Archive for the ‘Security and Compliance’ category

FATF guidance – risk based approach for banks – Synergy Software Systems

November 4th, 2014

The FATF has adopted guidance which will help in the design and implementation of the risk-based approach for the banking sector, taking into account national risk assessments and the national legal and regulatory framework.
The risk-based approach is an essential component of the effective implementation of the FATF Recommendations. Countries, competent authorities and reporting entities are expected to identify, assess and understand the money laundering / terrorist financing risks they are exposed to so that they can develop the risk-based measures to mitigate these risks.

Basel Core Principle
Element of Supervision

Principle 1 Responsibilities, objectives and powers:
An effective system of banking supervision has clear responsibilities and objectives for each authority
involved in the supervision of banks and banking groups. A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorise banks, conduct ongoing supervision, address compliance with laws
and undertake timely corrective actions to address safety and soundness concerns.
Principle 2 Independence, accountability, resourcing and legal protection for
supervisors
:
The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable
for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor.
Principle 3 Cooperation and collaboration:
Laws, regulations or other arrangements provide a framework for cooperation and collaboration
with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information.
Principle 5 Licensing criteria:
The licensing authority has the power to set criteria and reject applications for establishments that do not meet the criteria. At a minimum, the licensing process consists of an assessment of the ownership structure and governance (including the fitness and propriety of Board members and senior management) of the bank and its wider group, and its strategic and operating plan, internal controls, risk management and projected financial condition (including capital base). Where the proposed owner or parent organisation is a foreign bank, the prior consent of its home supervisor is obtained.

Talk to us to find out how BRSAnalytics can help you clearly demonstrate effective robust management of governance and compliance.
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Leverage Ratio Standards for Kuwaiti banks

November 4th, 2014

Mohammad Y. Al-Hashel, Governor of the Central Bank of Kuwait (CBK) recently announced that CBK’s Board of Directors has approved the instructions for implementing the Leverage Ratio Standards to Kuwaiti banks, both conventional and Islamic.

The implementation of the Leverage Ratio Standards comes within the framework of the CBK’s measures to fully apply the International regulatory framework for banks (Basel III) reforms and guidelines. It also aims to keep abreast of the developments in field of banks control,Al-Hashel reiterated that the CBK is firmly committed to complete implementing Basel III reforms and guidelines
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The leverage ratio is the proportion of debts that a bank has compared to its equity/capital.

The Governor pointed out that the CBK, through the new instructions, seeks to curb the accumulation of leverage ratio in the banking sector which could put pressures on the financial system or the whole economy. It also aims to boost capital adequacy requirements.

Under the new instructions, a Banks’ leverage ratio should not exceed three percent. The new instruction is effective 31 December 2014.
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The CBK is moving forward toward accomplishing the other standards of Basel III set of reforms, liquidity ratios standards, according to a well-planned schedule and taking into consideration the comprehensive quantitative impact study (QIS) outcomes, The Governor said that final Basel III Leverage ratio standard instructions are now published on the CBK website for those interested in the banking and financial business.

“Basel III” is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to: improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source; improve risk management and governance; strengthen banks’ transparency and disclosure”s.

Recent Banking regulatory news.

October 31st, 2014

The videos below from PWC provide an interesting insight into the current status and future direction of banking


Learn more at PwC.com – http://pwc.to/1eBeif7
“Powerful forces are reshaping the banking industry, creating an imperative for change. Banks need to chose what posture they want to adopt – to lead the change, to follow fast, or to manage for the present. Whatever their chosen strategy, leading banks will need to balance execution against 6 critical priorities and have a clear sense of the posture they wish to adopt. However, each of them is important, and success will come from a balanced execution across these priorities — and a balance of tactical initiatives and longer-term programs, all coming together as an integrated whole.”

Banking Banana Skins 2014 Overview

Regulators want to ensure that banks, implement effective corporate governance. The scope of corporate governance to address has increased exponentially The separation between ownership and control in firms could result in managers exploiting corporate assets for their own individual interests.”

In the mid-1900s Legislators introduced a wave of corporate governance regulations to mitigate risk with new requirements for the role of the board overseeing the firm’s business strategy and financial soundness, key personnel decisions, internal organisation, governance structures and risk management practices. So long as boards did their job, it then seemed that investors would be protected.

Now a bank’s corporate governance has to protect against all the risks that bank’s business may experience. and there is zero tolerance of a bank’s failure to manage its risks. Not to mention adverse negative media attention and steep regulatory fines. The fallout of the 2007 financial crisis, perhaps overlooks the risks inherent in a bank’s business model – with governments, regulators, investors and customers all demanding change.

New laws impose more stringent requirements and intensified scrutiny and pressure from regulators. Significant problems remain. The Financial Stability Board (FSB) has asserted that much more work is needed to “establish effective risk governance frameworks” (2013).

The Basel Committee on Banking Supervision (BCBS) recently revised its Guidelines Corporate governance principles for banks on 10 October 2014. This further raises the standards in corporate governance at banks and emphasizes the critical role of the board and its risk committees in ensuring a bank’s risk governance.

The BCBS suggests that boards should be more involved in “evaluating and promoting a strong risk culture in the bank” by setting the banks” risk appetite and overseeing the implementation of this. The increased focus on risk and the supporting governance framework includes identifying the responsibilities of different parts of the bank for addressing and managing risk. These areas are often referred to as the “three lines of defence”:
- business units
- risk management function
- internal audit.

Regardless of the structure, responsibilities for each line of defence should be well defined and communicated and supported by the board.

Managing risks includes identifying, assessing and reporting such exposures, taking into account the bank’s risk appetite and its policies, procedures and controls. The manner in which the front line a business unit executes its responsibilities should reflect the bank’s existing risk culture—in a top-down fashion directly aligned to the approach set by the board.

An effective risk management function complements the business unit’s risk activities by monitoring and reporting against responsibilities. Among it is responsible for overseeing the bank’s risk-taking activities and assessing risks and issues independently from the business line. This requires an independent and effective compliance function responsible for routinely monitoring compliance with laws, corporate governance rules, regulations, codes and policies to which the bank is subject. The function must have sufficient authority, stature, independence, resources and access to the board.

