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FSB Releases Reform Agenda for 2010, Liquidity Risk and Accounting Standards Feature Heavily

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Last year saw the transformation and empowerment of the Financial Services Board (FSB) to lead and monitor regulatory coordination across Europe. This year, the regulatory body has a significant list of tasks ahead of it to effectively put this function into practice, including coordinating the implementation of improvements to accounting standards and raising capital and liquidity requirements.

Chairman of the FSB Mario Draghi has long been focused on the area of risk management with regards to revisions to the Basel framework and spent a large proportion of last year raising the profile of these issues. To drive forward this agenda in 2010, the FSB has already conducted its first meeting of the year, on 9 January in Basel. The meeting involved discussions aimed at determining the FSB’s regulatory policy reform agenda for 2010, ranging from compensation practices to accounting rules.

“Further work is essential to address the underlying weaknesses that gave rise to the crisis. Momentum is being maintained towards meeting the clear targets set by G20 leaders for improving financial regulation. Coordination is taking place to achieve consistency across borders and maintain a level playing field,” states the FSB in a recent communication (see below for the full document).

This year the FSB will continue to be focused on the interaction between firms’ risk management cultures and their compensation practices in an attempt to ensure that they are better aligned. To this end, it launched in December 2009 a peer review of implementation of the Principles and Standards for Sound Compensation Practices (see the other release below). The review will focus on the steps being taken or planned by FSB member jurisdictions to ensure effective application of the principles and standards, as well as progress to date in implementation by significant financial institutions.

It is therefore asking for feedback from financial institutions and other stakeholders on practical experiences in implementing the FSB principles and standards, or the related respective national rules. This includes descriptions of how compensation arrangements at financial institutions have changed in practice, in areas such as governance, pay structures or risk adjustments, as well as areas where implementation is proving challenging, and issues of consistency in regulatory responses across sectors and jurisdictions.

Feedback can be submitted by 1 February 2010 to fsb@bis.org under the subject heading “FSB Thematic Peer Review on Compensation” and individual submissions will not be made public. The review is to be completed by March 2010, as requested by G20 Leaders, and the resulting report will be published at that point.

This practical data will not likely include technology considerations but the focus on risk management in general should assist chief risk officers (CROs) and those in the risk function in general in raising the profile of their endeavours. It could secure them extra funding for technology investments to improve risk management and balance out the regulatory and public concerns about risky behaviours related to compensation.

Another FSB agenda item that should assist in this manner is the 2010 focus on bank capital and liquidity requirements, which is based on the Basel Committee’s recent papers on the subject. According to the FSB, the planned quantitative impact assessment of the proposals will take careful account of the cumulative effect of all elements of the proposed Basel II changes. The FSB will assess the macroeconomic implications of the implementation of the proposed regulation and the Basel Committee will then take this assessment into account in framing the appropriate transitional arrangements.

The wide ranging impacts of changes to the Basel framework will include significant investment in risk modelling and analytics systems in order to take into account the revisions. A more enterprise-wide approach to risk management is an expected outcome of all this related work and firms will need the technology and institutional capabilities to gather this risk data together in a comprehensive and timely manner.

Separately, the FSB is also coordinating a number of work streams to assess and propose international policy actions to address system-wide cross border liquidity risks, including the particular issues that arise for emerging markets. Liquidity risk in particular has gained notoriety over recent months due to the implementation of the systems and controls aspects of the UK Financial Services Authority’s (FSA) new reporting regime. The industry can therefore expect similar implementations to be carried out and similar technology readjustments to be required in jurisdictions across the globe in the near future (some considerably sooner than others).

The FSB will also be continuing to monitor global regulatory standards and the consistency of regulation at a global level, in line with its goals identified by the G20. This may cause a degree of international debate with regards to harmonisation at the national level over the course of the year and this could have knock on effects on technology spending as certain jurisdictions may be forced to revise current regulatory reporting requirements.

The same may be true of the FSB’s current drive towards strengthening and harmonising accounting standards at the global level. “FSB members welcomed the International Accounting Standards Board’s (IASB) plan to continue its enhanced technical dialogue with prudential authorities and market regulators on financial institution reporting issues, and to conclude its full review of the financial instruments standard by the end of this year,” states the FSB.

The IASB is currently endeavouring to develop new global accounting standards to improve the decision usefulness and relevance of financial reporting for key stakeholders, including prudential regulators. These standards should add yet more fuel to the fire for those in the pricing and valuations space in terms of investing in data systems and third party data feeds to improve transparency.

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