial institutions and creditors would be required to
develop and implement a written identity theft prevention program
(“Program”);

(2) The objectives of the Program;

(3) The elements that the Program would be required to contain; and

(4) The steps financial institutions and creditors would need to take to
administer the Program.

Which Financial Institutions and Creditors Would Be Required
to Have a Program
The “scope” subsections of the proposed rules generally set forth the
types of entities that would be subject to the Commissions’ identity theft
red flags rules and guidelines.

Under these proposed subsections, the rules would apply to entities over
which the Commissions have recently been granted enforcement
authority under the FCRA.

The Commissions’ proposed scope provisions are similar to the scope
provisions of the rules adopted by the Agencies.

The CFTC has tailored its proposed “scope” subsection, as well as the
definitions of “financial institution” and “creditor,” to describe the
entities to which its proposed identity theft red flags rules and guidelines
would apply.

_____________________________________________________________

The CFTC’s proposed rule states that it would apply to futures
commission merchants (“FCMs”), retail foreign exchange dealers,
commodity trading advisors (“CTAs”), commodity pool operators
(“CPOs”), introducing brokers (“IBs”), swap dealers, and major swap
participants.

The SEC’s proposed “scope” subsection provides that the proposed rules
and guidelines would apply to a financial institution or creditor, as
defined by the FCRA, that is:

• A broker, dealer or any other person that is registered or required to be
registered under the Securities Exchange Act of 1934 (“Exchange Act”);

• An investment company that is registered or required to be registered
under the Investment Company Act of 1940, that has elected to be
regulated as a business development company under that Act, or that
operates as an employees’ securities company under that Act; or

• An investment adviser that is registered or required to be registered
under the Investment Advisers Act of 1940.

The entities listed in the proposed scope section are the entities regulated
by the SEC that are most likely to be “financial institutions” or
“creditors,” i.e., registered brokers or dealers (“broker-dealers”),
investment companies and investment advisers.

The CFTC has determined that the proposed identity theft red flags rules
and guidelines would apply to these entities because of the increased
likelihood that these entities open or maintain covered accounts, or pose
a reasonably foreseeable risk to customers or to the safety and soundness
of the financial institution or creditor from identity theft.

The proposed scope section also would include other entities that are
registered or are required to register under the Exchange Act.

The section would not specifically identify those entities, such as
nationally recognized statistical ratings organizations, self-regulatory
_____________________________________________________________

organizations, and municipal advisors and municipal securities dealers,
because, as discussed below, they are unlikely to qualify as “financial
institutions” or “creditors” under the FCRA.

The proposed scope section also would not include entities that are not
themselves registered with the Commission, even if they register
securities under the Securities Act of 1933 or the Exchange Act, or report
information under the Investment Advisers Act of 1940.

• The Commissions solicit comment on the “scope” section of the
proposed identity theft red flags rules.
• Should the SEC’s proposed scope section specifically list all of the
entities that would be covered by the rule if they were to qualify as
financial institutions or creditors under the FCRA?

Are the entities specifically listed in the proposed rule the registered
entities that are most likely to be financial institutions or creditors under
the FCRA? Should the SEC exclude any entities that are listed?
Should it include any other entities that are not listed?

Should the SEC include entities that register securities with the SEC or
that report certain information to the SEC even if the entities themselves
do not register with the SEC?

Definition of Financial Institution
As discussed above, the Commissions’ proposed red flags rules and
guidelines would apply to “financial institutions” and “creditors.”

The Commissions are proposing to define the term “financial institution”
by reference to the definition of the term in section 603(t) of the FCRA.

That section defines a financial institution to include certain banks and
credit unions, and “any other person that, directly or indirectly, holds a
transaction account (as defined in section 19(b) of the Federal Reserve
Act) belonging to a consumer.”
_____________________________________________________________

Section 19(b) of the Federal Reserve Act defines a transaction account as
“a deposit or account on which the depositor or account holder is
permitted to make withdrawals by negotiable or transferable instrument,
payment orders of withdrawal, telephone transfers, or other similar items
for the purpose of making payments or transfers to third parties or
others.”

Accordingly, the Commissions are proposing to define “financial
institution” as having the same meaning as in the FCRA.

The CFTC’s proposed definition, however, also specifies that the term
“includes any futures commission merchant, retail foreign exchange
dealer, commodity trading advisor, commodity pool operator,
introducing broker, swap dealer, or major swap participant that directly or
indirectly holds a transaction account belonging to a customer.”

The SEC is not proposing to mention specific entities in its definition of
“financial institution” because the SEC’s proposed scope section lists
specific entities subject to the SEC’s rule.

Definition of Creditor

The Commissions are proposing to define “creditor” to reflect a recent
statutory definition of the term.

In December 2010, President Obama signed into law the Red Flag
Program Clarification Act of 2010 (“Clarification Act”), which amended
the definition of “creditor” in the FCRA for purposes of identity theft red
flag rules and guidelines.

The Commissions’ proposed definition of “creditor” would refer to the
definition in the FCRA as amended by the Clarification Act.

The FCRA now defines a “creditor,” for purposes of the red flags rules
and guidelines, as a creditor as defined in the Equal Credit Opportunity
Act (“ECOA”) (i.e., a person that regularly extends, renews or continues

_____________________________________________________________

credit, or makes those arrangements) that “regularly and payment of debt
or to incur debts and defer its payment or to purchase property or services
and defer payment therefor.”

The Agencies defined “credit” in the same manner in their identity theft
red flags rules.

The SEC’s proposed definition would include “lenders such as brokers or
dealers offering margin accounts, securities lending services, and short
selling services.”

These entities are likely to qualify as “creditors” under the proposed
definition because the funds that are advanced in these accounts do not
appear to be for “expenses incidental to a service provided.”

The proposed definition of “creditor” would not include, however, CTAs
or investment advisers because they bill in arrears, i.e., on a deferred basis,
if they do not “advance” funds to investors and clients.

The Elements of the Program
The proposed rules set out the four elements that financial institutions
and creditors would be required to include in their Programs.61 These
elements are identical to the elements required under the Agencies’ final
identity theft red flag rules.

First, the proposed rule would require financial institutions and creditors
to develop Programs that include reasonable policies and procedures to
identify relevant red flags for the covered accounts that the financial
institution or creditor offers or maintains, and incorporate those red flags
into its Program.

Rather than singling out specific red flags as mandatory or requiring
specific policies and procedures to identify possible red flags, this first
element would provide financial institutions and creditors with flexibility
in determining which red flags are relevant to their businesses and the
covered accounts they manage over time.
_____________________________________________________________

Given the changing nature of identity theft, the Commissions believe that
this element would allow financial institutions or creditors to respond and
adapt to new forms of identity theft and the attendant risks as they arise.

Second, the proposed rule would require financial institutions and
creditors to have reasonable policies and procedures to detect red flags
that have been incorporated into the Program of the financial institution
or creditor.

This element would not provide a specific method of detection.

Third, the proposed rule would require financial institutions and creditors
to have reasonable policies and procedures to respond appropriately to
any red flags that are detected.

This element would incorporate the requirement that a financial
institution or creditor assess whether the red flags detected evidence a
risk of identity theft and, if so, determine how to respond appropriately
based on the degree of risk.

Finally, the proposed rule would require financial institutions and
creditors to have reasonable policies and procedures to ensure that the
Program (including the red flags determined to be relevant) is updated
periodically, to reflect changes in risks to customers and to the safety and
soundness of the financial institution or creditor from identity theft.

As discussed above, financial institutions and creditors would be required
to determine which red flags are relevant to their businesses and the
covered accounts they manage.

The Commissions are proposing a periodic update, rather than
immediate or continuous updates, to be parallel with the final identity
theft red flags rules of the Agencies and to avoid unnecessary regulatory
burdens.

_____________________________________________________________

Proposed Amendments Conforming PCAOB Rules and Forms
to the Dodd-Frank Act
DATE: Feb. 28, 2012
SPEAKER: Daniel L. Goelzer, Board Member
EVENT: PCAOB Open Board Meeting
LOCATION: Washington, DC

These proposals would revise the Board's rules in light of the
Dodd-Frank Act and would also make an assortment of other updating
and clarifying changes.

The principal PCAOB impacts of the Dodd-Frank Act are to give the
Board regulatory authority over auditors of securities brokers and
dealers and to empower the Board to share non-public inspection
information with foreign regulators.

The new law also made some technical changes to the Board's
authority unrelated to those two objectives, such as clarifying that the
Board retains enforcement jurisdiction over people who violate Board
rules or standards, but leave the accounting profession before the
Board has a chance to commence disciplinary action against them.

