Saturday 22nd November 2014
NEWS TICKER – FRIDAY NOVEMBER 21ST 2014: The director of the National Security Agency, Navy Admiral Michael Rogers, says he expects to see adversaries launch a cyber-attack in the next few years aimed at severely damaging America's critical infrastructure. "I fully expect that during my time as commander, we're going to be tasked to help defend critical infrastructure within the United States because it is under attack by some foreign nation or some individual or group," Rogers told the House Select Committee on Intelligence this morning (EST). Rogers, who also serves as commander of the US Cyber Command, says the government is better prepared to defend against those attacks than it was two years ago.On November 24th, the Federal Reserve will conduct a fixed-rate offering of term deposits through its Term Deposit Facility (TDF) that will incorporate an early withdrawal feature. This feature will allow depository institutions to obtain a return of funds prior to the maturity date subject to an early withdrawal penalty. The Federal Reserve will offer eight-day term deposits with an interest rate of 0.29000% and a maximum tender amount of $20,000,000,000. The penalty for early withdrawal is 0.75%, the minimum tender per institution is $20,000,000,000 - The Straits Times Index (STI) ended +29.72 points higher or +0.90% to 3345.32, taking the year-to-date performance to +5.70%. The FTSE ST Mid Cap Index gained +0.64% while the FTSE ST Small Cap Index gained +0.83%. The top active stocks were SingTel (+0.51%), UOB (+1.37%), DBS (+1.64%), Keppel Corp (+0.22%) and OCBC Bank (+1.16%). The outperforming sectors today were represented by the FTSE ST Basic Materials Index (+1.70%). The two biggest stocks of the FTSE ST Basic Materials Index are Midas Holdings (+1.72%) and Geo Energy Resources (+3.02%). The underperforming sector was the FTSE ST Technology Index, which gained +0.16% with Silverlake Axis’s share price gaining 0.41% and STATS ChipPAC’s share price unchanged. The three most active Exchange Traded Funds (ETFs) by value were the IS MSCI India (+1.70%), SPDR Gold Shares (+0.34%), DBXT MSCI Singapore IM ETF (unchanged). The most active Real Estate Investment Trusts (REITs) by value were Suntec REIT (unchanged), Ascendas REIT (unchanged), CapitaCom Trust (+0.89%) - In an interview with US online service Careers Info-Security News Greg Shannon, chief scientist at the CERT Division of Carnegie Mellon University's Software Engineering Institute says that to defeat cyber-adversaries, cybersecurity professionals should adopt a contrarian attitude, says. "Having that contrarian point of view allows you to get into the mindset of the adversary," Shannon says in an interview with Information Security Media Group. "How would this technology work if it did something the designer of it didn't think of?" he asks. "Certainly, that's the way the adversary is thinking, coming up with new attacks, new threats. They're looking at an app, a piece of software or some websites, [and they think] 'What can I do here that the designer didn't think of? Is there a way to get information through channels, through tricks that weren't anticipated? Is there some frailty of humans that I can exploit to get information out of them that they wouldn't normally give me?'" – Raiffeisen Bank International warned in an analyst conference call yesterday that profits in its Russian business would be challenged in Q4 versus Q3. The bank’s Chief Financial Officer Martin Gruell said higher risk provisioning and increased operating expenses could cut profits in its single most profitable market. "I would expect the fourth quarter to be a bit lower than the third quarter," he said. He believes the worst of the rouble's devaluation is over, but explained that the impact on the group’s capital from the dip in the ruble, could push RBI's core capital below 10% of risk-weighted assets by the end of this year - The performance of the Dutch residential mortgage-backed securities (RMBS) market remained stable during the three-month period ended September 2014, according to the latest indices published by Moody's Investors Service. The 60+ day delinquencies of Dutch RMBS, including Dutch mortgage loans benefitting from a Nationale Hypotheek Garantie, decreased to 0.95% in September 2014 from 0.98% in June 2014. At the same time, the 90+ day delinquencies decreased to 0.72% during the three-month period compared with 0.75% in June 2014. Cumulative defaults continued to increase to 0.54% of the original balance, plus additions (in the case of Master Issuers) and replenishments in September 2014, compared with 0.47% in June 2014, says the ratings agency. Cumulative losses slightly increased to 0.11% in September 2014 from 0.10% in June 2014 – According to a Clearstream client bulletin on November 18th, the US Internal Revenue Service and the US Treasury published an amendment to the current temporary regulations (TD9657) regarding FATCA. The amendment impacts Foreign Financial Institutions (FFIs) who have entered into an agreement with the IRS to become a participating FFI. It amends the determination date and timing for reporting with respect to the 2014 calendar year.

