International Association of Risk and Compliance Professionals (IARCP)

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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.comTop 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,

Which is the difference between good deleveraging and bad deleveraging?According to Dr Andreas Dombret, Member of the Executive Board of the DeutscheBundesbank, good deleveraging means scaling back the exposure to other financial intermediaries, whereas bad deleveraging means that lending to the real economy is being reduced.Dr Andreas Dombret is one of my favourite speakers. In Number 2 of our list he asks the question:Will 2012 go down in history as an annus horribilis or rather as anannus mirabilis, or neither?He starts from the originator of the annus horribilis, Queen Elizabeth, that used the phrase to describe her feelings about the year 1992, and he goes on with the fire at Windsor Castle. Many people use the metaphor of a large-scale fire to explain the economic term of a systemic event.The fire spread so rapidly due to a citys narrow streets and the interconnectedness of houses.The fire in the financial markets was stopped by the ECB, by the two firewalls EFSF and ESM as well as by the governments announcing that they would improve the financial system.Thus 2012 is an annus mirabilis.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 2

He also remembered Peter Bernstein, the financial historian from the US, that illustrated his point by citing the anecdote of a Moscovite professor of statistics, who refused to go to the air-raid shelter during World War II bomb attacks.The professor argued: See, Moscow has seven million inhabitants. Why should I expect to be one who will be hit?His neighbours were astonished, when he came back to the shelter the next night.Now the professors argumentation was:Moscow has seven million inhabitants and one elephant. Last night the elephant was hit.More at Number 2 of our list.

In Number 1 this week we have the speech of Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas.

He speaks about the the injustice of being held hostage to large financial institutions considered too big to fail.

I enjoyed what he remembered:

One is reminded of the comment French Prime Minister Clemenceau made about President Wilsons 14 points:

Why 14? he asked. God did it in 10.

Were that we only had 14 points of financial regulation to contend with today.Read more at Number 1 below. Welcome to the Top 10 list.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 3Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas.

Ending 'Too Big to Fail': A Proposal for Reform Before It's Too Late (With Reference to Patrick Henry, Complexity and Reality)

Remarks before the Committee for the Republic Washington, D.C. January 16, 2013Dr Andreas DombretMember of the Executive Board of the Deutsche Bundesbank

Challenges for financial stability policy and academic aspects

Dinner Speech at the Joint Conference of the Deutsche Bundesbank, the Technical University Dresden and the Journal of Financial StabilityPreserving the safety and security of Malaysias banking system

Speech by Mr Encik Abu Hassan Alshari Yahaya, Assistant Governor of the Central Bank of Malaysia, at the launch of the e-Banking Fraud Awareness Campaign, Kuala LumpurInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 4Comments received on the consultative report "Recovery and resolution of financial market infrastructures

South Africa, Financial Services Board (FSB) has requested the SAFEX Clearing Company (Pty) Limited (SAFCOM) and Strate Limited to provide feedback.Opening Remarks at Investor Advisory Committee MeetingBy Chairman Elisse WalterU.S. Securities and Exchange Commission Washington, D.C. January 18, 2013Tougher credit rating rules confirmed by European Parliament's vote

New rules on when and how credit rating agencies may rate state debts and private firms' financial health were approved by Parliament on Wednesday.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 5FSA UK

Risk to Customers from Financial Incentives

Consumer trust and confidence in financial services is essential.Ensuring the smooth functioning of money markets

Speech by Mr Benot Coeur, Member of the Executive Board of the European Central Bank, at the 17th Global Securities Financing Summit, Luxembourg, 16 January 2013.Michel BARNIER

The European banking union, a precondition to financial stability and a historical step forward for European integrationInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 6Understanding the European Banking UnionIn June 2012, EU leaders agreed to deepeneconomic and monetary union as one of the remedies of the current crisis.

At that meeting (European Council of 28/29 June), the leaders discussed the report entitled 'Towards a Genuine Economic and Monetary Union', prepared by the President of the European Council in close collaboration with the President of the European Commission, the Chair of the Eurogroup and the President of the European Central Bank.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 7Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas.

Ending 'Too Big to Fail': A Proposal for Reform Before It's Too Late (With Reference to Patrick Henry, Complexity and Reality)

Remarks before the Committee for the Republic Washington, D.C. January 16, 2013

It is an honor to be introduced by my college classmate, John Henry. John is a descendant of the iconic patriot, Patrick Henry.

Most of Johns ancestors were prominent colonial Virginians and many were anti-crown. Patrick, however, was the most outspoken.

Ask John why this was so, and he will answer: Patrick was poor.However poor he may have been, Patrick Henry was a rich orator. In one of his greatest speeches, he said:

Different men often see the same subject in different lights; and therefore, I hope that it will not be thought disrespectful to those gentlemen if, entertaining as I do, opinions of a character very opposite to theirs, I shall speak forth my sentiments freely, and without reserve.

This is no time for ceremony [it] is one of awful moment to this country.

Patrick Henry was addressing the repression of the American colonies by the British crown.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 8

Tonight, I wish to speak to a different kind of repressionthe injustice of being held hostage to large financial institutions considered too big to fail, or TBTF for short.

I submit that these institutions, as a result of their privileged status, exact an unfair tax upon the American people.

Moreover, they interfere with the transmission of monetary policy and inhibit the advancement of our nations economic prosperity.

I have spoken of this for several years, beginning with a speech on the Pathology of Too-Big-to-Fail in July 2009.

My colleague, Harvey Rosenbluma highly respected economist and the Dallas Feds director of researchand I and our staff have written about it extensively.

Tomorrow, we will issue a special report that further elucidates our proposal for dealing with the pathology of TBTF.

It also addresses the superior relative performance of community banks during the recent crisis and how they are being victimized by excessive regulation that stems from responses to the sins of their behemoth counterparts.

I urge all of you to read that report.

Now, Federal Reserve convention requires that I issue a disclaimer here: I speak only for the Federal Reserve Bank of Dallas, not for others associated with our central bank.

That is usually abundantly clear.

In many matters, my staff and I entertain opinions that are very different from those of many of our esteemed colleagues elsewhere in the Federal Reserve System.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 9

Today, I speak forth my sentiments freely and without reserve on the issue of TBTF, while meaning no disrespect to others who may hold different views.

The Problem of TBTF

Everyone and their sister knows that financial institutions deemed too big to fail were at the epicenter of the 200709 financial crisis.

Previously thought of as islands of safety in a sea of risk, they became the enablers of a financial tsunami.

Now that the storm has subsided, we submit that they are a key reason accommodative monetary policy and government policies have failed to adequately affect the economic recovery.

Harvey Rosenblum and I first wrote about this in an article published in the Wall Street Journal in September 2009, The Blob That Ate Monetary Policy.

Put simply, sick banks dont lend. Sickseriously undercapitalized megabanks stopped their lending and capital market activities during the crisis and economic recovery.

They brought economic growth to a standstill and spread their sickness to the rest of the banking system.

Congress thought it would address the issue of TBTF through the DoddFrank Wall Street Reform and Consumer Protection Act.

Preventing TBTF from ever occurring again is in the very preamble of the act.

We contend that DoddFrank has not done enough to corral TBTF banks and that, on balance, the act has made things worse, not better.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 10

We submit that, in the short run, parts of DoddFrank have exacerbated weak economic growth by increasing regulatory uncertainty in key sectors of the U.S. economy.

It has clearly benefited many lawyers and created new layers of bureaucracy.

Despite its good intention, it has been counterproductive, working against solving the core problem it seeks to address.

Defining TBTF

Let me define what we mean when we speak of TBTF.

The Dallas Feds definition is financial firms whose owners, managers and customers believe themselves to be exempt from the processes of bankruptcy and creative destruction.