Clearly, the Board needs to conform its rules to changes in the statutes
that govern its work, and I support the proposals.

To the extent they flow from Dodd-Frank, the amendments the staff
has proposed should be largely non-controversial.

However, mixed in with this regulatory housekeeping are some more
significant issues.

_____________________________________________________________

I hope that investors, public companies, broker-dealers, and auditors
will not let their eyes glaze over as they wade through the regulatory
minutiae and miss the nuggets of policy.

I would particularly direct attention to three areas.

First, as we have discussed at other public meetings, most
broker-dealers are small, non-public companies.

The rules that work for public company auditors may not always make
sense for closely-held, mom-and-pop operations.

For example, the Board is not proposing to extend the requirement for
audit committee pre-approval of auditor non-audit services to
broker-dealer engagements.

The Board is, however, proposing to apply the same prohibition
against the auditor providing tax services to individuals who are
involved in the financial reporting process to broker-dealer auditors as
already apply to issuer auditors.

While in general the lines drawn in the proposed amendments make
sense, I have doubts about the personal tax services provision.

As the proposing release explains, the Board adopted that part of its
independence rules in 2005, in response to situations in which the
auditor's tax advice to corporate executives seemed to be in conflict
with the best interests of the public company.

Clearly, the auditor should not be involved in situations in which
corporate insiders responsible for financial reporting cause a
publicly-held company to structure their compensation in a way that
reduces the insiders' taxes, but increases the company's.

But it is far from clear — at least to me — that the same concerns apply
to privately-held brokerage firms, especially ones that are owned by a
single individual or a small group of partners.

_____________________________________________________________

In those cases, the conflict between the audit client and the insider
does not exist, since there are no public shareholders.

Second, there are some significant proposals in this release that would
affect public company auditors. For example —

 The Board is proposing to require the filing of a special report if a
registered accounting firm resigns, declines to stand for
re-appointment, or is dismissed from an issuer audit engagement and
the issuer fails to file the required Form 8-K report with the SEC.
This proposed change addresses the potential risk posed when issuers
(including significant subsidiaries) change auditors, but fail to notify
the Commission and the investing public.
 The Board is also proposing to revise it annual reporting form,
Form 2, to reflect the Dodd-Frank requirement that certain foreign
public accounting firms must designate the Board or the Commission
is the firm's agent for service of process under Section 106 of the Act.
Designating such an agent makes it more feasible for the Commission
to compel foreign firms to produce work papers in SEC investigations.
In effect, the proposal would require firms to indicate in their annual
reports to the Board whether or not they have complied with this new
law.
I have no particular problem with these proposals, but they may raise
issues of the extent to which the Board should use its authority to
require firms to file reports as a lever to encourage compliance, or to
compensate for non-compliance, with other laws or with the SEC's 8-K
requirements.

Commenters may want to consider that issue.

Finally, these amendments include changes to the rules that govern
Board disciplinary proceedings, including increasing the level of fines,
specifying the burden of proof with respect to affirmative defences,
and encouraging affidavits in support of Wells submissions.

_____________________________________________________________

While I don't think any of these will have a major effect on the way
Board enforcement proceedings are conducted, those who regularly
practice before the Board should certainly pay attention to them.

PCAOB enforcement practitioners may also have ideas for other ways
in which the procedural framework that governs the enforcement
process could be improved.

As the Board gains more experience with its new authority under
Dodd-Frank, I expect that further revisions to the Board's rules and
procedures will be necessary.

In the meantime, I hope that commenters will provide any insights
they may have on the practical application of these proposals and on
whether there are other amendments that should be considered now.

I want to close by recognizing the staff members who have worked
hard over the last several months to prepare this release and the related
rule changes.

The work was, I am sure, at some points interesting and stimulating,
but at others tedious, if not mind-numbing.

The main authors of the release were Nancy Doty, Associate General
Counsel, and Vincent Meehan, Assistant General Counsel. Bob Burns,
Associate General Counsel, also played a key role. Thanks to all of you
for your efforts. Thanks also to our colleagues at the SEC for their
helpful suggestions.