An independent and effective internal audit function . should “provide independent review and assurance on the quality and effectiveness of the bank’s risk governance framework including links to organisational culture, as well as strategic and business planning, compensation and decision-making processes”. The board should ensure that the risk management, compliance and audit functions are properly positioned, staffed and resourced and carry out their responsibilities independently and effectively.

Effective internal corporate governance provisions doesn’t just benefit small stakeholders. Ensuring effective oversight of managerial actions should result in lower equity and debt capital cost for the bank, a reduction of labour costs and higher value in products and services from clients but it also poses many challenges for the banks and their regulators. . Complexity can take many forms such as the evaluating the quality of a bank’s loan portfolio or ascertaining the importance of off-balance sheet operations. The BCBS’s revised principles provide a framework within which banks and supervisors should operate to achieve robust and transparent risk management and decision-making and, in doing so, promote public confidence and uphold the safety and soundness of the banking system.

EU banks s(bar Italy) stood-up pretty well to the EBA’s stress test. Only 25 failed (CET> 5.5%) from the 130 banks tested. About half of those had already taken actions to remedy their alleged failings, .

So outside of Italy, EU banks should be more confident to lend again and rebuild their damaged balance sheets.. Banks will eventually have to open their cheque books and start lending again. Moreover, the Banking Union will further break-down barriers to cross-border lending within the Eurozone. Banks will no longer have any endogenous constraints to lending in any Eurozone country.

External constraints still need to be considered. The Eurozone economy is on the verge of tipping into its third recession in only six years. The Eurozone is “marching towards stagnation and deflation” according to the Economist (25 October 2014). A large portion of its private sector is actually minimising debt instead of maximising profits following the housing collapse in the 1990s, to repair their balance sheets. This deleveraging reduces aggregate demand and throws the economy into a very special type of recession. There are signs that the EU may be suffering from a similar fate to Japan.. Governments and central banks don’t have any easy solutions to put things right again.

Other financial institutions are considering taking a larger slice of the credit market. Insurance firms provide one option – they take in more than €1 trillion in premiums each year. As with the banks, new rules will force insurers to hold more capital than before against corporate loans. Equity investment or debt finance from asset managers and other shadow bank players are also increasingly another option for obtaining credit. Regulatory action to facilitate some types of credit is also being considered. For example, the EBA is seeking views on what is required to simulate a “prudentially sound securitisation market” with a view to “widening long-term funding opportunities for the European economy”. It

The EBA published its Work Programme 2015 on 10 October 2014 (dated 30 September 2015). Drafting regulatory and technical standards on CRD IV, BRRD and the revision of the Deposit-Guarantee Schemes Directive will take-up the majority of the EBA’s workload in 2015. The EBA also expects to contribute to the various legislative processes (e.g. shadow banking), monitor implementation (e.g. CRD IV), calibrate rules (liquidity and leverage ratios) and develop various ad-hoc reports (e.g. Bitcoin).

The FSB revised its Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes) on 15 October 2014,to incorporate recently published guidance on the resolution of FMIs and insurers, client asset protection and information sharing. The FSB also published Guidance on Cooperation and Information Sharing with Host Authorities of Jurisdictions Not Represented on CMGs where a G-SIFI has a Systemic Presence on 17 October 2014.

The ECB will take over responsibility for prudential supervision of Eurozone banks from 4 November 2014. This change represents a significant milestone in the evolution of EU banking regulation.
Also, on 20 October 2014, it published a Decision of the European Central Bank of 17 September 2014 on the implementation of separation between the monetary policy and supervision functions of the European Central Bank (ECB/2014/39). The decision sets out the ECB’s arrangements for complying with the separation of the monetary policy function from the new supervisory function under SSM. It outlines arrangements related to professional secrecy and the exchange of information between the two functions. The decision will enter into force on the day of its publication in the Official Journal.

Further to our recent meetings with many banks at Gitex. We will be hosting BRSAnalytics principals and software authors, Computime and holding a series of meetings and proof of concepts with local banks in mid November. Meet with our expert team and understand how the purpose designed data model and regulatory processes built into BRSAnalytics proven in many bank over over the last 8years, can help you comply with current and future regulatory compliance with a rapid implementation. Slash reporting time, and cost and risk of error and relax in the knowledge of expert local support that will keep reports current with Central Bank requirements.

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Bank Regulatory Reporting update – Middle East – October 2014 – Synergy Software Systems

October 26th, 2014

The importance of transparency in bank reporting was the subject of an extended article in Gulf News. http://gulfnews.com/business/banking/understanding-bank-performance-reporting-1.1384891. “In a recent discussion paper, it is appropriate and long overdue that the Basel Committee on Banking Supervision recognised the need to incorporate the accounting, non-risk weighted leverage into the framework of assessing capital adequacy. “
Dr. R. Seetharaman, Group CEO, Doha Bank spoke at the fifth US- MENA Private Sector Dialogue on correspondent banking, which was hosted by the Union of Arab Banks at BNY Mellon, New York on 14th and 15th October 2014
I the session “Customer risk ratings and evolving nature of financial crime” he said that Banks should strengthen their fight against financial crime to protect against reputation risks. Dr. Seetharaman also gave insights on current trends in Correspondent Banking. “Banks have looked forward to scale their vast Correspondent Banking networks to reduce risks and strengthen controls, expand their client coverage and geographic reach by striking up new banking partnerships. However with the onslaught of new financial regulation banks need to reassess and redefine this business. With banking revenues under pressure, many banks are questioning whether they can continue to try to offer all services to clients in all markets, combined with rising costs related to new regulations. Banks are selectively increasing the global banking partnerships. … After crisis, letters of credit re-emerged as the key solution for alleviating the spike in credit risk concerns. During the financial crisis, it was correspondent banking, which played a pivotal role as many global banks retreated towards their home market, leaving constraints in trade funding and risk mitigation. Local banks became vital, both for local corporates and their international trading partners. When it came to securing the handling of trade flows despite a spike in perceived risks during the crisis, local banks proved that their knowledge of local companies was critical to keep trades flowing.”