Such firms capture the financial upside of their actions but largely avoid paymentbankruptcy and closurefor actions gone wrong, in violation of one of the basic tenets of market capitalism (at least as it is supposed to be practiced in the United States).

Such firms enjoy subsidies relative to their non-TBTF competitors.

They are thus more likely to take greater risks in search of profits, protected by the presumption that bankruptcy is a highly unlikely outcome.

The phenomenon of TBTF is the result of an implicit but widelytaken-for-granted government-sanctioned policy of coming to the aid of the owners, managers and creditors of a financial institution deemed to be so large, interconnected and/or complex that its failure could substantially damage the financial system.

By reducing a TBTF firms exposure to losses from excessive risk taking, such policies undermine the discipline that market forces normally assert on management decision making.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 11

The reduction of market discipline has been further eroded by implicit extensions of the federal safety net beyond commercial banks to their nonbank affiliates.

Moreover, industry consolidation, fostered by subsidized growth (and during the crisis, encouraged by the federal government in the acquisitions of Merrill Lynch, Bear Stearns, Washington Mutual and Wachovia), has perpetuated and enlarged the weight of financial firms deemed TBTF.

This reduces competition in lending.

DoddFrank does not do enough to constrain the behemoth banks advantages. Indeed, given its complexity, it unwittingly exacerbates them.

Complexity Bites

Andrew Haldane, the highly respected member of the Financial Policy Committee of the Bank of England, addressed this at last summers Jackson Hole, Wyo., policymakers meeting in witty remarks titled, The Dog and the Frisbee.

Here are some choice passages from that noteworthy speech.

Haldane notes that regulators efforts to catch the crisis Frisbee have continued to escalate.

Casual empiricism reveals an ever-growing number of regulators

Ever-larger litters have not, however, obviously improved the watchdogs Frisbee-catching abilities.

[After all,] no regulator had the foresight to predict the financial crisis, although some have since exhibited supernatural powers of hindsight.

So what is the secret of the watchdogs failure?International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 12

The answer is simple.

Or rather, it is complexity complex regulation might not just be costly and cumbersome but sub-optimal. In financial regulation, less may be more.

One is reminded of the comment French Prime Minister Clemenceau made about President Wilsons 14 points:

Why 14? he asked. God did it in 10.

Were that we only had 14 points of financial regulation to contend with today.

Haldane notes that DoddFrank comes against a background of ever-greater escalation of financial regulation.

He points out that nationally chartered banks began to file the antecedents of call reports after the formation of the Office of the Comptroller of the Currency in 1863.

The Federal Reserve Act of 1913 required state-chartered member banks to do the same, having them submitted to the Federal Reserve starting in 1917.

They were short forms; in 1930, Haldane noted, these reports numbered 80 entries.

In 1986, [the call reports submitted by bank holding companies] covered 547 columns in Excel, by 1999, 1,208 columns.

By 2011 2,271 columns.

Fortunately, he adds wryly, Excel had expanded sufficiently to capture the increase.

Though this growingly complex reporting failed to prevent detection of the seeds of the debacle of 200709, DoddFrank has layered on copiousInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 13

amounts of new complexity. The legislation has 16 titles and runs 848 pages.

It spawns litter upon litter of regulations: More than 8,800 pages of regulations have already been proposed, and the process is not yet done.

In his speech, Haldane notedconservatively, in my viewthat a survey of the Federal Register showed that complying with these new rules would require 2,260,631 labor hours each year.

He added: Of course, the costs of this regulatory edifice would be considered small if they delivered even modest improvements to regulators ability to avert future crises.

He then goes on to argue the wick is not worth the candle.

And he concludes: Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex.

That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity.

[The situation] requires a regulatory response grounded in simplicity, not complexity. Delivering that would require an about-turn.

The Dallas Feds Proposal: A Reasonable About-Turn

The Dallas Feds proposal offers an about-turn and a way to mend the flaws in DoddFrank. It fights unnecessary complexity with simplicity where appropriate.

It eliminates much of the mumbo-jumbo, ineffective, costly complexity of DoddFrank.

Of note, it would be especially helpful to non-TBTF banks that do not pose systemic or broad risk to the economy or the financial system.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 14

Our proposal would relieve small banks of some unnecessary burdens arising from DoddFrank that unfairly penalize them.

Our proposal would effectively level the playing field for all banking organizations in the country and provide the best protection for taxpaying citizens.

In a nutshell, we recommend that TBTF financial institutions be restructured into multiple business entities.

Only the resulting downsized commercial banking operationsand not shadow banking affiliates or the parent companywould benefit from the safety net of federal deposit insurance and access to the Federal Reserves discount window.

Defining the Landscape

It is important to have an accurate view of the landscape of banking today in order to understand the impact of this proposal.

As of third quarter 2012, there were approximately 5,600 commercial banking organizations in the U.S.

The bulk of theseroughly 5,500were community banks with assets of less than $10 billion.

These community-focused organizations accounted for 98.6 percent of all banks but only 12 percent of total industry assets.

Another group numbering nearly 70 banking organizationswith assets of between $10 billion and $250 billionaccounted for 1.2 percent of banks, while controlling 19 percent of industry assets.

The remaining group, the megabankswith assets of between $250 billion and $2.3 trillionwas made up of a mere 12 institutions.

These dozen behemoths accounted for roughly 0.2 percent of all banks, but they held 69 percent of industry assets.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 15The 12 institutions that presently account for 69 percent of total industry assets are candidates to be considered TBTF because of the threat they could pose to the financial system and the economy should one or more of them get into trouble.

By contrast, should any of the other 99.8 percent of banking institutions get into trouble, the matter most likely would be settled withprivate-sector ownership changes and minimal governmentalintervention.

How and why does this work for 99.8 percent but not the other 0.2 percent?International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 16

To answer this question, it helps to consider the sources of regulatory and market discipline imposed on each of the three groups of banks.

Lets look at two dimensions of regulatory discipline: Potential closure of the institution and the effectiveness of supervisory pressure on bank management practices.

Do the owners and managers of a banking institution operate with the belief that their institution is subject to a bankruptcy process that works reasonably quickly to transfer ownership and control to another banking entity or entities?

Is there a group of interested and involved shareholders that can exert a restraining force on franchise-threatening risk taking by the banks top management team?

Can management be replaced and ownership value wiped out? Is the firm controlled de facto by its owners, or instead effectivelymanagement-controlled?

In addition, we ask: To what extent do uninsured creditors of the banking entity impose risk-management discipline on management?

This analytical framework is summarized in the following slide:International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 17Looking across line 1, it is clear that community banks are subject to considerable regulatory and shareholder discipline.

They can and do fail.

In the last few years, the Federal Deposit Insurance Corp. (FDIC) has built a reputation for regulators carrying out Joseph Schumpeters concept of creative destruction by taking over small banks on a Friday evening and reopening them on Monday morning under new ownership.In on Friday, out by Monday is the mantra of this process. Knowing the power of banking supervisors to close the institution,owners and managers of community banks heed supervisory suggestionsto limit risk.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 18

Community banks often have a few significant shareholders who have a considerable portion of their wealth tied to the fate of the bank.

Consequently, they exert substantial control over the behavior of management because risk and potential closure matter to them.

Since community banks derive the bulk of their funding from federally insured deposits, they are simple rather than complex in their capital structure and rarely have uninsured and unsecured creditors.

Market discipline over management practices is primarily exerted through shareholders.

Of the three groups, the 70 regional and moderate-sized banking organizations depicted in line 2 are subject to a broader range of market discipline.

Like community banks, these institutions are not exempt from the bankruptcy process; they can and do fail.

But given their size, complexity and generally larger geographic footprint, the failure resolution and ownership transfer processes cannot always be accomplished over a weekend.

In practice, owners and managers of mid-sized institutions are nonetheless aware of the downside consequences of the risks taken by the institution.