_____________________________________________________________

Proposed Auditing Standard on Related Parties and Proposed
Amendments on Significant Unusual Transactions
DATE: Feb. 28, 2012
SPEAKER: Daniel L. Goelzer, Board Member

Non-arm's length transactions with company insiders, or with entities
controlled by insiders, have a long and notorious history in the annals
of fraudulent financial reporting.

Similarly, for nearly a century, every accounting student has learned
about the possibilities and perils of period-end window-dressing and
other kinds of form-over-substance maneuvers intended to produce an
accounting effect rather than to promote a business purpose.

And, as the idea of pay-for-performance has become business
orthodoxy during the last several decades, the risk that accounting
measures may be manipulated to meet compensation-triggering
targets has become painfully obvious.

Competent auditors are of course already well-aware of these risks,
and competently performed audits already address them.

The hunt for transactions and relationships with friendly parties, and
for unusual transactions with material financial reporting
consequences, is — or at least should be — a key part of any audit.

Nevertheless, the Board's inspection findings, the SEC and PCAOB
enforcement dockets, and the newspaper headlines all make clear that
there is considerable room for improvement.

However, I do not think it is the case that undetected related party
dealings, or financial statements that are misleading because they
_____________________________________________________________

elevate form-over-substance, are principally the result of weak
auditing standards.

The root causes often lie in lack of professional skepticism, lack of
proper training and technical competence, and lack of adequate time
and audit effort.

I do agree, however, that strengthening the standards in these areas is
a necessary step on the road to reducing the incidence of misleading
financial reporting and better protecting investors and increasing their
confidence.

The proposals the Board is considering seek to move auditing down
that road in several ways.

For example —

 Auditors would be required to perform specific procedures to
determine whether there are related parties that management has
failed to identify.
The proposal would explicitly recognize the risk that management
may fail to disclose all related party transactions and would tell the
auditor how to respond when that occurs.
The underlying theme of the proposed standard is the need for
heightened skepticism where related parties are involved.
 Similarly, auditors would be required to perform specific
procedures to identify significant unusual transactions and to obtain
an understanding of the business purpose — or lack thereof — once
such transactions are identified.
The proposal would also require the auditor to evaluate whether
significant unusual transactions have been appropriately accounted
for and adequately disclosed.
 Further, while Auditing Standard No. 12 already requires the
auditor to consider the risks of material misstatement associated with
_____________________________________________________________

a company's financial relationships with senior management, the
proposal would be more focused.
It would expressly require the auditor to obtain an understanding of
relationships, including compensation, with "executive officers" and,
in particular, to read executive officers' employment and
compensation contracts.
The proposals would also sharpen the requirements around what the
auditor must tell the audit committee about related party and
significant unusual transactions and when the committee must be
told.

For example, the proposed standard would require that the auditor
provide the audit committee with the auditor's assessment of the
company's accounting and disclosure regarding transactions with
related parties, prior to the issuance of the auditor's report.

The proposal would also require the auditor to inform the audit
committee if significant related party transactions that have not been
appropriately authorized, or that appear to lack a business purpose,
come to the auditor's attention.

In my view, these communications requirements are critical
components of what the Board is seeking to accomplish.

In many cases, the sorts of abuses these proposals address are
evidence of both a financial reporting break-down and a corporate
governance break-down.

The board of directors needs to be promptly armed with information
so that it can take appropriate action.

I support issuing these proposals for comment.

Of course, to make sure that final standard setting in this area
accomplishes its investor protection goals, it is important that
commenters tell the Board what the practical effect would be on the

_____________________________________________________________

way audits are conducted.

Also, if commenters have other ideas about ways to strengthen
auditing in these areas, I would encourage them to give the Board
their suggestions.

I want to thank the staff members who have worked on this proposal. I
particularly want to acknowledge the efforts of Deputy Chief Auditor
Greg Scates, Associate Chief Auditor Brian Degano, and Assistant
Chief Auditor Nick Grillo.

They have been ably supported with advice and input from OCA's
Counsel, Karen Burgess, and by Associate General Counsel Bob Burns
and Assistant General Counsel Nina Mojiri-Azad. Thanks to all of you
for your hard work and commitment to this important project.

_____________________________________________________________

DATE: Feb. 28, 2012
SPEAKER: James R. Doty, Chairman

Thank you for your summary of the proposed standard and
amendments before us today and thank you all for your hard work
drafting these proposals.

This proposal contemplates additional audit procedures intended to
improve the auditor's evaluation of the identification of, accounting
for, and disclosure about related parties and significant unusual
transactions.