Twin peaks: the fire walk of UK market regulation?

Monday, 05 March 2012
Twin peaks: the fire walk of UK market regulation? Those who were keen followers of the 1990s cult television series Twin Peaks and its prequel film, Twin Peaks: Fire Walk With Me may have experienced some concern at hearing recently in a speech by the Financial Services Authority's (FSA’s) chief executive officer, Hector Sants, that the regulator would very shortly start adopting a ‘Twin Peaks’ model of regulation.  However, rather than a drama concerning the murder of a teenage girl, which explored the gulf between the veneer of small-town respectability and the seedier layers of life lurking beneath it, this is the continuing drama of the progress of the UK’s regulatory reform programme, though it is also laced with some underlying seediness, mystery and double-think, all thrown in for good measure. Charlotte Hill, partner and head of the financial services and regulation practice at law firm Stephenson Harwood, gives a sprightly, sometimes humorous run through the implications of change, positing that it might all be too complicated for it’s own good. http://www.ftseglobalmarkets.com/media/k2/items/cache/3fc2270e36abb53621f286382276e85e_XL.jpg

Those who were keen followers of the 1990s cult television series Twin Peaks and its prequel film, Twin Peaks: Fire Walk With Me may have experienced some concern at hearing recently in a speech by the Financial Services Authority's (FSA’s) chief executive officer, Hector Sants, that the regulator would very shortly start adopting a ‘Twin Peaks’ model of regulation.  However, rather than a drama concerning the murder of a teenage girl, which explored the gulf between the veneer of small-town respectability and the seedier layers of life lurking beneath it, this is the continuing drama of the progress of the UK’s regulatory reform programme, though it is also laced with some underlying seediness, mystery and double-think, all thrown in for good measure. Charlotte Hill, partner and head of the financial services and regulation practice at law firm Stephenson Harwood, gives a sprightly, sometimes humorous run through the implications of change, positing that it might all be too complicated for it’s own good.

The financial crisis and recession caused the FSA, the United King-dom’s financial markets reg-ulator, to be criticised for being too costly and ineffective in its approach to regulation, resulting in a complete reform of the UK's regulatory structure.

Right now the UK financial markets are governed by a tripartite system of regulation, with regulatory responsibility being shared between the Bank of England (BoE), the FSA and HM Treasury. However it looks as if this system has now had its day and change is afoot. There is much optimism that this time around, all will be well and the shortcomings of the previous system will be addressed and a new dawn is breaking.



The old structures will be replaced with an all-new, all-improved, shiny new system, where responsibility for regulation will be shared between, em ... three new regulatory bodies! These are the Financial Policy Committee (FPC), which will sit in the BoE and take responsibility for the macro-prudential regulation of the UK financial system; the Prudential Regulation Authority (PRA), which will sit as an independent subsidiary of the BoE and take responsibility for the micro-prudential regulation of financial institutions of systemic importance, such as banks and building societies; and the Financial Conduct Authority (FCA), which will inherit the majority of the FSA’s current regulatory functions and be responsible for the conduct of business regulation of all firms currently regulated by the FSA. This will include those firms that will be dual-regulated, authorised and subject to prudential regulation by the PRA.  

In two speeches on February 6th and 7th this year, Hector Sants announced what he termed a "major milestone" in the progress of the regulatory reform programme, namely, the introduction of a "Twin Peaks" model of regulation, which would be operating within the FSA from April 2nd 2012. From this date, two regulatory models (the Twin Peaks) will operate within the FSA in preparation for those models becoming separate regulatory entities early in 2013. One peak is earmarked for prudential regulation and the other for conduct regulation. So, banks, building societies, insurers and major investment firms will have two separate groups of supervisors: one focussing on prudential issues and the other on conduct.

Whilst the FSA could not completely replicate the new approach envisaged by the Financial Services Bill at this stage, the Twin Peaks model will ensure that the transition to the new regulatory structure early in 2013 (termed, in true superb FSA-speak, the "cutover") would be "seamless".  