Uninsured depositors and unsecured creditors are also aware of their unprotected status in the event the institution experiences financial difficulties.

Mid-sized banking institutions receive a good dose of external discipline from both supervisors and market-based signals.

TBTF megabanks, depicted in line 3, receive far too little regulatory and market discipline.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 19

This is unfortunate because their failure, if it were allowed, could disrupt financial markets and the economy. For all intents and purposes, we believe that TBTF banks have not been allowed to fail outright.

Knowing this, the management of TBTF banks can, to a large extent, choose to resist the advice and guidance of their bank supervisors efforts to impose regulatory discipline. And for TBTF banks, the forces of market discipline from shareholders and unsecured creditors are limited.

Lets first consider discipline from shareholders.

Having millions of stockholders has diluted shareholders ability to prevent the management of TBTF banks from pursuing corporate strategies that are profitable for management, though not necessarily for shareholders.

As we learned during the crisis, adverse information on poor financial performance often is available too late for shareholder reaction or credit default swap (CDS) spreads to have any impact on management behavior.

For example, during the financial crisis, shares in two of the largest bank holding companies (BHCs) declined more than 95 percent from their prior peak prices and their CDS spreads went haywire.

The ratings agencies eventually reacted, in keeping with their tendency to be reactive rather than proactive.But the damage from excessive risk taking had already been done. And after the crisis?Judging from the behavior of many of the largest BHCs, with limited exception, efforts by shareholders of these institutions to meaningfully influence management compensation practices have been slow in coming.

So much for shareholder discipline as a check on TBTF banks.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 20

Unfortunately, TBTF banks also do not face much external discipline from unsecured creditors.

An important facet of TBTF is that the funding sources for megabanks extend far beyond insured deposits, as referenced by my mention of CDS spreads.

The largest banks, not just the TBTF banks, fund themselves with a wide range of liabilities.

These include large, negotiable CDs, which often exceed the FDIC insurance limit; federal funds purchased from other banks, all of which are uninsured, and subordinated notes and bonds, generally unsecured.

It is not unusual for such uninsured/unsecured liabilities to account for well over half the liabilities of TBTF institutions.

If market discipline were to be imposed on TBTF institutions, one would expect it to come from uninsured/unsecured depositors, creditors and debt holders.

But TBTF status exerts perverse market discipline on the risk-taking activities of these banks.

Unsecured creditors recognize the implicit government guarantee of TBTF banks liabilities.

As a result, unsecured depositors and creditors offer their funds at a lower cost to TBTF banks than to mid-sized and regional banks that face the risk of failure.

This TBTF subsidy is quite large and has risen following the financial crisis.

Recent estimates by the Bank for International Settlements, for example, suggest that the implicit government guarantee provides the largest U.S. BHCs with an average credit rating uplift of more than two notches,International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 21

thereby lowering average funding costs a full percentage point relative to their smaller competitors.

Our aforementioned friend from the Bank of England, Andrew Haldane, estimates the current implicit TBTF global subsidy to be roughly $300 billion per year for the 29 global institutions identified by the Financial Stability Board (2011) as systemically important.

To put that $300 billion estimated annual subsidy in perspective, all theU.S. BHCs summed together reported 2011 earnings of $108 billion.

Add to that the burdens stemming from the complexity of TBTF banks.

Here is the basic organization diagram for a typical complex financial holding company:International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 22

To simplify a complex issue, one might consider all the operations other than the commercial banking operation as shadow banking affiliates, including any special investment vehiclesor SIVsof the commercial bank.

Now, consider this table.

It gives you a sense of the size and scope of some of the five largest BHCs, noting their nondeposit liabilities in billions of dollars and their number of total subsidiaries and countries of operation (according to the Financial Stability Oversight Council):For perspective, consider the sad case of Lehman Brothers.

More than four years later, the Lehman bankruptcy is still not completely resolved.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 23

As of its 10-K regulatory filing in 2007, Lehman operated a mere 209 subsidiaries across only 21 countries and had total liabilities of $619 billion.

By these metrics, Lehman was a small player compared with any of the Big Five.

If Lehman Brothers was too big for a private-sector solution while still a going concern, what can we infer about the Big Five in the table?

Correcting for the Drawbacks of DoddFrankDoddFrank addresses this concern. Under the Orderly Liquidation Authority provisions of DoddFrank, a systemically important financial institution would receive debtor-in-possession financing from the U.S.

Treasury over the period its operations needed to be stabilized. This is quasi-nationalization, just in a new, and untested, format.

In Dallas, we consider government ownership of our financial institutions, even on a temporary basis, to be a clear distortion of our capitalist principles.

Of course, an alternative would be to have another systemically important financial institution acquire the failing institution.

We have been down that road already.

All it does is compound the problem, expanding the risk posed by the even larger surviving behemoth organizations.

In addition, perpetuating the practice of arranging shotgun marriages between giants at taxpayer expense worsens the funding disadvantage faced by the 99.8 percent remainingsmall and regional banks.

Merging large institutions is a form of discrimination that favors the unwieldy and dangerous TBTF banks over more focused, fit and disciplined banks.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 24

The approach of the Dallas Fed neither expands the reach of government nor further handicaps the 99.8 percent of community and regional banks.

Nor does it fight complexity with complexity.

It calls for reshaping TBTF banking institutions into smaller, less - complex institutions that are: economically viable; profitable; competitively able to attract financial capital and talent; and of a size, complexity and scope that allows both regulatory and market discipline to restrain excessive risk taking.

Our proposal is simple and easy to understand. It can be accomplished with minimal statutory modification and implemented with as little government intervention as possible.

It calls first for rolling back the federal safety net to apply only to basic, traditional commercial banking.

Second, it calls for clarifying, through simple, understandable disclosures, that the federal safety net applies only to the commercial bank and its customers and never ever to the customers of any other affiliated subsidiary or the holding company.

The shadow banking activities of financial institutions must not receive taxpayer support.

We recognize that undoing customer inertia and management habits at TBTF banking institutions may take many years.

During such a period, TBTF banks could possibly sow the seeds for another financial crisis. For these reasons, additional action may be necessary.

The TBTF BHCs may need to be downsized and restructured so that the safety-net-supported commercial banking part of the holding company can be effectively disciplined by regulators and market forces.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 25

And there will likely have to be additional restrictions (or possibly prohibitions) on the ability to move assets or liabilities from a shadow banking affiliate to a banking affiliate within the holding company.

To illustrate how the first two points in our plan would work, I come back to the hypothetical structure of a complex financial holding company.

Recall that this type of holding company has a commercial bank subsidiary and several subsidiaries that are not traditional commercial banks: insurance, securities underwriting and brokerage, finance company and others, many with a vast geographic reach.

Where the Government Safety Net Would Begin and EndUnder our proposal, only the commercial bank would have access to deposit insurance provided by the FDIC and discount window loans provided by the Federal Reserve.

These two features of the safety net would explicitly, by statute, become unavailable to any shadow banking affiliate, special investment vehicle of the commercial bank or any obligations of the parent holding company.This is largely the current casebut in theory, not in practice. And consistent enforcement is viewed as unlikely.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 26Reinforced by a New CovenantTo reinforce the statute and its credibility, every customer, creditor and counterparty of every shadow banking affiliate and of the senior holding company would be required to agree to and sign a new covenant, a simple disclosure statement that acknowledges their unprotected status.

A sample disclosure need be no more complex than this:International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 27This two-part step should begin to remove the implicit TBTF subsidy provided to BHCs and their shadow banking operations.

Entities other than commercial banks have inappropriately benefited from an implicit safety net.

Our proposal promotes competition in light of market and regulatory discipline, replacing the status quo of subsidized and perverse incentives to take excessive risk.