Dr. Seetharaman also gave his views on the regulatory focus on correspondent banking. He said “Regulators continue to scrutinise due diligence and risk management practices in the Correspondent Banking arena due to the inherent risks associated with processing transactions as well as cases in which Correspondent Banking accounts have been used to move illicit funds. Recent regulatory actions have resulted in record-breaking financial penalties and have highlighted the vulnerabilities which financial institutions are exposed to when there are failures in in the areas of governance, client due diligence, risk assessment and transaction monitoring.“

Dr. Seetharaman further highlighted recent Financial Crimes, and AML lawsuits faced by financial institutions. “Certain banks failed to conduct basic due diligence on some of its account holders, assign the appropriate risk categories and ignored warnings that monitoring systems are not adequate. Violation of Know Your Customer (KYC) norms also exposed them to fraud risks. Certain banks failed to check and monitor the relationships its corporate customers had with politically exposed people. Some banks failed to identify high risk transactions. Financial crimes have increased the penalties for banks and also affected the reputation risks.”

Islamic Banking continues to grow in the region but what exactly is it?
You will find a lot of useful information on this portal. Islamic Finance News Portal – Bringing you the latest updates in global Shariah finance
The 4th Annual World Islamic Retail Banking Conference was officially inaugurated this month with more than 150 delegates – The conference started with a panel discussion outlining regulatory changes and the impact those will have on retail banking.

In the USA On October 17th the Federal Reserve Board (FRB) released instructions and guidance (Guidance) for CCAR 2015 and finalized amendments to the Capital Plan rule, providing more clarity . Modifications to the Capital Plan rule are consistent with the June proposal, and the Guidance provides additional information on content and the organization of capital plan submissions. The Guidance’s focuses on: internal controls, model inventory, risk identification, and organization

This indicates both that the FRB’s emphasis is now moving from quantitative to qualitative judgments and that the regulators’ expectations continue to rise and this is likely to reflected in this region’s regulatory authority focus. Some key points
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Completeness in risk identification is key.
Documentation for internal controls -increased expectation.
Methodology and model inventory must be mapped to FR Y-14 and be subject to internal audit.
This follows on form September when, the Office of the Comptroller of the Currency (“OCC”) finalized its risk governance framework for large banks and thrifts (“Guidelines”) that was proposed in January 2014.

The responsibility to oversee risk management in the USA clearly remains squarely with the Board of Directors, which retains the ultimate risk governance oversight role. The Guidelines clarify that the Board need not take on responsibility for day-to-day managerial duties. This however require consideration of risk appetite and risk profile, lines of reporting, talent management training and retention, regulatory reporting systems – robustness, ease of use, auditability, adaptability and scalability etc..

You can register now for our next free seminar on Bank Regulatory Reporting to be held at Microsoft Gulf, Offices, DIC during the morning of 17 November 2014

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Credit reporting in the GCC

October 20th, 2014

Marwan Ahmad Lutfi, CEO of Al Etihad Credit Bureau (AECB), the UAE federal government company mandated to implement and operate a credit reporting system across the UAE, stressed the importance of strengthening communication, collaboration and knowledge exchange between GCC countries in order to support the regional credit reporting industry and in turn enhance GCC economies and credit markets.

Speaking during a panel discussion ­ ‘credit reporting growth in the GCC region: progress with the credit reporting infrastructure and business models in the GCC region’ at today’s World Consumer Credit Reporting Conference (WCCRC) in Dubai, Mr. Lutfi said:

“In light of the GCC’s continuing economic recovery and the ongoing development of the region’s financial infrastructure, there is a need for certain precautions to be taken in order to protect the lending sector, by providing a clear picture of credit behaviour patterns and minimising any risks to the credit market. This will help banks and financial institutions to reduce costs and lower provisions for credit losses, as well as allow individuals and companies with good credit profiles to access better loan terms and interest rates.”

The 9th World Consumer Credit Reporting Conference (WCCRC) is being held until October 21st in Dubaifor the first time in the Middle East\.

Mr. Lutfi added: “The banking sector in the GCC, and particularly in the UAE, has experienced a number of positive developments in recent years, through the implementation of high quality credit reporting and enhanced transparency. Credit bureaux will provide reliable and accurate credit information to help banks and financial institutions effectively evaluate risk, enabling them to make positive decisions in order to reduce credit losses from non-performing loans. This will, in turn, enhance the financial and regulatory infrastructure across GCC countries.”

GITEX 2014 BRSAnalytics – see us at the Synergy stand

September 30th, 2014

Following the successful launch of BRSANALYTICS at GITEX 2013 Comoutime and its regional Middle East partners Synergy Software Systems will be exhibiting from Stand D7-10 at Gitex Technology Week in Dubai 12th – 16th October.

The annual GITEX technology conference brings together the biggest technology brands and cutting-edge conference programmes This year 3,700 exhibitors will converge from all corners of the globe .
The overwhelming response witnessed during our last visit at GITEX has inspired us to return this year with an application geared to deliver bigger and better functionality,” says Enterprise Group Channel and Business Development Executive Daniel Buttigieg. “We believe we have achieved this with the second generation BRSANALYTICS technology.”

BRSANALYTICS v2, a regulatory reporting solution for banks, is packed with features for a robust, user-friendly experience. The new browser-based interface provides intuitive navigation and system configurations, business rules, process management, and other reference data are accessed directly from the application by authorised functional users.

Daniel, also mentioned “The built in system ETL process and audit trails and workflow approvals provide robust data management and simplified submission of returns in the Central Banks formats. BRSAnalytics also features built in dashboards to assist management with analysis and monitoring of performance trends and KPIs and provides an ad hoc query for compliance officers to drilldown to rapidly find answers to both Central Bank and management queries. .”

This software is particularly suited to address the requirements of Middle Eastern financial institutions,” adds Head of Sales and Marketing Neil Bianco. “For instance, because Islamic banks obtain deposits mostly through profit-sharing investment accounts (PSIAs) – typically considered to be more volatile than conventional deposits. Basel III requires that all banks offset that volatility by increasing their high-quality liquid assets (HQLAs).
Banks must implement strategies for stress testing complex data to demonstrate compliance with the relevant Central Bank’ Basel III directives.

Out-of-the-box BRSANALYTICS reporting packs directly cater for regulatory standards by systematically gathering, cleansing, analysing and reporting to board members and the regulator in the required formats.”

Having visited the UAE numerous times over the past few years, we look forward to meeting again with our valued business partner, colleagues and customers.”

To see show case presentations and product demos, visit Stand D7-10 to meet with Daniel and Neil and the Synergy Software Systems team. We invite you to discuss in more detail how BRSANALYTICS can rapidly and cost effectively help your financial institution to meet the tide of newly emerging regulatory requirements.

Stephen Jones, Director Synergy Software Systems commented “We focus on proven branded international solutions, to ensure an ongoing product road map, built on familiar Microsoft technologies. This ensures rapid deployment, low risk and better value for our clients. This is one reason that Microsoft presented us with the Highest Customer Satisfaction award 2014. “

As one regional financial controller out it “Go with Synergy and sleep at night”

Central Bank of Kuwait -Euromoney conference 2014

September 9th, 2014

A speech delivered by H.E. the Governor of the Central Bank of Kuwait (CBK), Dr. Mohammad Y. Al-Hashel in Euromoney Conference held in the State of Kuwait, September 9th 2014. The Speech can be found in both English and in Arabic

http://www.cbk.gov.kw/PDF/Euro09Sep2014.pdf

http://www.cbk.gov.kw/PDF/Euro09Sep2014AR.pdf

The speech outlines the role of the Central Bank as a regulatory capacity and the considerable progress towards adoption of Basel lll in Kuwait. It also addressed the real estate sector finance regulation and prudential risk

From the closing remarks:
“Finally, I observe that the global banking and financial industry is witnessing
a new era of structural and regulatory reform aimed at strengthening
monetary and financial stability and in the long run establishing overall
economic stability. Therefore, we, the regulatory authorities and banking
and financial units, should derive benefits from such reforms by adopting
the correct approach in developing our banking and financial systems in
view of the regional and international experiences, as well as implementing
the best international practices taking into consideration the vital role of
banks in the national economy and their deep relations with the society. ”

Home depot- biggest credit card breach ever?

September 5th, 2014

Home Depot may have earned the dubious distinction of being responsible for the biggest compromise ever involving credit and debit card data.

Security blogger Brian Krebs, whoreported the data breach Tuesday, updated his report yesterday with new information gathered from the cyber underground. According to Krebs, the data strongly suggests that a breach occurred at nearly all of Home Depot’s 2,200 stores in the U.S.

Krebs based his conclusion on a review of stolen credit and debit card data posted on an online store that sells such information. The site lists each card, along with the city, state and ZIP code of the card owner, as well as the store code where the data was stolen.
Several companies have reported data breaches in recent days, including grocery chain Supervalu, UPS Stores Inc. and Dairy Queen.

The breaches have highlighted escalating concerns over a point of sale (PoS) system malware tool dubbed “Backoff” that was used in the massive data heists at Target and others like Neiman Marcus and P.F. Chang’s.

According to federal law enforcement authorities, Backoff has infected PoS systems at around 1,000 retailers. Security firm Kaspersky Labs, which conducted its own research of the malware, believes the number could be much higher.

Basel III and Islamic Banks -ask Synergy Software Systems

September 4th, 2014

The tough Basel III regulatory standards, also pose questions for Islamic lenders that could prove expensive:
- Will regulators treat their deposit the same way?
- How will this affect banks with separate Islamic branches.?

Islamic finance frowns on monetary speculation, so their balance sheets are largely clear of the derivatives and complex, risky assets that surfaced in other banks during the global financial crisis. These factors were reported for example last month in http://gulfnews.com/business/banking/islamic-banks-to-benefit-form-basel-iii-capital-rules-1.1373655 However, the issues are wider than the balancde shet.

Interest payments are not allowed by sharia principles, so Islamic banks obtain deposits mostly through profit-sharing investment accounts (PSIAs), which are generally considered to be more volatile than conventional deposits. So Islamic banks are expected to be required to offset that volatility under Basel III by increasing the amount of high-quality liquid assets (HQLAs) that they hold.

This is easier said than done. Islamic securities markets are relatively immature , than conventional markets, so sharia-compliant HQLAs are in short supply –

Islamic commercial banks held about $1.2 trillion worth of assets at the end of last year, according to a study by Thomson Reuters. Those banks account for roughly a quarter of deposits in Gulf Arab countries and over a fifth in Malaysia.

Basel III requires banks to hold enough HQLAs to cover net cash outflows for a 30-day period under a high-stress scenario. Outflows are calculated by applying different weights to funding sources, including PSIAs. The riskier the funding source, the larger the amount of HQLAs needed to cover it.

With the exception of Malaysia and Bahrain, few central banks actively issue instruments which qualify as HQLAs.. Government-issued sukuk qualify, but most sovereign sukuk are either not listed on developed markets or are not actively traded, making those very hard for Islamic banks to obtain. This contrasts with conventional banks’ access to huge markets in high-quality government debt such as U.S. Treasuries and German Bunds. Alternatives such as the short-term sukuk issued by the Malaysia-based International Islamic Liquidity Management Corp, which was established to promote a cross-border market in Islamic instruments, remain small compared with the overall size of the industry..

Much depends on the weightage or “run-off rates” that national regulators who will implement Basel III in their own jurisdictions, choose to assign to PSIAs.

Regulators are keen to develop their Islamic banking sectors, so are unlikely to assign punitive weights. However, they may not be able to treat PSIAs as benignly as conventional bank deposits. For instance, PSIAs held by Islamic banks tend to have relatively short maturities..