The Board is considering this proposal because related party
transactions and significant unusual transactions have played a
recurring role in financial failures, from those that led to the
Sarbanes-Oxley Act to those recently alleged in certain emerging
market companies.

Auditors have a unique vantage point from which to identify improper
transactions.

We want this proposal and the related amendments to sharpen
auditors' focus and help them be more effective in their investor
protection role.

We have been mindful to build on our existing risk assessment

_____________________________________________________________

standards to align those concepts with this proposal.

Accordingly, these changes are intended to make audits more
efficient, more effective and integrated with the overall audit approach.

This proposal should also enhance the auditors' understanding of the
issuers' financial arrangements with its senior officers.

Members of our Standing Advisory Group have noted the importance
of additional guidance to auditors in this high risk area, precisely to
avoid misdirected or fruitless attempts to audit related party
transitions effectively.

DATE: Feb. 28, 2012
SPEAKER: Lewis H. Ferguson, Board Member

I support the release of the proposed standard dealing with related
parties that would supersede AU 334, as well as the proposed
amendments to AU 316, Consideration of Fraud in a Financial
Statement Audit, to strengthen the auditor's evaluation of significant
unusual transactions, and the amendments to PCAOB standards that
would address the auditor's consideration of a company's financial
relationships and transactions with its executive officers.

Taken together, these new standards further elucidate and strengthen
the Board's risk assessment standards set forth in Auditing Standards
8 through 15.

Related party transactions, significant and unusual transactions, and
transactions between a company and its executive officers may or may
not overlap, but together they encompass types of relationships and
_____________________________________________________________

transactions that may be especially vulnerable to fraud or material
misstatement of financial statements.

Indeed, an examination of the major financial frauds and financial
statement restatements in recent years, both in the U.S. and abroad,
reveals that one or more of the relationships or types of transactions
addressed by these proposals have been present in many of these
cases.

The PCAOB's own inspection results have shown that some auditors
have not given adequate consideration to the risks of material
misstatement from related party transactions.

Our inspection results have also revealed deficiencies in some
auditors' consideration and understanding of off-balance sheet
structures which can also be a source of material misstatement.

These facts suggest two things to me:

1) that the types of relationships and transactions addressed by the
Board's proposals deserve special scrutiny by auditors and

2) that audit committees should be informed in detail of the work
performed by auditors in these areas so that they can fully understand
their meaning and implications.

These new standards should both clarify for auditors those areas that
the Board believes require special attention and should insure that
audit committees are better informed about them.

With respect to related parties, auditors should ascertain from
management information about the identity, background, nature of
the relationship, types of transactions and business reasons for the
transactions as well as whether they were authorized in accordance
with company policy.

These rules are designed to give the auditor an understanding of the
economic substance and business rationale for the transaction, an
_____________________________________________________________

understanding that should make abuses easier to spot.

The amendments to AU 316 will require auditors to perform specific
procedures to identify significant unusual transactions, to understand
and evaluate the business purpose of such transactions and to evaluate
whether they have been appropriately accounted for and adequately
disclosed.

Additionally, other amendments will require auditors to perform
procedures to obtain an understanding of the company's financial
relationships and transactions with its executives, to obtain
representations from management that there are no other
arrangements, whether oral or written, concerning such relationships
and transactions that have not been disclosed.

The amendments will also emphasize the auditor's existing
responsibilities to communicate possible fraud to management, the
audit committee and under certain circumstances the U.S. Securities
and Exchange Commission.

Together, the proposed changes should provide clearer guidance
about the types of investigative and analytic steps that auditors need to
undertake in connection with types of relationships and transactions
that experience has shown are particularly subject to abuse.

If they operate as intended they may improve the analytical rigor with
which auditors approach such matters and the understanding of audit
committees of such transactions.

If, as hoped, this is the case, investors will be the beneficiaries.

I want to acknowledge and express my appreciation for the dedicated
of the Office of the Chief Auditor and the General Counsel on the
proposals and specifically Greg Scates, Brian Degano, Nick Grillo,
Bob Burns and Nina Mojiri-Azad. We look forward to receiving
comments on these proposals.

_____________________________________________________________

DATE: Feb. 28, 2012
SPEAKER: Jay D. Hanson, Board Member

The standards we are proposing today "raise the bar" for what
auditors are required to do in auditing related party transactions and
other transactions deemed to be significant and unusual.

