Understanding Risk Management and Compliance, What is Different After Monday, January 27, 2014 [NOOK Book]

Overview

Risk management and compliance: A game that you never get bored of...

There are so many surprises and inconsistencies.

I have spent considerable time trying to understand better the European EMIR (Regulation No 648/2012), and how it affects the implementation of the Basel III / CRD IV, Solvency II and the Dodd Frank Act.

I am very surprised!...

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Understanding Risk Management and Compliance, What is Different After Monday, January 27, 2014

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Overview

Risk management and compliance: A game that you never get bored of...

There are so many surprises and inconsistencies.

I have spent considerable time trying to understand better the European EMIR (Regulation No 648/2012), and how it affects the implementation of the Basel III / CRD IV, Solvency II and the Dodd Frank Act.

I am very surprised!

EMIR is based on Basel 2 (no, not Basel 3 / CRD IV). Basel 2 /CRD III.

Let's start from... the start. The European Market Infrastructure Regulation (EMIR) is the European Commission's response to the commitment by G20 countries to address risks related to the OTC derivative markets.

EMIR is not only applicable in all European Union member states, but also to counterparties outside the EU.

Once fully implemented, EMIR will require central clearing for certain classes of OTC derivatives, application of risk mitigation techniques for non-centrally cleared OTC derivatives, exchange of collateral and adequate capital to cover the exposures arising from OTC derivatives not cleared by a Central Clearing Counterparty (CCP), and a framework to enhance the safety of all Central Clearing Counterparties (CCPs) and Trade Repositories (TRs).

Let's read the Commission Delegated Regulation No 152/2013 supplementing Regulation (EU) No 648/2012 (with regard to regulatory technical standards on capital requirements for central counterparties):

Article 3
Capital requirements for operational and legal risks

1. A CCP shall calculate its capital requirements for operational - including legal - risk using either the Basic Indicator Approach or Advanced Measurement Approaches as provided in Directive 2006/48/EC subject to the restrictions provided in paragraphs 2 to 7.

(Note: This is the EU directive implementing Basel 2, not Basel 3)

2. A CCP may use the basic indicator approach in order to calculate its capital requirements for operational risk in accordance with Article 103 of Directive 2006/48/EC.

6. A CCP may also apply to its competent authority for permission to use Advanced Measurement Approaches. The competent authority may grant the CCP the permission to use Advanced Measurement Approaches based on its own operational risk measurement systems in accordance with Article 105 of Directive 2006/48/EC.

Article 4
Capital requirements for credit risk, counterparty credit risk and market risk which are not already covered by specific financial resources as referred to in Articles 41 to 44 of Regulation (EU) No 648/2012

1. A CCP shall calculate its capital requirements referred to in Article 1 as the sum of 8 % of its risk-weighted exposure amounts for credit and counterparty credit risk and its capital requirements for market risk calculated in accordance with Directives 2006/48/EC and 2006/49/EC, subject to the restrictions provided in paragraphs 2 to 5.

3. For the calculation of the risk-weighted exposure amounts for credit risk which is not already covered by specific financial resources as referred to in Articles 41 to 44 of Regulation (EU) No 648/2012, a CCP shall apply the Standardised Approach for credit risk provided for in Articles 78 to 83 of Directive 2006/48/EC.

Interesting! And we have not even touched the Dodd-Frank Act, MiFID 2, UCITS 5, AIFMD, Solvency II...
Very interesting! Everything from the Basel 2 framework is here - credit risk, market risk, operational risk, Basic, Standardized and Advanced Measurement Approaches, Stress Testing, everything.

We need a wise combination of Basel 2 and Basel 3.

We should start from the Basel 2 requirements as mentioned in the regulation and then change whatever has been changed after the Basel III / CRD IV amendments.
It is not that easy, and there are very few experts that understand both, the Basel 2/3 environment and the complex world of the Central Clearing Counterparties (CCPs) and Trade Repositories (TRs).

What about insurers and Solvency II? :)
According to the FCA in UK, EMIR affects insurers that ...

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Product Details

Meet the Author

George Lekatis is the General Manager of Compliance LLC, a leading provider of risk and compliance training and executive coaching in 36 countries.George has more than 17,000 hours experience as a professional speaker and seminar leader. He has worked for more than 18 years as a management consultant and educator and has demonstrated exceptional presentation and communication skills.George is the president of the Basel ii Compliance Professionals Association (BCPA, basel-ii-association.com), the largest association of Basel ii professionals in the world, and the Basel iii Compliance Professionals Association (BiiiCPA, basel-iii-association.com), the largest association of Basel iii professionals in the world.George is also president of the Sarbanes Oxley Compliance Professionals Association (SOXCPA, sarbanes-oxley-association.com), the largest Association of Sarbanes Oxley professionals in the worldGeorge is an expert witness, qualified to investigate and testify about risk and compliance management standards, policies, procedures, best practices, due care and due diligence.
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