The uncertainty looks unlikely to be cleared up at least before next year, when the Malaysia-based Islamic Financial Services Board (IFSB), a global standard-setting body, is expected to release a guidance note on the subject.

The note will deal with issues such as the contractual rights of depositors, for example whether they can withdraw money in fewer than 30 days without a significant penalty, said a source familiar with the IFSB’s deliberations.

Malaysia’s central bank has issued some guidance on PSIAs, saying it will classify them as two types: general PSIAs, broadly equivalent to conventional retail deposits, and specific or restricted PSIAs, deemed similar to managed investment accounts. It has given Islamic banks a two-year transition period to differentiate between those types. Yet while the central bank has already spelled out ratios and weights for Basel III capital adequacy rules, it has not yet announced run-off rates or HQLA requirements for PSIAs.

Basel III says national regulators around the world could assign run-off rates of 3 per cent or higher to stable, conventional bank deposits, and as much as 10 per cent to less stable deposits, according to S&P. Islamic banks may end up being assigned numbers within that range; given the size of the deposits at stake, a variation of several percentage points will make a big difference to how much HQLAs the banks are forced to hold.

The PSIA issue may increase pressure on central banks and governments to address longstanding problems in Islamic finance.

As part of its efforts to develop as an Islamic financial centre, Dubai is actively trying to list sukuk on its exchanges and encouraging its state-linked firms to issue trade-able sukuks, but it may be years before supply begins to meet demand.

Another problem is deposit insurance. For bank deposits to be deemed stable they need to be protected by an insurance scheme, but sharia-compliant schemes are rare, partly because government support for domestic banks is considered implicit in many Gulf countries.

Bahrain introduced Islamic deposit insurance in 1993.

In May this year, Qatar said it would develop an Islamic deposit insurance scheme.

In June, Bangladesh said Islamic deposits would be covered under an existing scheme managed by the central bank.

The first sukuk to have claimed to be in compliance with Basel III requirements was issued in November 2012 by Abu Dhabi Islamic Bank (ADIB). The issuance was worth USD1bln and classified as AT1 capital requirements. This issuance generated an overwhelming response with an order book of USD15.5bln (more than 30 times over-subscribed on the initial benchmark size), and carries
a profit rate of 6.375%, the lowest ever coupon for an instrument of this type. This supports proposition that sukuk issuers have an opportunity to tap into the Basel III-compliant sukuk market.

The Islamic Financial Services Board (IFSB) released draft guidelines on capital adequacy for Islamic banks in November 2012 which clarifies the use of sukuk as additional capital. As per the IFSB Exposure Draft 15, sukuk issued against assets owned by an Islamic bank may be used by that bank as additional capital to meet regulatory minimum requirements. The minimum maturity of the sukuk is five years and it should not have step-up features, such as periodic increases in the rate of return, giving an incentive for the issuer to redeem it.

Over the past two years three UAE based Islamic banks such as Abu Dhabi Islamic Bank, Dubai Islamic Bank and Al Hilal Bank have opted for Tier 1 sukuk issuance totalling $2.5 billion. Issuers of these sukuk say that they qualify as Additional Tier 1 (AT1) capital under Basel III.

The ADIB USD1bln sukuk was based on the contract of Mudharabah and is classified as equity, which therefore does not include principal loss absorption or equity conversion features. Periodic distributions are fully discretionary and non-cumulative. The sukuk is unrated, but will be included in Fitch-eligible capital with a 50% equity credit. It has no maturity date while ADIB can choose to repay the sukuk on certain dates from 2018 if it wishes.

This has significant implications in particular for regional banks that deal with both conventional and Islamic finance. They will have to establish processes to ensure
that the two sets of rules are implemented across two divisions simultaneously. For those banks already specialising in either conventional or Islamic finance,
the impact is no less significant. They will have to comply with new regulatory measures around their liquidity ratios. They will also have to implement strategies for stress testing that allow for complex data to be analysed in order to demonstrate compliance with the Relevant Central Bank’ Basel III directives.

These requirements call for considerable technology change at many banks to ensure that the required financial and risk data can be accurately gathered, cleansed, analysed and reported to board members and the regulator in the
formats required.

Meeting the regulations as they are currently shaped, for Basel III is not a one-time compliance exercise. The requirements will evolve and banks will benefit from taking a long-term view of regulatory compliance. This means developing a framework for implementing consistent compliance practices and implementing a regulatory reporting framework with in-built enterprise-wide risk management tools to ensure ongoing compliance.

Basel 111 – and money laundering

August 24th, 2014

Basel III is proceeding globally, with tangible differences evident between jurisdictions such as pace of adoption, the degrees of strict compliance to the Basel Committee guidance, and the resulting technical infrastructure challenges banks face. Some countries in the Middle East have accelerated
capital deduction phase-in periods or changed limited deductions to
full deductions.

Basel III largely focuses on the liability side of the balance sheet, and modifies requirements for both the quantity and the quality of loss-absorbing capital.

There new requirements for a leverage ratio, and for liquidity and stable funding requirements (a short-term 30-day liquidity coverage ratio and a 1-year
net stable funding ratio). Basel III requires more high-quality common equity Tier 1 (CET1) capital relative to total Tier 1 and Tier 2 capital, and adds a number of capital buffers which can only be met with CET1 capital. These buffers are above regulatory minimums that range from an additional 2.5% of risk-weighted assets up to 8.5%, and even higher in some regions. Basel III recommends an additional loss-absorbing buffer for global and domestic systemically important banks, which can range up to 3.5% – and depend on a bank’s cross-jurisdictional activity (only for G-SIBs), size, interconnectedness, substitutability, and complexity.

In the EU the Capital Requirements Directive (CRD IV) which relates to Basel
III creates an additional buffer known as a systemic risk buffer, which is applied to the whole financial sector, and subsets of it, to prevent and to mitigate long-term non-cyclical systemic and macro-prudential risks. EU member states can apply systemic risk buffers of 1% – 3% for all exposures, and up to 5% for domestic exposures, without having to seek prior approval from the European Commission. 6 For banks subject to both a systemically important bank buffer and the
systemic risk buffer, the higher of the two will apply, but if the systemic risk buffer applies to domestic exposures only, they will be combined. Expect similar legislation to follow in this region at some point in the not too distant future.

