Monday, October 25, 2010

FSB publishes report on improving OTC derivatives markets

The Financial Stability Board (FSB) published today a report on Implementing OTC Derivatives Market Reforms. The report responds to calls by G20 Leaders at the Pittsburgh and Toronto Summits to improve the functioning, transparency and regulatory oversight of over-the-counter (OTC) derivatives markets..

The report sets out recommendations to implement the G20 commitments concerning standardisation, central clearing, organised platform trading, and reporting to trade repositories. The report represents a first step toward consistent implementation of these commitments. Authorities will need to coordinate closely to minimise the potential for regulatory arbitrage.

The report was developed by a working group comprising international standard setters and authorities with the responsibility for translating the G20 commitments into standards implementing regulations.

It can be downloaded here:

Thursday, October 21, 2010

Joint Forum Report on Developments in Modelling Risk Aggregation

The report suggests improvements to the current modelling techniques used by complex firms to aggregate risks. It also examines supervisory approaches to firms' use of risk aggregation models, particularly in light of the global financial crisis.

Mr Tony D'Aloisio, Chairman of the Joint Forum and Chairman of the Australian Securities and Investments Commission, said "This report is essential reading for firms considering ways to make more effective use of risk aggregation methods, and for supervisors wanting to understand firms' use of risk aggregation models to help identify shortcomings in a firm's approach."

Key Findings

  • Despite recent advances, models currently in use have not adapted to support all the functions and decisions for which they are now used. Firms using these models may not fully understand the risks they face, including tail events.
  • While some firms are addressing these issues - particularly the treatment of tail events - others are not.
  • Firms face a range of practical challenges when modelling risk aggregation. These include managing the volume and quality of data and communicating results in a meaningful way. Despite these challenges, the Joint Forum found that firms have little or no appetite for fundamentally reassessing or reviewing how risk aggregation processes are managed.
  • In carrying out their responsibilities, supervisors generally do not rely on aggregation models currently used by firms as they are generally considered a "work in progress" with best practices yet to be established. Substantial improvements and refinements in methods - particularly in aggregating across risk classes - are needed before supervisors are likely to be comfortable in placing reliance on these models for supervisory purposes.

Key Recommendations

  • Firms should improve their risk aggregation techniques, for example by reassessing and reorienting models according to their purpose and function. Such improvements will assist firms to better comprehend the risks they face.
  • Firms using models for risk identification and monitoring purposes should ensure they are sufficiently sensitive, granular, flexible and clear. Models used for capital adequacy and solvency purposes should be improved to better reflect tail events.
  • Supervisors should recognise the risks posed by continued use of current aggregation processes and methods. Supervisors are urged to communicate their concerns to firms while highlighting the benefits of appropriately calibrated and well-functioning aggregation models for improved decision making and risk management. Supervisors should work with firms to implement these improvements.
Full publication (PDF 113 pages, 572 kb)

Wednesday, October 20, 2010

Macroprudential policy, tools and systems for the future

In its newest report on Macroprudential Policy, the Group of Thirty calls for urgent action to strengthen system-wide financial regulation and supervision.

The report calls on public officials to empower systemic financial regulators with new tools to enhance economic stability and potentially lessen the severity of future economic crises. These tools would address leverage, liquidity, credit and supervision. The report underscores the fact that while policy action may be difficult and controversial, robust action is necessary.

For more information on the release of the report, visit the publication's press page.

You may also download the executive summary of the report, or purchase the publication in its entirety. It is also available for free here.

A survey of current regulatory trends - report of the IBA Task Force on the Financial Crisis

The International Bar Association’s Task Force on the Financial Crisis has released a new report:
A Survey of Current Regulatory Trends, dated October 2010. This report features an overview of the work of the Task Force from its Chair, Hendrik Haag, as well as updates on regulation from diverse jurisdictions: the US, the UK, Germany, Switzerland, France, Spain, Japan and Russia.

Download here: