Monday, March 31, 2008

New Governance, Compliance Standards for the financial industry in the making.

The Financial Stability Forum (FSF), which is a consortium of 26 National Authorities (including international financial institutions, Central Banks, regulatory and supervisory groups etc) met in Rome this past week, to contemplate on the current challenges facing the financial industry and the possible remedial measures that need to be in place in order to avoid a repeat of the current financial crises.

The FSF was put in place with a broad agenda for regulating, streamlining and stabilizing the international financial markets.

A few of the topics covered at the most recent meeting of the FSF held on March 29th include:

1.A report detailing the market weaknesses as well as ways to increase market resilience will be delivered to the Central Bank Governors of the G-7 countries. This report will indicate improvements in the current regulatory approach that may give rise to newer compliance requirements.The report outlines specific policy recommendations in the following areas: prudential oversight of capital, liquidity and risk management; transparency, disclosure and
valuation practices; the role and uses of credit ratings; the authorities’ responsiveness to risks and their arrangements to deal with stress in the financial system.

2. On the urging of the FSF, the hedge fund industry in both the U.K. and the U.S. are in the process of developing best practice standards. The level of adherence to these standards will be closely regulated and reported to the FSF.

3. The International Monetary Fund, (IMF) in close partnership with the Sovereign Wealth Funds (SWF) is coordinating work to identify a set of voluntary best practice guidelines, focusing on the governance, institutional arrangements and transparency of SWFs.A Sovereign Wealth Fund (SWF) is a state-owned fund composed of financial assets such as stocks, bonds, property or other financial instruments.SWFs are typically created when governments
have budgetary surpluses and have little or no international debt for eg. The Kuwait Investment Authority. The Organisation for Economic Co-operation and Development (OECD) is developing guidance for recipient countries’ policies toward investments from SWFs.
All these strategies clearly indicate that there will be an increase in the number and type of regulations geared toward the financial industry.Compliance laws will definitely go beyond Basel II and even the loosely regulated hedge fund industry will soon undergo a more comprehensive overhaul.

To add to this is the announcement by U.S. Treasury Secretary, Henry Paulson outlining the measures that he has in store for the ailing U.S. economy from a regulatory perspective:
1. Merge SEC and Commodity Futures Trading Commission bringing oversight of U.S. securities and futures markets under a single regulatory umbrella.

2. Eliminate the federal thrift charter, folding the Office of Thrift Supervision into the national bank regulator, the Comptroller of the Currency.

3. The blueprint also calls for a new Mortgage Origination Commission (MOC) with a director appointed by the president. "The MOC would evaluate, rate and report on each state's adequacy for licensing and regulation of participants in the mortgage origination process.

4. There would also be federal regulation of the insurance industry by establishing an Office of Insurance Oversight inside the Treasury Department.
Almost all of these recommendations will require legislation to put them into effect, and although according to Henry Paulson, increasing the number of regulations was not his intention in this overhaul, it seems obvious that this is going to be the case.

Keep checking back for updates.

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