The Basel III framework includes revisions to risk-weighted assets (RWAs) related to counterparty credit risk, including the treatment of “wrong-way” risk.

Globally,jurisdictions look to be implementing the minimum capital
requirements according to the BCBS schedule (by 2015) or even more
rapidly, with a faster phase-in for some of the largest banks. Many regions will adopt the BCBS phase-in schedule (which begins in 2016), but some Middle Eastern countries may require faster compliance.

The Islamic Financial Services Board’s (IFSB) revised capital requirements for Bassel III could help strengthen the Islamic finance industry, according to a recent Standard & Poor’s Ratings Services report. The report titled ‘Basel III Offers An Opportunity For Islamic Banks To Strengthen Their Capitalization And Liquidity Management,” sets out how Islamic banks will implement Basel III.

A liquidity coverage ratio might address some of the industry’s long-standing weaknesses, particularly the lack of high quality liquid assets (HQLA), said the report. The implementation of Basel III will also test the treatment of profit sharing investment accounts (PSIAs) from liquidity and funding perspective.
PSIA holders are, in theory, obliged to share any losses, but this could increase their volatility and liquidity coverage requirements and reduce their role as stable funding sources, The IFSB is likely to release its guidance note on the parameters and calculation of the liquidity coverage ratio and net stable funding ratio in early 2015.

The $300 million settlement between Standard Chartered (SC) and the New York Department of Financial Services (DFS), announced on 19 August, again highlights operational and regulatory risks for the bank, says Fitch Ratings.
The New York Department of Financial Services (DFS) said the British bank’s internal compliance systems had failed to detect or act on a large number of “potentially high-risk transactions” mostly originating from Hong Kong and the United Arab Emirates. Banking group Standard Chartered is liable to legal action in the UAE after it agreed to close some customers’ UAE accounts in an anti-money laundering settlement with US regulators, the UAE central bank said “because of the material and moral damage which is falling on them”
‘The new punishment came two years after the bank paid US regulators US$667 million to settle charges it violated US sanctions by handling thousands of money transactions involving Iran, Myanmar, Libya and Sudan.

In 2011 Dubai-based Noor Islamic Bank, since re-named Noor Bank, halted a business in which it channelled billions of dollars from Iranian oil sales through its accounts, as Washington stepped up sanctions over Iran’s disputed nuclear plans.

In May last year, the UAE revoked the licences of two local money exchange companies for non-compliance with regulations including rules against money laundering.

Last month The Basel Committee on Banking Supervision last week proposed standards on money laundering risks, which require banks to include AML within their firm-wide risk management process. “Basel’s commitment to AML is fully aligned with its mandate to strengthen the regulation, supervision and practices of banks worldwide, with the purpose of enhancing financial stability,” the committee stated on issuing the proposal for consultation.

AML is a new area for Basel, which usually deals with prudential standards such as the Basel III capital rules. Its efforts are in addition to those of the Financial Action Task Force (FATF), which issued global AML standards in 2012 and a flurry of practice guidelines last week. Basel supports individual country implementation of FATF standards, and views their proposed standards as supplemental to these, including cross-references back to these in its text.

In Iraq last year political and economic Iraqi circles confirmed the presence of extensive money-laundering operations. Weak monitoring systems and political conflicts of interest, were reasons advanced that prevented the exposure of these operations. Ahmad al-Jabouri, a member of the Integrity Committee in the Iraqi parliament, said in a statement that the amount of money subject to laundering operations are around “20% of Iraq’s investment budget.” Iraq’s 2013 general budget is more than $115 billion, $46 billion of which are investment expenditures. According to Jabouri, money-laundering operations make up $9 billion per year

Basel III in Oman

August 18th, 2014

Oman is not yet one of the 27 national members of the BCBS.

However, the CBO has called upon Omani banks to comply with Basel III standards and issued guidelines on how to implement compliance to this standard which started phasing in from January 2013 and will continue until December 2018,- i.e.in line with the global timeline set out in Basel III for the implementation of its reforms.

Will Basel III work in Oman, particularly with regards to Islamic financing? It seems so! HE Hamood Sangour Al-Zadjali, Executive President of the CBO, in an interview for the Oman Economic Review in April 2014, discussed Oman’s compliance with international best banking practices and stated:

“We have prescribed minimum regulatory capital for banks at 12 per cent of risk-weighted assets, much higher than that prescribed by the Basel norms. Moreover, the actual capital adequacy ratio is much higher at around 16 per cent. The CBO is well ahead in the implementation of Basel III framework, issued in November 2013. Some of the main features of these final guidelines prescribed by the CBO include: minimum common equity tier 1 ratio has been prescribed at seven per cent of risk weighted assets, while minimum Tier 1 capital ratio has been prescribed at nine per cent of risk weighted assets and the minimum total capital adequacy ratio has been prescribed at 12 per cent of risk weighted assets. All these norms … are in line with the international best practices prescribed by the Basel III.”

IMF staff reports U.A.E. – Basel 111 article 1V consultation

August 12th, 2014

The IMF published a staff report and a selected issues report last month for the 2014 Article IV Consultation with the United Arab Emirates. The IMF reveals that the authorities have stepped up the implementation of Basel III. They :

» Plan to phase in Basel III capital and liquidity standards over 2015–19

» To consult with banks about technical issues such as the definition of high-quality liquid assets, and a simple liquidity rule for smaller banks

Directors took note of the ample liquidity and capital buffers in the banking sector. They:

» Welcomed the recently introduced loan concentration limits

» Encouraged the development of domestic debt markets, which would support banks’ liquidity management in preparation for the introduction of the Basel III liquidity framework

Also see this IMF document: http://www.imf.org/external/pubs/ft/scr/2014/cr14187.pdf
This Staff Report was completed on June 11, 2014 and contains

- An Informational Annex prepared by the IMF.
- A Press Release summarizing the views of the Executive Board as expressed during its
June 26, 2014 discussion of the staff report that concluded the Article IV consultation.
– A Statement by the Executive Director for the United Arab Emirates.