As indicated earlier, some government intervention may be necessary to accelerate the imposition of effective market discipline.

We believe that market forces should be relied upon as much as practicable.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 28

However, entrenched oligopoly forces, in combination with customer inertia, will likely only be overcome through government-sanctioned reorganization and restructuring of the TBTF BHCs.

A subsidy once given is nearly impossible to take away.

Thus, it appears we may need a push, using as little government intervention as possible to realign incentives, reestablish a competitive landscape and level the playing field.

Why Protect the 0.2 Percent?My team at the Dallas Fed and I are confident this simple treatment to the complex problem and risks posed by TBTF institutions would be the most effective treatment.

Think about it this way: At present, 99.8 percent of the banking organizations in America are subject to sufficient regulatory or shareholder/market discipline to contain the risk of misbehavior that could threaten the stability of the financial system.

Zero-point-two percent are not.

Their very existence threatens both economic and financial stability.

Furthermore, to contain that risk, regulators and many small banks are tied up in regulatory and legal knots at an enormous direct cost to them and a large indirect cost to our economy. Zero-point-two percent.

If the administration and the Congress could agree as recently as two weeks ago on legislation that affects 1 percent of taxpayers, surely it can process a solution that affects 0.2 percent of the nations banks and is less complex and far more effective than DoddFrank.

Making a Time of Awful Moment a Time of PromiseThe time has come to change the decision making paradigm.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 29

There should be more than the present two solutions: bailout or the end-of-the-economic-world-as-we-have-known-it.

Both choices are unacceptable.

The next financial crisis could cost more than two years of economic output, borne by millions of U.S. taxpayers.

That horrendous cost must be weighed against the supposed benefits of maintaining the TBTF status quo.

To us, the remedy is obvious: end TBTF now. End TBTF by reintroducing market forces instead of complex rules, and in so doing, level the playing field for all banking institutions.

I return to Patrick Henry. He noted that it is natural to man to indulge in the illusions of hope.

We are apt to shut our eyes against a painful truth, and listen to the song of that siren till she transforms us.

We labor under the siren song of DoddFrank and the recent run-up in the pricing of TBTF bank stocks and credit, indulging in the illusion of hope that this complex legislation will end too big to fail and right the banking system.

We shut our eyes to the painful truth that TBTF represents an ongoing danger not just to financial stability, but also to fair competition.

The Dallas Fed offers a modest but, we believe, far more effective fix to DoddFrank. This plan is not without its costs.

But it is less costly than all the alternatives put forward and it seriously reduces the likelihood of another horrendous and costly financial crisis.

This need not be a time of awful moment. It should instead be a time of promise.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 30

Treating the pathology of TBTF now would be a big step toward a more stable and prosperous economic system, one that relies on fundamental principles of capitalism rather than regulatory complexity and increasing government intervention.

Thank you.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 31Dr Andreas DombretMember of the Executive Board of the Deutsche Bundesbank

Challenges for financial stability policy and academic aspects

Dinner Speech at the Joint Conference of the Deutsche Bundesbank, the Technical University Dresden and the Journal of Financial Stability

2012: An annus horribilis or an annus mirabilis or neither?Your Magnificence Professor Mller-Steinhagen,Mister State Minister Doctor Beermann, Ladies and Gentlemen:The turn of the year gives me the chance to relate my discussion of some of the future challenges for financial stability to a rsum of the previous year.Please allow me to do this from a European perspective and let me start with a seemingly innocent question:Will 2012 go down in history as an annus horribilis or rather as an annus mirabilis, or neither?The answer to this question is less trivial than it appears at first. Lets look to the origins of the words annus horribilis and annus mirabilis.To see this please note that the originator of the annus horribilis, Queen Elizabeth, used it to describe her feelings about the year 1992.At the time, her Majesty was talking about, among others, the fire at Windsor Castle, but one might also read it as a comment about whatInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 32

happened in the financial sector in 1992 when the markets forced the UK to leave the European Exchange Rate Mechanism.More recently, the Queens remarks sound as a comment about the financial and economic development of 2012.Please also note that many people use the metaphor of a large-scale fire to explain the economic term of a systemic event.Thus her Majesty is worth quoting in more length: 1992 is not a year on which I shall look with undiluted pleasure.In the words of one of my more sympathetic commentators it has turned to be an annus horribilis.I suspect that I am not alone in thinking it so. Indeed I suspect that there are very few people or institutions unaffected by the last months of worldwide turmoil and uncertainty.According to various measures 2012 was a year of considerable systemic tensions.Indeed, the indicators were approaching - but did not quite reach - the sad levels seen in the second half of 2008 and in the first half of 2009 - which was without doubts a very difficult period in the financial and economic history.Therefore, one might be tempted to classify 2012 as an annus horribilis. I wish to challenge this view.Will 2012, with hindsight, possibly go down in history as an annus mirabilis? Absurd, you may think.But on second thought this notion seems less absurd than it first appears.Let us not forget that the famous poem of John Dryden entitled annus mirabilis was inspired from major events in the year 1666.A very difficult year, to put it mildly, a year in which the Great Fire destroyed 80% of the city of London.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 33

The fire spread so rapidly due to the citys narrow streets and the interconnectedness of houses.The battle to stop the fire was considered to have been won by two factors: the strong east winds died down, and the Tower of London garrison used gunpowder to create effective firebreaks to stop the fire from spreading further eastwards.Drydens view was that God had performed miracles for England. The King promised to improve the streets.Well, some may say, so it is in 2012.The fire in the financial markets was stopped by the ECB, by the two firewalls EFSF and ESM as well as by the governments announcing that they would improve the financial system.Thus 2012 is an annus mirabilis.But as you know, miracles need to be acknowledged either by the pope or by the scientific community.So let us check whether a miracle was at work in 1666.And what I am going to say now about 1666 can be understood as a metaphorical warning about what could happen if we do not draw the right policy conclusion from the events of 2012.Despite numerous radical proposals, London was rebuilt using essentially the same street plan which was in use before the fire.So the miracle is that nothing similar to the Great Fire has happened in the following years.The lesson of this story is quite clear.The financial system needs better rules than in the years preceding the crisis.We need a resilient financial system.We need a strong supervision. We need effective macroprudential instruments.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 34

We need to know how these instruments will work, which is a challenge for the scientific community as well as for macroprudential policy makers.Otherwise, we would be putting our trust in a miracle.And we need to understand the complicated interactions between the financial and the real economy, which is the topic of your conference.Links between the Financial System and the Real EconomyTake, for example, the LTROs which provided banks with liquidity for a period of three years.These LTROs have made the links between the public and the banking sector in some countries closer, not wider meaning that the system is even more vulnerable to systemic contagion than before.Another example is the issue of deleveraging and forbearance. In Europe, many banks balance sheets are too large.Most of you probably agree that it is necessary for these banks to shrink their balance sheets.At the same time, some fear that deleveraging cuts off corporations from their financing sources.From a theoretical viewpoint, however, a distinction needs to be made between good and bad deleveraging.Good deleveraging, for instance, means scaling back the exposure to other financial intermediaries whereas bad deleveraging means that lending to the real economy is being reduced.The problem with this view is that, in practice, the distinction is not at all so clear-cut.The issue becomes even more complicated, when we additionally introduce the concept of forbearance, i.e. postponing the act of declaring a doubtful loan to be a doubtful loan.What is the best response to this issue?International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 35