Not only are there the two independent groups of supervisors for banks, insurers and major investment firm but also, all other firms (that is, those which are not dual-regulated) will be supervised entirely by the conduct supervisors. These separate groups of supervisors will make their own separate judgements, and against different objectives. This is an important distinction, as we are told that they will be "pursing different goals". Up to now, there has been little clarity on what all this means, but the approach is summarised in another piece of fluent FSA-speak: "independent but coordinated decision making"––an approach that will be "stressed to staff". The thrust of this appears to be a policy of sometimes working together, but sometimes not, whilst somehow managing to share all data collected from companies.  Although no detail is given, "greater clarity" apparently has been given to the objectives of the two supervisory groups. No information is given on what this "clarity" entails.

Those still reeling from the spectre of two separate sets of supervisors will exit screaming at the intelligence that the existing ARROW risk mitigation programme will be split between the Twin Peaks. The Financial Services Authority (FSA) is a risk-based regulator and ARROW is the framework it uses to make risk-based regulation operational. ARROW stands for the Advanced, Risk-Responsive Operating Framework and covers firm specific (vertical supervision), thematic (those involving several firms or relating to the market as a whole; the FSA terms this ‘horizontal’ work) and internal risks (these are operational risks that might impact the FSA).

ARROW will be split between those actions which are relevant to the conduct supervisory group's objectives and those that relate to the objectives of the prudential group. What is worse is that this is only just around the corner. From April 2nd 2012 onwards, the two separate supervisory units will run their own risk mitigation programmes and firms will have "two separate sets of mitigating actions to address".  

The two supervisory teams will assess risk separately, against their own separate objectives (and of course, firms do not as yet know what these are). Any firm currently preparing for an ARROW visit, or anticipating one later in the year will not be delighted by the knowledge that each group may well ask apparently similar questions, but that the purpose will be different.  

Conclusions drawn from the ARROW process will be coordinated with "a single pack of documentation" being presented to the firm's board––but this will have "two separate sections". However, there will not be a consolidated list of required actions arising from the ARROW visit.

Doubling up on visits
The meaning seems to be that you will still have an ARROW visit (at least, for the lifetime of the current FSA), but this will in fact be two visits. When the visit is over, the FSA will provide one, consolidated pack of documentation summarising the conclusions of the assessment. However this will be divided into two, with two separate sets of actions, to each of which firms are required to give "equal focus". So, you are indeed seeing double––your one ARROW visit has suddenly become two. Anyone who has been through the current ARROW process well knows the enormous amount of preparatory work that is necessary and the stress of the increasingly demanding interviews, so it is hardly welcome news that the amount of work involved is about to be doubled.

Firms will be required to make "behavioural changes", so that the new approach works "to the benefit of society" as a whole. In line with this, firms must comply with supervisory judgements "willingly" and "proactively"; in other words, not challenge FSA judgements, but take it like lambs. Firms must align their goals with those of their supervisors and (again) "with society as a whole". So, now companies have "the best interests of society" to contend with, along with everything else.

Unsurprisingly, no steer is given as to what these might be, or which society the regulator may have in mind. Rather puzzlingly, a further feature of this new world is that firms must "recognise that there are times when both firms and the regulator will make judgements which in hindsight are found to be wrong".  Sounds sinister!  What does this mean exactly?  

Perhaps the killer punch comes in an apparently throwaway line that is not elaborated further that firms must "recognise that this new approach will require greater resources and expertise and thus costs more than the old reactive model". Double the trouble, it seems, means double the cost. More fees and a greater cost of regulation at a time when companies are feeling the pinch of uncertain markets and falling revenues and buckling under the weight of around thirty-five (at last count) separate new legislative measures from Europe.

There is much still to be done and in his speeches, Sants provided a shopping list of the issues still to be addressed within the next twelve months, any one of which would be enough to keep an army of regulators busy for a good deal longer than this. They include amendments to the threshold conditions; the designing of a new "operating platform" for the FCA and the PRA; designing a new supervisory framework to replace ARROW; finalising the new Memorandum of Understanding detailing how the FCA and the PRA will coordinate their activities; splitting the Rulebook between the PRA and the FCA; and training (and presumably, recruiting) staff.

The next twelve months are likely to be extremely lively, as the FSA wrestles with operating within the Twin Peaks framework and labours with the complexity and volume of the issues still to be addressed.  Firms once again will be obliged to wrestle with major operational changes due to regulatory upheaval. Twin Peaks looks like being only the beginning of the fire walk.

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