Last month the Central Bank of the U.A.E. announced that the ratio of Emirati employees working at the Bank reached 64% at the end of the first half of 2014. The ratio of Emiratisation by job categories reached 100% within the leadership and Supervisory category, 71 % within the executive category and 44% within the specialised/technical category.

The Central Bank’s management has developed specialised training programmes to improve performance of staff, particularly national employees, in collaboration with leading international training institutions.

Meanwhile, the ratio of Emiratisation at national banks reached 34%, and 21% at non-national banks, with a total Emiratisation ratio of 32%. The Central Bank emphasises on all occasions the need for raising the ratio of Emiratisation in banking and other financial institutions in the U.A.E. and supports the call through its regulations issued in this regard.

Brisbane G20 – FSB – Central Banks and GLAC

August 6th, 2014

The FSB chairman and Bank of England Gov. Mark Carney sent a letter to G20 Finance Ministers and Central Bank Governors On 4 April 2014 about their plans for the November 2014 G20 summit to be held in Brisbane in November this year.

The letter summarises the priorities for completing reforms by the G20 summit in Brisbane. These are:
- ending too-big-to-fail
- transforming shadow banking
- making derivatives markets safer

Making resolution work in Europe and beyond – the case for going concern loss absorbing capacity was the subject of a recent speech given by Andrew Gracie, Executive Director, Resolution, Bank of England at the Bruegel breakfast panel event, Brussels Thursday 17 July 2014 . see http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech749.pdf

Some more unusually clear source of information on this topic Basel Committee Post Crisis Reform: “Finishing the job!” /em>
Laurent Clerc Director Financial Stability Banque de France

http://ukalma.org.uk/?wpdmact=process&did=Mjc0LmhvdGxpbms

and this presentation:
The FSB Key Attributes of Effective Resolution Regimes Bail-in Framework by Ruth Walters https://www.bfg.pl/sites/default/files/presentation_by_ms._ruth_walters_fsb.pdf

The problem of ‘too big too fail’ of course was discussed as long back as Cannes in 2011.
The FSB will publish a consultation on ‘gone-concern loss-absorbing capacity’ (GLAC), to assess the capacity of G-SIFIs to absorb losses when they fail. The FSB will be seeking agreement at the Brisbane Summit on three issues:
- the criteria that liabilities should meet to be considered as GLAC
- the appropriate amount of GLAC banks should hold
- where this should be held in the banks’ group structure.

An open issue is whether GLAC should be based on risk-weighted assets or on a non-risk-weighted measure. Thee is merit in both approaches. Using a risk-weighted approach would be coherent with Basel III capital requirements; but from an EU perspective, a non-risk weighted concept would be preferable, because this would be compatible with the resolution regime envisaged by the EU’s directive on bank recovery and resolution.

Big firms that straddle national borders present additional problems for regulators:
- Who exactly should take the hit when things go wrong?
- Which regulator should take the lead in sorting it out?
- What happens when different regulators disagree over what to do?
- Whose laws are applied when things go awry?

On the resolution of cross-border banks, the letter states that this must be supported by contractual or statutory approaches for cross-border recognition of resolution actions, including temporary stays on close-out and cross-default rights in financial contracts when a firm enters resolution, and bail-in of debt issued under foreign law. Mike Callaghan, programme director of the G20 Studies Centre at the Lowy think-tank in Sydney, Australia, says “that n agreement on resolving complex, cross-border institutions would be “pretty difficult to achieve by Brisbane”.

The FSB’s agenda will also tackle “shadow banking,” where non-regulated firms act much like banks and could pose a risk to the financial system.

FSB members are divided about the amounts of “bail-inable” debt that should be carried, and the form it should take, Japan officials argue that forcing banks to issue a single type of bail-inable bond ignores the fact that its own sector is heavily deposit-funded. Tokyo has already overhauled its resolution regime, and is not eager to do it again. France, too, seems reluctant to add new requirements for bail-inable debt on top of newly introduced EU-specific resolution rules. China ‘s state-owned banking sector seems clear that public money will be used in a crisis, and would see bail-in as a foreign concept. There is also debate about whether any surplus equity that banks are holding should be counted towards GLAC. Some Asian countries argue for this.

The proposals are likely to forward a numerical range for GLAC coupled with a second “pillar”, leaving considerable discretion to the national regulator when dealing with individual institutions.

The new framework will be applied to the list of 29 G-SIFIs after the consultation is completed and a ‘comprehensive’ impact assessment is
finalised.

EBA Implementing Technical Standards (ITS)

July 8th, 2014

The European Banking Authority (EBA) today published an XBRL taxonomy to be used by competent authorities for remittance of data under the EBA Implementing Technical Standards (ITS) on supervisory reporting. \

It presents the data items, business concepts, relations, visualisations and validation rules described by the EBA Data Point Model (DPM) contained in the ITS on supervisory reporting, including the amendments relating to asset encumbrance, forbearance and non-performing exposures.

The reference date is as of 30 September 2014 onwards and it includes the first reports under FINREP.

The taxonomy defines a representation for data collection under the reporting requirements related to own funds, financial information, losses stemming from: lending collateralised by immovable property, large exposures, leverage ratio, liquidity ratios and asset encumbrance.

As part of enhancing regulatory harmonisation in the EU banking sector and facilitating cross-border supervision, uniform data formats are necessary to enable comparable data on credit institutions and investment firms across the EU.

The EBA XBRL taxonomy was primarily developed for data transmission between competent authorities. The EBA, many authorities have been using it for the collection of supervisory reporting from the credit institutions and investment firms they supervise. The taxonomy proposed by the EBA will lead to convergence of supervisory practices across Members States and also facilitate supervisors to identify and to assess risks consistently across the EU and to compare EU banks in an effective manner.

The updated taxonomy issued today incorporates corrections to the COREP and FINREP reporting structures in line with the published ITS, and new reporting structures for asset encumbrance.