The first answer is transparency. At this point, transparency is more easily said than done.But we need it, particularly in the context of a banking union and possible bank recapitalisations.And transparency is especially important with a view to legacy assets and forbearance of the problem banks.How do we proceed further?Repairing the banks balances sheets and injecting capital is one answer.However, some fear that repairing balance sheets has procyclical effects and could damage the availability of credit for the real economy.In my view, however, repairing balance sheets will have a long-term positive impact on potential output growth more than offsetting the possible short-term cyclical effects.The Limits of State InterventionsI often hear that the banks were responsible for the crisis. But can governments do better?As you know, one reason for the financial crisis was the use of risk models based on assumptions, which concentrated on expected values rather than tails.Peter Bernstein, the financial historian from the US, illustrated this point by citing the anecdote of a Moscovite professor of statistics, who refused to go to the air-raid shelter during World War II bomb attacks.The professor argued: See, Moscow has seven million inhabitants. Why should I expect to be one who will be hit?His neighbours were astonished, when he came back to the shelter the next night.Now the professors argumentation was:Moscow has seven million inhabitants and one elephant. Last night the elephant was hit.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 36

If regulators and banks essentially use the same models for their risk management, why should we expect a better financial stability outcome?Of course, one solution is to improve our models. But I do not think that this is the end of the story.I rather believe that regulators can do better if they acknowledge their own limitations.Regulators should employ the market mechanism to find the best risk management tools.In an ideal world the market is a discovery process.First, each individual agent knows better what is good for him.But at the end of the discovery process in theory we will get the best risk management tools, if and this if is the decisive word here if banks with weak risk management processes are allowed to fail, having to leave the market.This is one reason why resolving the too-big-to-fail-problem needs to be a top priority on the regulatory agenda.As far as I can judge, we are only beginning to understand howwell-established instruments like the capital ratio work and what effect they have on the banks behaviour.And there are other new macroprudential instruments where our knowledge is even more limited.Take the counter-cyclical buffer.The idea is simple and compelling. When the regulators identify a bubble developing, this buffer is activated, thereby leading banks to reduce their lending.If all works well, this buffer prevents the exuberances altogether, or at least mitigates it.However, it is not clear how the buffers should be calibrated in order to achieve better financial stability.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 37

Moreover, not much is known about possible time lags.In the worst situation, these buffer effects are not counter- but pro-cyclical.Things become even more complicated if different instruments are applied at the same time.As you can easily see, there are many questions waiting to be answered, many problems waiting to be resolved.When I think about what we know how macroprudential instruments work, traffic lights come to my mind.To prevent pedestrians from crossing the street when the traffic light is red the authorities actually installed buttons that pedestrians could press to shorten the red phase.And it turned out to be a success: fewer pedestrians crossed the street when the lights were red.However, what the pedestrians did not know was that pushing the buttons had no effect on the duration of the red phase.Please do not misunderstand me: I do not believe that macroprudential instruments are useless. Quite the contrary is true.What I want to highlight is that we cannot expect to prevent all future crises from happening.It is an illusion to believe that we can finetune our instruments such that they have exactly the effect we want them to have.Recently, Otmar Issing wrote in the Frankfurter Allgemeine Zeitung: The attempt to prevent each kind of crisis is just as hopeless as harmful. The guiding principle of the market paradigm of action and liability for the consequences (of these actions) should be valid without exemption.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 38

Taking this into consideration, the effects and the interdependence of macroprudential instruments may turn out to be a very fruitful research area.To sum up, every intervention in the market needs to be justified by market failures, something that, unfortunately, is not hard to find in many areas of the financial system.There is no guarantee, however, that governments can do a better job.But at least the state has an incentive taking into account the negative externalities of banks decisions and thus to minimise tax payers losses.When the state is aware of its own limitations there is a good chance that the outcome will be better than one in which the financial system is left to its own devices.Newtons annus mirabilisThere was one famous scientist for whom 1666 was indeed an annus mirabilis.Isaac Newton made revolutionary inventions and discoveries in calculus, motion, optics and gravitation.As such, 1666 was later referred to Isaac Newton's annus mirabilis.It is the year when Isaac Newton was said to have observed an apple falling from a tree and hit upon gravitation.He afforded the time to work on his theories due to the closure of Cambridge University.In his own words: All this was in the two years 1665 and 1666, for in those days I was in the prime of my age of invention, and minded mathematics and philosophy more than at any time since.Nowadays, Newtons experience might inspire you to invent and discover macroprudential mechanisms which policy makers could put to appropriate use in practice.Then the year 2012 might, in hindsight, turn out to have been a genuine annus mirabilis.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 39

I wish you all a very successful conference. Thank you for your attention.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 40Preserving the safety and security of Malaysias banking system

Speech by Mr Encik Abu Hassan Alshari Yahaya, Assistant Governor of the Central Bank of Malaysia, at the launch of the e-Banking Fraud Awareness Campaign, Kuala Lumpur

It is my pleasure and honour to be invited to launch this joint e-Banking fraud awareness campaign.

I would like to thank the Association of Banks in Malaysia for this invitation and the coordinated efforts in undertaking this important awareness campaign.

A significant initiative

This campaign is indeed a very important initiative for the banking industry in Malaysia.

This is the first time that all banks have come together in a concerted effort to help create greater awareness of online fraud with the cooperation of CyberSecurity and the Police Force.

This is to be lauded as all stakeholders have a role to play in preserving the safety and security of the banking system.

Maintaining confidence in online banking services

Online transactions have been growing at a rapid pace over the years.

Over the last decade, the use of electronic payments has increased at an average annual growth of 23.4%.

In 2012, Malaysian households and businesses performed more than 300 million financial transactions with a value close to RM15 trillion viaInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 41

electronic channels comprising mainly funds transfers, bill payments, top-up for prepaid cards, purchases of phone cards and payments for investments in the capital market.

Among the electronic channels, internet banking is the most popular.

Fundamental to the growth of internet banking over the years is the confidence which the public has in its convenience and security.

This is something that we cannot take for granted and must be continuously preserved.

Advancement in technology and innovation has resulted in greater consumer convenience and enhanced efficiency.

However, the same technology and innovation have also created new methods of perpetrating fraud that could be executed faster and with greater reach.

Cyber criminals have been active ever since the advent of the internet, and are constantly finding new ways to defraud innocent victims.

Safety and security of transactions in the banking system is fundamental in ensuring consumer confidence.

Hence, an important function and responsibility of the Central Bank is to ensure online transactions can be made in a safe and efficient manner in the economy, in the pursuit of monetary and financial stability objectives.

The need for constant vigilance & cooperation

This fight that the banks are launching today is something that requires the support of all parties.

We are aware of the creative ways in which criminals have attempted to deceive customers over the years and measures were required to be taken by the banks to protect the customers.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 42

While it is good to know that banks have played their roles in investing in robust security systems, they must also ensure that customers play their part in protecting their own assets and savings.

The reminder and greater awareness from the Banks through this campaign is timely.

It will not only reinforce the need for constant vigilance from all parties, but also help create an environment where everyone is risk conscious and responsible in protecting the interests of each other.

These initiatives would not achieve the desired outcomes without effective communication, and the media has a critical role to play in conveying the message from the banks.

We have always acknowledged the importance of the media and I would like to record Bank Negara Malaysias appreciation for the assistance rendered by the media in creating awareness of this issue in the past.

We hope that with the support of the media on this occasion too, this campaign will be a success, and the public will have heightened levels of understanding and vigilance over this issue.

On behalf of Bank Negara Malaysia, I would like to thank all the banks for taking this initiative to undertake this joint e-banking awareness campaign.

Our thanks also to Cyber Security and the Police Force for your ongoing efforts to collaborate with the banking industry.

I wish all of you the best and assure you that Bank Negara Malaysia will continuously support you in this noble effort.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 43Comments received on the consultative report "Recovery and resolution of financial market infrastructures

South Africa, Financial Services Board (FSB) has requested theSAFEX Clearing Company (Pty) Limited (SAFCOM) and Strate Limitedto provide feedback.

IntroductionOn the 31st of July 2012, a consultative report on the Recovery and Resolution of Financial Market Infrastructures was issued by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO).