Investors have been harmed in the past by frauds perpetuated in
connection with related parties as well as surprised by the significance
of related party transactions and significant unusual transactions not
disclosed to them.

These proposed standards are intended to address both problems.

Many years ago, as a young audit senior, I was responsible for
detecting a fraud at a client.

As it turned out, the fraud went to the highest level of the organization.

The business was struggling to meet its cash needs and found
"creative" ways to obtain more money from its asset based lender.

The creative ways ultimately crossed the line. In reviewing the audit
results, it became clear that too many things failed to add up.

Several related parties had been identified and disclosed in the past,
and as I dug deeper into these related parties, I encountered more
questions than answers.

The simple question, "where is this related party located?" was met
with evasive answers.

_____________________________________________________________

The answer to the question of how many employees the related party
had — zero — was troubling and created serious doubt about whether
the related party was actually providing any services.

As I began to understand the flow of transactions, or, rather, the flow
of funds, it became clear how the lender was being defrauded.

Unfortunately, the business did not have an audit committee, and the
CEO was deeply involved in the fraud.

Ultimately, the CEO pled guilty to charges against him and died in
prison.

This is but one example of many similar scenarios, some of which are
not discovered until great harm has been done to investors.

In some cases, related party transactions involve difficult
measurement and recognition issues that pose a risk of material
misstatement in the financial statements; in other cases, related party
transactions have been used — as in the situation I encountered — to
engage in fraud.

The auditing standard addressing related parties dates back almost 30
years to 1983, and the standard we are proposing today is the result of a
fresh look at this important topic.

It is intended to strengthen the existing audit procedures for
identifying, assessing and responding to the risks of material
misstatement associated with a company's related party transactions.

Complementing this proposed standard are proposed amendments to
strengthen the auditor's identification and evaluation of significant
unusual transactions, along with a series of amendments to standards
addressing related matters, such as transactions and relationships with
executive officers.

The changes we are proposing today attempt to apply a
comprehensive and common sense approach to the auditor's work to
_____________________________________________________________

identify and understand related party transactions, significant and
unusual transactions, and their respective implications.

The proposed related party standard requires auditors:

 to consider the fraud risks posed by the relevant transactions;
 to conduct procedures to identify related parties, including by
asking management to identify such relationships and the resulting
transactions;
 to discuss relevant relationships and transactions with the audit
committee, including inquiring about any concerns that audit
committee members may have about any related party relationships;
 to conduct specified procedures to understand the transactions,
including their business purpose and the company's accounting and
disclosures; and
 to consider all other evidence revealed during the auditor's work
that may be relevant to the auditor's evaluation.
Similar to the proposed standard on related parties, the proposed
amendments to AU sec. 316 are intended to focus auditors on the
identification and evaluation of significant unusual transactions.

Identifying such transactions — broadly defined in the proposed
amendments as significant transactions outside the normal course of
business or that otherwise appear to be unusual due to their timing,
size or nature — may be difficult.

However, it is a procedure that is vital to protecting the interests of
investors.

The proposed amendments would require auditors to inquire about
such transactions with a variety of parties, to understand and consider
the implications of the company's internal controls related to such
transactions, and to review other information that comes to light
during the performance of the audit that may evidence significant
_____________________________________________________________

unusual transactions.

The amendments also would require auditors to design and perform
specific audit procedures intended to address the risks of material
misstatement uniquely presented by significant unusual transactions
and to facilitate a clearer understanding by auditors of the business
purpose of such transactions.

As I noted earlier, the proposed standard, Related Parties, and the
proposed amendments regarding significant unusual transactions also
are intended to complement each other.

For example, while Appendix A to the new related parties standard
provides guidance to auditors on examples of information that could
indicate the existence of transactions with related parties, it may also
help auditors to identify significant unusual transactions.

At the same time, the new procedures required in connection with the
auditor's evaluation of significant unusual transactions may also help
the auditor identify related parties or transactions with related parties
that were previously undisclosed to the auditor.

I believe that the proposed standard and proposed amendments —
through the increased focus on related party and significant unusual
transactions, and the increase in audit procedures required in these
areas — will increase investor confidence in the financial statements
and serve the public interest.

However, I am, as always, interested in the costs associated with the
proposals, and whether there are any unintended consequences that
we should consider before adopting final standards.