It includes the following technical documents:
• The set of XML files forming the XBRL taxonomy
• A description of the architecture of the XBRL taxonomy
• The DPM of which the taxonomy is a standardised technical implementation, includes both database and document representations, along with a description of the formal modelling approach on which it is based.

Date of applicability
The existing taxonomy (2.0.1) related to the September 2013 framework release is to be used for remittance to the EBA for reports with reference dates prior to 30 September 2014.

Reports with reference dates as of 30 September 2014 and beyond are to use this revised taxonomy (2.1), which is related to the March 2014 framework release. Remittance of FINREP reports will, therefore, commence using this revised taxonomy.

Legal basis and next steps
This XBRL taxonomy was developed based on the final draft ITS on supervisory reporting including amendments regarding asset encumbrance, forbearance and non-performing exposures (and incorporating some revisions arising from the publication and adoption process of the Commission Implementing Regulation (EU) No 680/2014) and in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (Capital Requirements Regulation – CRR).

While the original ITS were adopted by the European Commission and published in the Official Journal of the European Union on 28 June 2014, the ITS amendments regarding asset encumbrance, forbearance and non-performing exposures are pending adoption and publication. Hence, this taxonomy is subject to further necessary revisions following the publication and adoption process and based on any critical technical corrections that may be identified.

Later this year, the EBA expects to publish a further revision of its XBRL taxonomy incorporating further alignment corrections, and additional reporting requirements regarding funding plans, which is expected to be used for reports with reference dates as of 31 December 2014 and beyond.

It seems probable that similar reporting formats will be introduced to this region. So consider this when selecting your regulatory reporting solution, BRS Analytics data model and report outputs have already been extended to meet the COREP and FINREP requirements.

FATCA – now in effect from 1 July 2014

July 2nd, 2014

Does the Foreign Account Tax Compliance Act (FATCA), affect you? The legislation came into full effect on the 1st of July 2014 and has many implications, particularly for US expatriates and for financial institutions with which they deal.

FATCA, a U.S. tax avoidance measure that requires foreign (non- U.S.) financial institutions (FFIs) to identify, report on and, in some circumstances, withhold on payments to account holders. The point of FATCA is increase transparency for the IRS with respect to U.S. persons that may be investing and earning income through non-U.S. institutions. FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met.

U.S. taxpayers owning financial assets in excess of $50,000 in foreign accounts must report those assets every year on a new Form 8938 to be filed with the 1040 tax return.

The law requires foreign financial institutions (FFIs) to enter into an agreement with the Internal Revenue Service to identify their U.S. account holders and to disclose the account holders’ names, tax identification numbers, addresses and the transactions of most types of accounts.

FFI’s are now required to report the following:
1) The name, address and U.S. tax identification number (TIN) of each account holder that is a specified U.S. person;
2) In the case of any account holder that is a U.S. entity with one or more U.S. owners, the name, address and TIN of each substantial U.S. owner of such entity;
3) The account number;
4) The year-end account balance or value; and
5) Gross receipts and gross withdrawals or payments from the account.

If an FFI does not enter into an agreement with the IRS, all relevant U.S.-sourced payments, such as dividends and interest paid by U.S. corporations, will be subject to a 30 percent withholding tax.

Many Americans residing overseas are faced with ‘banking lock-out’ because financial institutions have in some cases chosen to eliminate their US client basis to minimize their exposure to FATCA reporting requirements, withholding fees and potential penalties.

While there is speculation that this law will make it less desirable for foreigners to do business with Americans and even a reduced desire to hold dollar-based assets there is still a need for Middle East FIs to address this reporting requirement.

US citizens working here should seek independent financial advice or speak to a tax advisor for more information and visit the IRS website – www.irs.gov/

(From Notice 2014-33: Comments received after the publication of the temporary Chapter 4 regulations have indicated that the release dates of the final Forms W-8 and accompanying instructions present practical problems for both withholding agents and FFIs to implement the new account opening procedures beginning on 1 July 2014. In consideration of these comments, the US Treasury and the IRS intend to amend the Chapter 4 regulations to allow a withholding agent or FFI to treat an obligation held by an entity that is issued, opened, or executed on or after 1 July 2014, and before 1 January 2015, as a pre-existing obligation for purposes of implementing the applicable due diligence, withholding, and reporting requirements under Chapter 4. The proposed amendments to the Chapter 4 regulations will only be available to obligations held by entities. )

http://www.irs.gov/pub/irs-pdf/p5124.pdf This user guide FATCA XML V1.1 sets out the xml schema and the information required in each data element.

Once FFIs register with the IRS through the agency’s website, they will receive a notice that the registration has been accepted and will be issued a Global Intermediary Identification Number (GIIN), to be used for reporting purposes. Approximately 77,000 banks and financial institutions from 70 countries have already registered, according to news reports. Reuters reported that more than 500 U.S. businesses have also registered, including Citibank and JPMorgan Chase. As of June 13, 2014, 36 nations had signed agreements with the IRS, including Australia, France, Germany, Japan, Mexico, South Africa, the United Arab Emirates and the United Kingdom. Many places where Americans have traditionally hidden assets, including Switzerland, the Cayman Islands and the Bahamas, have signed agreements as well. Forty-two other nations have reached “agreements in substance.”

The IRS issued a notice in May 2014 announcing that calendar years 2014 and 2015 will be regarded as a “transition period” for FATCA enforcement. The transition period is “intended to facilitate an orderly transition” for financial institutions struggling to achieve FATCA compliance, according to the IRS.

Take note that the July 1, 2014, effective date is not postponed and the legal obligations imposed by FATCA have not changed. “An entity that has not made good-faith efforts to comply with the new requirements will not be given any relief from IRS enforcement during the transition period,” the notice states.

The IRS is just letting the international financial community know that a good-faith attempt at compliance will be acceptable until January 2016. Instead of aggressive policing of reporting accuracy, the IRS may check on the status of FFIs’ filing of W-8 and W-9 forms and take into account whether a withholding agent has made reasonable efforts to modify its account opening practices and procedures.