Subsequently the Financial Services Board (FSB) has requested the SAFEX Clearing Company (Pty) Limited (SAFCOM) and Strate Limited to provide feedback and commentary on the report.

This report serves as a consolidation of Strate Limiteds and SAFCOMs views on the contents of the document.

BackgroundStrate Limited is a licensed Central Securities Depository (CSD) for the electronic settlement of financial instruments in South Africa.Strate handles the settlement of a number of securities including equities and bonds for the Johannesburg Stock Exchange (JSE) as well as a range of derivative products such as warrants, Exchange Traded Funds (ETFs), retail notes and tracker funds.It is also responsible for the settlement of money market securities to its portfolio of services. It provides services to issuers for their investors in terms of the Companies Act and Securities Services Act (SSA), 2004.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 44

SAFEX Clearing Company (Pty) Limited operates as a clearing house for the Johannesburg Stock Exchange derivatives markets. It was incorporated in 1987 and is based in South Africa.

As of October 2008, SAFEX Clearing Company (Pty) Limited operates as a subsidiary of the JSE.General CommentIn compiling a response to the request for comment by CPSS-IOSCO, Strate has reviewed the Consultative Report, the Key Attributes of Effective Resolution Regimes for Financial Institutions (issued by the Financial Stability Board) as well as the Principles for Financial Market Infrastructure and the associated recommendations for Regulators.Strate believes that the Consultative Report has been generally well thought out and represents a comprehensive assessment of the likely impacts in the event of FMI default or failure as well as an effective guideline to assist individual FMIs in the development of an appropriate and effective Recovery and Resolution plan.The broad differentiation between those FMIs that assume credit risk and those that do not is also considered most appropriate to take into account the different roles and responsibilities of individual FMIs.It is, however, very clear from this exercise that a comprehensive review of the Resolution Regimes contained in current and proposed future legislation will need to be undertaken to ensure that the ideals contained in the referenced documents are suitably entrenched and understood.Specific responses to questions raised:The following responses and comments have been put forward for each of the specific questions raised in the Recovery and Resolution of Financial Market Infrastructures report.1. In what circumstances, and for what types of FMI, can a statutory management, administration or conservatorship offer an appropriate process within which to ensure a continuity of critical services?International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 45

The consideration as to whether statutory management, administration or conservatorship would offer the most appropriate process within which to ensure the continuity of critical services is, in our opinion, directly linked to the speed with which such an arrangement could be effectively implemented within the framework provided in local legislation rather than the type of FMI.This does, however, also link to question 2 below.Are there powers beyond those of a standard insolvency practitioner that a statutory manager, administrator or conservator would require in these circumstances?Potentially, yes.This assessment can, however, only be completed with a full legislative review in the particular jurisdiction to ensure that the appointed authority has the necessary authorities already outlined in the Consultative Paper.Key to this assessment will be the ability to ensure the speedy assumption of control by the appointed authority.Is tear-up an appropriate loss allocation arrangement prior to resolution of a CCP?If so, in what circumstances?Unable to comment not applicable to StrateTo what extent should the possibility of a tear-up in recovery be articulated in ex ante rules?Unable to comment not applicable to Strate.Should there be a limit to the number of contracts that are eligible for tear-up?Unable to comment not applicable to Strate.How should the appropriate haircuts be determined? Unable to comment not applicable to Strate.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 46

What qualitative or quantitative indicators of non-viability should be used in determining the trigger for resolution for different types of FMI?Key to this decision is the role of the particular FMI. In the case ofnon-credit risk bearing FMIs the indicators would tend to be qualitative rather than quantitative once the primary measurement of adequate reserves has been addressed.In the case of Strate, this would include many elements assessed by its lead regulator in terms of the annual licence renewal process (including such things as competencies, quality of service delivery, operational capacities, robustness of existing technology etc.).What loss allocation methods must be available to a resolution authority, and for which types of FMI?Could or should these resolution powers include tear-up, cash calls or a mandatory replenishment of default fund contributions by an FMIs direct participants?Does it make a difference if the losses are from a defaulting member or are made up of other losses (e.g. losses in investments made by the FMI)?In what circumstances, and by what methods, should losses be passed on beyond the direct participants e.g. to the clients or FMI shareholders in resolution?To the extend applicable to Strate, losses in investments made by the FMI would be allocated directly to its shareholders rather than to its participants in any way.What, if any, special considerations or methods should be applied when allocating losses whose maximum value cannot be capped (e.g. when allocating potential losses that might arise from open and uncapped positions at a CCP)?Unable to comment not applicable to Strate.How should equity in FMIs be treated in resolution scenarios: should it be written down in all circumstances?International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 47

From a Strate perspective, and given the nature of the risks borne by the CSD, no need for differentiation in the treatment of equity write-downs could be identified.Are there circumstances in which loss allocation in resolution should result in a different distribution of losses to losses borne in insolvency?Does it make a difference if the losses stem from a defaulting member or are made up of other losses (e.g. losses in investments made by the FMI or resulting from operational risks)?Given the profile of Strate it is not envisaged that there should be any difference in the loss allocation regardless of whether by resolution or insolvency.Should an FMIs rules for addressing uncovered losses be taken into account when calculating whether creditors are no worse off in resolution than in liquidation?Unable to comment not applicable to Strate.Are there any circumstances in which the ability to exercise termination rights as a result of the use of resolution powers should outweigh the objective of ensuring continuity?Given the profile of Strate this would only apply to contracts for services from third parties and to the extent that the ability to exercise termination rights relates to non-core services, this may assist in minimizing the immediate negative financial impacts on the FMI.It is unlikely that one would wish to invoke the early termination of core services as part of a resolution process.Are there any circumstances in which a temporary stay on exercising termination rights should apply for any event of default and not just where triggered by the resolution measures?As with 13. above, the profile of Strate reduces the need to exercise, or indeed temporarily stay, termination rights whether as a result of default or resolution.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 48

Are there any circumstances in which a moratorium with a suspension of payments to unsecured creditors may be appropriate when resolving an FMI? Should this be limited to certain types of FMI and/or certain types of payment?The benefit of introducing a suspension of payments to unsecured creditors to assist in the resolution of an FMI such as Strate would be minimal and, given the specific nature of the role that Strate plays in the market, is unlikely to affect (either positively or negatively) its ability to continue settling or processing transactions which are processed directly between counterparties through the Central Bank payment system or, as is the case with Corporate Events processing, through Trust accounts which could effectively be ring-fenced from the FMI itself.If so, should resolution authorities retain the discretion to apply a moratorium and, if so, what restrictions (if any) on its use would be appropriate (e.g. scope, duration or purpose)?Given the response to 15 above, this is not considered relevant to Strate other than to the extent that the Resolution Authority may wish to defer payment on non-core services in terms of existing powers.No special powers are considered necessary.Should the bail-in tool be available to collateral, margin (including initial margin) and other sources of funds if they would bear losses in insolvency?Unable to comment not applicable to Strate.In what circumstances and for what types of FMI should wider loss recovery arrangements exist beyond the FMIs own rules and the resolution powers of the resolution authority?Not applicable to Strate as it does not assume principal risk in any of the transactions it processes. The CSD Rules already cover the CSD adequately in this respect.In conducting a resolvability assessment of an FMI, what factors should authorities pay particular attention to?International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 49

The assessments outlined in Annexure II of the Key Attributes of Effective Resolution Regimes for Financial Institutions issued by the Financial Stability Board are considered sufficiently comprehensive to conduct a resolvability assessment.20. In addition, is the summary of the application of the Key Attributes to FMIs provided in the annex sufficiently detailed to support the development of recovery and resolution regimes for FMIs?Are there specific areas where more detail could be provided?If so, which areas and what additional detail should be provided?Are any of the key attributes not applicable to a particular type of FMI? If so, which key attribute(s) and why not?Other than those areas already identified in the Annex as being not applicable to an FMI like Strate, no additional areas could be identified and no additional detail is considered necessary to assist Strate, in consultation with its Lead Regulator, in the development of an appropriate Resolution Plan.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 50Opening Remarks at Investor Advisory Committee MeetingBy Chairman Elisse WalterU.S. Securities and Exchange Commission Washington, D.C. January 18, 2013

Good morning. It is a pleasure to be with you today, and to make my first public appearance as SEC Chairman with you, a group who has chosen to dedicate yourselves to looking at theissues we face through the eyes of the investors we are dedicated to protect.