In crafting the proposed standard and other amendments, we
considered what burdens would be imposed on auditors and their
clients.

For example, in connection with the proposed requirements relating to
the auditor's work to understand the company's financial relationships
_____________________________________________________________

and transactions with its executive officers, we thought carefully about
what procedures to require in order to obtain the maximum benefit
without imposing unreasonable burdens, and I believe we have struck
an appropriate balance.

Cost-benefit analysis has been a much discussed topic recently in the
context of financial regulation.

Many believe, and I agree, that it is difficult to monetize or otherwise
quantify the benefits of such regulations.

Nevertheless, we can explain the benefits and consider the costs of
implementing our proposals.

In that vein, I encourage commenters to provide us with your views on
the benefits to investors of the amendments that we have proposed, as
well as to let us know whether management or auditors anticipate
significant cost increases as a result of the additional procedures.

Are some firms already performing the proposed procedures, even if
not currently required?

If not, consider whether you can try to apply the proposed standard
and provide us with feedback on your experiences. Are there other
procedures that firms or audit committees have found effective in
these areas?

Do investors or audit committees believe that we have missed any
steps that should be required?

Do audit committee members believe that more should be done, or
that additional items should be discussed by the auditor and the audit
committee?

I look forward to receiving thoughtful comments on these questions
and many others posed in the release.

In the meantime, I would like to join my fellow Board members in
_____________________________________________________________

thanking members of the Office of the Chief Auditor and of the Office
of General Counsel for their hard work, particularly Greg Scates, Brian
Degano, Nick Grillo, Karen Burgess, Bob Burns, and Nina
Mojiri-Azad.

As usual, their work is exemplary. I would also like to thank the staff of
the SEC who took time to provide their views; we always benefit from
their expertise and perspective.

_____________________________________________________________

Gabriel Bernardino, Chairman of EIOPA
Stability and growth – A balancing act
Gala Dinner of the Institutional Money Congress,

Ladies and Gentlemen,
I am very pleased to be here with you tonight.

First of all I would like to thank the organizers for their invitation to
deliver this short dinner speech.

It is my pleasure as Chair of EIOPA, the European Insurance and
Occupational Pensions Authority, based in Frankfurt, to welcome you to
such an important congress.

The Institutional Money Congress is known as a significant
communication platform for institutional investors, providing an ideal
forum for professional exchange between internationally renowned asset
managers and institutional investors.

This year it will also be an opportunity to debate the challenges posed by
recent regulatory initiatives, such as Solvency II and Basel III, and
discuss their possible effects on the investment policies of financial
institutions.
As for challenges I think there is no doubt that the development and
implementation of these regimes requires significant effort not only from
regulatory and supervisory authorities, but also from the industry.

_____________________________________________________________

The more these issues are discussed, the easier we will build up a new
financial culture based on robust standards of solvency, enhanced risk
management and increased consumer protection.

And by launching discussions and different workshops on such topics,
the Institutional Money Congress creates a basis for this culture.

Because only by discussing, by exchanging views we can reach a full
understanding of the regimes by all market participants.

Let me start by using this opportunity to make some remarks about the
possible consequences of Solvency II on the investment behaviour of
insurers and more generally on the financial markets.

It is clear that applying capital charges for investment risk may encourage
insurers to shift to less volatile investments, especially when the expected
financial returns of risky assets do not offset the additional capital
requirement.

However, as insurers are aware of the changing regulation and have been
rebalancing their portfolios accordingly, there should not be any
significant sudden portfolio reallocations.

Most importantly, a reduction of investment risk could also be achieved
by an improvement in asset liability management, especially on long term
guaranteed products.

That is the purpose of the strong focus of Solvency II on enhancing risk
management policies and practices.
Controlling and ensuring sound and prudent management is far more
important than the capital calculations, because management errors by
their nature cannot be compensated by capital requirements.

As a consequence of a greater focus on asset liability management,
insurers could be willing to invest more in relatively highly rated
corporate bonds since they offer higher yield and would provide
diversification benefits within the fixed income portfolio.
_____________________________________________________________

Therefore, easier access to financing could be granted to firms with high
credit ratings, which will translate into a lower cost of capital and would
therefore contribute to higher investment and economic growth.

Overall, regulatory regimes are always a result of a balancing act between
different objectives.