As you know, although I am new to the role of Chairman, I am proud to have worked at the SEC both as a staff member and a Commissioner for a total of more than two decades.

I have made the SEC the cornerstone, and the heart, of my career because I strongly believe that the SECs mission of investor protection and market stability is critical to the function of and confidence in the financial system as a wholeand especially because I believe that investors need and deserve an effective advocate within the Federal government.

Today, thanks to our exceptional staff and strong leadership team, I believe that we are executing our role as the investors advocate boldly and effectively, at a time when our role has become more important than ever.

This is a challenging and exciting time for the Commission.

Commissioners and the staff are considering a number of complex and important issues and working hard on rules that will have a profound and positive impact on investors and our markets for years to come.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 51

I am currently working with the other Commissioners to prioritize the many agenda items before us and to set a realistic timetable for executing on those priorities.

With these discussions still under way, I cant yet give you too many details.

I will say, though, that I am confident that completing the remaining rulemakings and other projects mandated by the Dodd-Frank Act and the JOBS Act will be at the top of the list.

And despite the often-mentioned 2-2 divide, I find that my fellow commissioners as well as Commission staff are eager to find common ground and move forward in a practical and effective manner.

Im also on something of a listening tour -- clarifying my own thoughts and keeping an appropriate perspective by listening to ideas, questions and complaints from people in and out of the agency.

And, that is why I am here today to listen to you.

The Investor Advisory Committee is the right idea, and particularly at this critical juncture in the history of our markets.

Over the last decade, the retail investing landscape has become increasingly complex, populated by products, strategies, technologies, opportunities, and risks that simply didnt exist just a short time ago.

And, on top of the changes that arise more or less organically from in the marketplace, important new legislation is reshaping the terrain, as well. Just 21 months after Dodd Frank, the most significant financial reform bill in decades, was enacted and created this committee the JOBS Act brought another seismic shift in the way companies, particularly small and emerging ones, raise capital and how individual investors participate in that process.

Against this backdrop, the decisions confronted by individual investors decisions that are absolutely critical to the course of their lives and theInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 52

lives of their families and the information and advice they receive when they make these decisions, are becoming more complex even as the stakes grow higher.

As some of you may know, when I think about the SECs role at a time like this, I like to think of my very dear if completely imaginary Aunt Millie, a retail investor with a modest portfolio, looking towards a secure retirement hopefully in the near term and some fun with her family during her golden years.

Now, as dear to me as she is, Aunt Millie is no hedge fund manager.

So when she sits down with her financial professional, and the talk turns to ETFs and target date funds, crowdfunding or her professionals fees, I want the SECs presence to be felt there in that office whether or not she even knows anything about the SEC (although MY Aunt Millie is, of course, qvelling at her nieces recent promotion), I want the SEC to be there looking out for her, helping her make sense of the environment in which she is investing her future security.

Aunt Millie and her fellow retail investors are unique among the major stakeholders in the financial system: they arent members of a trade association, and they dont exactly spend a lot of time (or any time for that matter) following the Federal Register, monitoring the SEC, or although I am trying to improve this submitting substantive comments on proposed rules and concept releases.

Like most retail investors, Aunt Millie is under-informed and underrepresented in the regulatory process.

That is why, in the midst of continuing and significant changes in the markets, your work is so important.

You help represent these retail investors with a visibility and sophistication that ensures that their needs and interests are carefully considered.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 53

You help us keep the playing field level for all investors, including and especially investors like Aunt Millie and her compatriots.

Your first set of recommendations to the Commission, on proposed rules that would lift the restriction on general solicitation in certain private placements, reflects your commitment to that task.

I deeply appreciate the effort and thoughtfulness that went into crafting the recommendations.

In addition, your ability to work together and provide recommendations that were unanimously supported by the Committee is heartening to me and serves as an example to us all.

In a short time, you have established yourselves as an effective organization and a critical component of the ongoing regulatory dialogue that affects every American investor.

I look forward to our continuing collaboration as you address other matters of critical importance in a relentlessly evolving financial world.

Thank you for what you have accomplished already and for what I know you will continue to do. I said earlier that we were still sorting out all of our priorities for the days ahead, but one of them is certainly this: continuing the close relationship that I believe we already have.

And, since Im here as part of my listening tour and not my talking tour, its probably time for me to stop talking and start listening to any questions and comments you may have.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 54

Fulfilling the Commissions Statutory Responsibility to Respond to IACs Recommendations

By Commissioner Luis A. Aguilar, U.S. Securities and Exchange Commission, Investor Advisory Committee Meeting Washington, D.C., January 18, 2013

I want to welcome the members of the Investor Advisory Committee to the Committees third in-person meeting. I also want to thank you for your continuing focus on the many issues confronting investors.

Your input to the Commission is vital to highlight the initiatives that serve to benefit and protect investors, as well as to deter the Commission from undertaking initiatives that undercut or dismantle existing investor protections.

It is critical that initiatives undertaken by the Commission fulfill its mission of protecting investors.

As the Investor Advisory Committee, you are the Committee focused on the needs of investors and your recommendations are critical to facilitating that the Commission is operating to fulfill its mission.

Congress clearly had this in mind when it codified this Committee in Section 911 of the Dodd-Frank Act and mandated how the Committee would operate.

This Committee has already demonstrated that it takes its responsibilities seriously.

For example, on October 12, 2012, the Committee sent the Commission seven unanimous recommendations regarding the SEC Rulemaking to Lift the Ban on General Solicitation and Advertising in Rule 506 Offerings.

I commend you for the hard work that you have undertaken, as reflected in the recommendations we received and which are available on the SEC website.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 55

It is now incumbent on the Commission to act. As required by Section 911 of the Dodd-Frank Act, the Commission is required to review the findings and recommendations of the Committee.

In particular, the statute specifies that, each time the Committee submits a finding or recommendation to the Commission, the Commission is required to

promptly issue a public statement

assessing the finding or recommendation of the Committee; and

disclosing the action, if any, the Commission intends to take with respect to the finding or recommendation.

The importance of this obligation is underscored by the fact that the law requires that the Commission itself assess the Committees recommendations and determine how best to respond to them.

This is a responsibility of the Commission not one that has been delegated to the staff.

To that end, I look forward to the Commission issuing the required response assessing your October 2012 recommendations.

It is imperative that this Committees recommendations be treated with the serious consideration that the law mandates.

I look forward to the Committees on-going efforts and to what the Committee has to say.

Thank you.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 56Tougher credit rating rules confirmed by European Parliament's vote

New rules on when and how credit rating agencies may rate state debts and private firms' financial health were approved by Parliament on Wednesday.

They will allow agencies to issue unsolicited sovereign debt ratings only on set dates, and enable private investors to sue them for negligence.

Agencies' shareholdings in rated firms will be capped, to reduce conflicts of interest.

MEPs also ensured that the ratings are clearer by requiring agencies to explain the key factors underlying them.

Ratings must not seek to influence state policies, and agencies themselves must not advocate any policy changes, adds the text.

The rules have already been provisionally agreed with the Council.

"We are taking some steps forward with this new regulation, fully in line with its basic spirit, which is to enable firms to do their own internal ratings.

These should provide viable, comparable and reliable alternatives to those of the rating oligopoly", said lead MEP Leonardo Domenici (S&D, IT).International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 57

Set dates for sovereign debt ratingsUnsolicited sovereign ratings could be published at least two but no more than three times a year, on dates published by the rating agency at the end of the previous year.Furthermore, these ratings could be published only after markets in the EU have closed and at least one hour before they reopen.Agencies to be liable for ratingsInvestors who rely on a credit rating could sue the agency that issued it for damages if it breaches the rules set out in this legislation either intentionally or by gross negligence, regardless whether there is any contractual relationship between the parties.Such breaches would include, for example, issuing a rating compromised by a conflict of interests or outside the published calendar.Reducing over-reliance on ratingsTo reduce over-reliance on ratings, MEPs urge credit institutions and investment firms to develop their own rating capacities, to enable them to prepare their own risk assessments.The European Commission should also consider developing a European creditworthiness assessment, adds the text.By 2020 no EU legislation should directly refer to external ratings, and financial institutions must not be any more obliged to automatically sell assets in the event of a downgrade.Capping shareholdingsA credit rating agency will have to refrain from issuing ratings, or disclose that its ratings may be affected, if a shareholder or member holding 10 % of the voting rights in that agency has invested in the rated entity.The new rules will also bar anyone from simultaneously holding stakes of more than 5% in more than one credit rating agency, unless the agencies concerned belong to the same group.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 58

The Domenici report on the regulation was adopted by 579 votes to 58, with 60 abstentions and that on the directive by 599 votes to 27, with 68 abstentions.Article 1 Subject matterThis Regulation introduces a common regulatory approach in order to enhance the integrity, transparency, responsibility, good governance and independence of credit rating activities, contributing to the quality of credit ratings issued in the Union, thereby contributing to the smooth functioning of the internal market while achieving a high level of consumer and investor protection.It lays down conditions for the issuing of credit ratings and rules on the organisation and conduct of credit rating agencies, including their shareholders and members, to promote credit rating agencies' independence, the avoidance of conflicts of interest and the enhancement of consumer and investor protection.This Regulation also lays down obligations for issuers, originators and sponsors established in the Union regarding structured finance instruments.Article 5baOver-reliance on credit ratings in Union lawWithout prejudice to its right of initiative, the Commission shall continue to review references to credit ratings in Union law which trigger or have the potential to trigger sole or mechanistic reliance on credit ratings by competent authorities or financial market participants, with a view to eliminating all references to ratings in Union law by 1 January 2020, provided that appropriate alternatives to credit risk assessment have been identified and implemented.Article 6aConflicts of interest concerning investments in credit rating agencies1. A shareholder or a member of a credit rating agency holding at least 5 % of the capital or the voting rights in a credit rating agency or in a companyInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 59

which has the power to exercise dominant influence or control over the registered credit rating agency, shall be prohibited from:The prohibition referred to in point (a) of the first subparagraph does not apply to holdings in diversified collective investment schemes, including managed funds such as pension funds or life insurance, provided that the holdings in diversified collective investment schemes do not put him or her in a position to exercise significant influence on the business activities of those schemes.Article -8aSovereign debt ratingsSovereign debt ratings shall be issued in a manner, which ensures that the individual specificity of a particular Member State has been analysed.A statement announcing revision of a given group of countries shall be prohibited, if not accompanied by individual country reports.Those reports shall be made publicly available.Public communications other than credit ratings, rating outlooks or accompanying press releases, as referred to in point 5 of Part I of Section D of Annex I, which relate to potential changes of sovereign ratings shall not be based on information stemming from the sphere of the rated entity, where such information has been released without the consent of theInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com(a)holding 5 % or more of the capital of any other credit rating agency;(b)having the right or the power to exercise 5 % or more of the voting rights in any other credit rating agency;(c)having the right or the power to appoint or remove members of the administrative, management or supervisory body of any other credit rating agency;(d)being member of the administrative, management or supervisory body of any other credit rating agency;(e)exercising or having the power to exercise dominant influence or control over any other credit rating agency.P a g e | 60

rated entity, unless it is available from generally accessible sources or unless there are no legitimate reasons for the rated entity not to give its consent to the release of the information.A credit rating agency shall, taking into consideration the provisions in second subparagraph of Article 8(5), publish on its website and send to ESMA on an annual basis, in accordance with point 3 of Part III of Section D of Annex I, a calendar at the end of the month of December for the next 12 months, setting a maximum of three dates for the publication of unsolicited sovereign ratings and related outlooks and setting the dates for the publication of solicited sovereign ratings and related outlooks. Such dates shall be set on a Friday.Deviation of the publication of sovereign rating or related rating outlooks from the calendar shall only be possible in as much as this is necessary for the credit rating agency to comply with its obligations under Article 8(2), Article 10(1) and Article 11(1) and shall be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar.Article 8cUse of multiple credit rating agenciesWhere an issuer or a related third party intends to mandate at least two credit rating agencies for the credit rating of the same issuance or entity, the issuer shall consider the possibility to mandate at least one credit rating agency which does not have more than 10 % of the total market share and which can be evaluated by the issuer as capable for rating the relevant issuance or entity, provided that, based on the list of ESMA mentioned in paragraph 2, there is a credit rating agency available for rating the specific issuance or entity.Where the issuer does not mandate at least one credit rating agency which does not have more than 10 % of the total market share, this shall be recorded.With a view to facilitating the evaluation by the issuer under paragraph 1, ESMA shall annually publish on its website a list of registered credit rating agencies, indicating their total market share and the types of ratings issued, which can be used by the issuer as a starting point for itsevaluation.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 61

3. For the purposes of this Article, the total market share shall be measured by annual turnover generated from credit rating activities and ancillary services, at group level.Article 35a Civil liability1. Where a credit rating agency has committed intentionally or with gross negligence any of the infringements listed in Annex III having an impact on a credit rating, an investor or issuer may claim damages from that credit rating agency for damage caused to them due to that infringement.An investor may claim damages under this Article where it establishes that it has reasonably relied, in accordance with Article 5a or otherwise with due care, on a credit rating for a decision to invest into, hold onto or divest from a financial instrument covered by that credit rating.An issuer may claim damages under this Article where it establishes that it or its financial instruments are covered by that credit rating and the infringement was not caused by misleading and inaccurate information provided by the issuer to the credit rating agency, directly or through information publicly available.5. Civil liability as referred to in paragraph 1 may be limited in advance only where all of the following conditions are complied with:Where a limitation of civil liability does not comply with the conditions referred to in the first subparagraph it shall have no legal effect.5a. The terms damage, intention, gross negligence, reasonably relied, due care, impact, reasonable and proportionate which are referred to in this Article but are not defined in this Regulation, shall be interpreted and applied in accordance with the applicable national law as determined by the relevant rules of private international law.Matters concerning the civil liability of a credit rating agency and which are not at all covered by this Regulation shall be governed by theInternational Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com(a)the limitation is reasonable and proportionate; and(b)the limitation is allowed by the relevant national law as determined in accordance with paragraph 5a.P a g e | 62

applicable national law as determined by the relevant rules of private international law.The competent court to decide on a claim for civil liability brought by an investor shall be determined by the relevant rules of private international law.5b. This Article does not exclude further civil liability claims in accordance with national law.International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.comP a g e | 63FSA UK

Risk to Customers from Financial IncentivesContext

Consumer trust and confidence in financial services is essential.

In autumn 2011 we published a review ofsales incentives and asked for feedback on our proposed guidance.

We know that the way sales staff are paid influences how and what they sell to consumers.

Equally, we recognise that firms may want to incentivise their staff to sell.

We do