I am convinced that Solvency II will provide an appropriate basis for
increased policyholder protection and will contribute to reinforcing
financial stability, while allowing insurance companies to continue to
play their role as long term investors.

In a recent paper one of your distinguished guests, Prof. Thomas Sargent,
discussed where to draw the line between stability and efficiency.

In my opinion this is a fundamental question for the policy decisions to
be taken in the coming years.

We need to decide what we want to privilege: security or growth.

If we want both, and I believe we should, then we need to be prepared to
collectively accept some risks.

One of the major consequences of the financial crisis was the fall of
confidence and trust in the financial sector and increase in suspicion on
all areas of financial innovation.

Unfortunately, the benefits of financial innovation have been
overshadowed by the costs of some activities that went really bad.
I believe regulators and the industry need to take a fresh look at this area.

Financial innovation tools can be a useful way for investors to protect
themselves against unavoidable risks.

However, they should be used to facilitate risk transfer and access to
funding within the real economy and not to help institutions to arbitrage
regulations and make balance sheets look safer than they are.
_____________________________________________________________

In order to increase long term stability and regain consumer confidence
in the financial system we need to proceed with the reforms not only by
adapting regulation but also by changing behaviour.

We should encourage realistic risk assessment and pricing.

Market participants should take concrete steps to promote responsible
business conduct.

Overall we also need to reinforce preventive risk based supervision and
timely enforcement.

We have all been witnessing during the last years systemic risks caused
by excessive leverage combined with risky financial products as well as
inadequacies in financial regulation and supervision.

Various uncertainties around the global financial system are still at place.

In the modern highly integrated environment financial stability can be
already thought of as an international public good.

All countries benefit from the stability of the world financial system as a
whole.

But at the same time all countries experience certain costs when the
system is unstable.

So it became clear that without more effective supervision it will not be
possible to address further systemic risks in the financial system.
This calls for international coordination.

A number of different international bodies such as G20 and the Financial
Stability Board are currently working on these issues in their different
spheres of influence.

EIOPA for example is contributing to the development of a common
framework for supervising internationally active insurance groups and
_____________________________________________________________

developing criteria to identify systemic risk in insurance activities, both
conducted under the umbrella of the International Association of
Insurance Supervisors (IAIS).

The results of this heavy regulatory agenda will reshape the financial
system as we know it and we should be prepared to cope with the
challenges ahead.

At EIOPA we are quite aware of the relevance of our mandate and
responsibilities.

As you may know in January 2012 EIOPA completed the first year in its
status as a European institution, one of the three European Supervisory
Authorities.

EIOPA’s mission is to protect the public interest by contributing to the
short, medium and long term stability and effectiveness of the financial
system, for the EU citizens and economy.

This mission is pursued by promoting a sound regulatory framework and
consistent supervisory practices in order to protect the rights of
policyholders, pension scheme members and beneficiaries and contribute
to the public confidence in the European Union’s insurance and
occupational pensions sectors.

And I would like to assure you that we are ambitious in fulfilling our
obligations towards the EU citizens and businesses.

EIOPA is currently intensively working on the development of technical
standards and guidelines that are essential for the implementation of
Solvency II.

But if I start elaborating further on this, it will not be a dinner speech
anymore, but an epic poem.

_____________________________________________________________

EIOPA is also working intensively on the review of the IORP Directive,
advising the EU Commission on the ways to introduce a risk based
framework for the supervision of occupational pension funds.

EIOPA is an institution open to society.

We want to listen and debate with the different stakeholders and that is
why we value very much the opportunity to exchange views with you
during this Congress.

Thank you for your attention and have a good dinner.

_____________________________________________________________

IARCP Newsletter Discusses ECB Letter Seeking Clarification on Dodd-Frank Act

IARCP Newsletter Discusses ECB Letter Seeking Clarification on Dodd-Frank Act

Recomendados

Recomendados

Mais conteúdo relacionado

Semelhante a IARCP Newsletter Discusses ECB Letter Seeking Clarification on Dodd-Frank Act

Semelhante a IARCP Newsletter Discusses ECB Letter Seeking Clarification on Dodd-Frank Act (20)

Mais de Compliance LLC

Mais de Compliance LLC (20)

Último

Último (20)

IARCP Newsletter Discusses ECB Letter Seeking Clarification on Dodd-Frank Act