monday, february 12, 2018 - international association of ... · these frauds include...

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)

International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW, Suite 800, Washington DC 20005-6705 USA

Tel: 202-449-9750 www.risk-compliance-association.com

Monday, February 12, 2018 Top 10 risk and compliance management related news stories

and world events that (for better or for worse) shaped the week's agenda, and what is next

Dear members and friends, Today we will start with some warnings from the SEC’s Office of Investor Education and Advocacy about Pump-and-Dump, Market Manipulations, and Initial Coin Offerings (or ICOs).

Fraudsters profit by engaging in market manipulation, such as by spreading false and misleading information about a company (typically microcap stocks) to affect the stock’s share price. They may spread stock rumors in different ways, including on company websites, press releases, email spam, and posts on social media, online bulletin boards, and chat rooms. The false or misleading rumors may be positive or negative.

For example, “pump-and-dump” schemes involve the effort to manipulate a stock’s share price or trading volume by touting the company’s stock through false and misleading statements to the marketplace.

Pump-and-dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a promoter will call using the same sort of

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pitch. In reality, the author of the messages may be a company insider or paid promoter who stands to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create.

Once these fraudsters “dump” their shares for a profit and stop hyping the stock, the price typically falls, and investors lose their money.

The SEC’s Office of Investor Education and Advocacy is also warning investors about potential scams involving stock of companies claiming to be related to, or asserting they are engaging in, Initial Coin Offerings (or ICOs). Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams.

These frauds include “pump-and-dump” and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies.

Developers, businesses, and individuals increasingly are using ICOs – also called coin or token launches or sales – to raise capital. There has been media attention regarding this form of capital raising.

While these activities may provide fair and lawful investment opportunities, there may be situations in which companies are publicly announcing ICO or coin/token related events to affect the price of the company’s common stock.

The SEC may suspend trading in a stock when the SEC is of the opinion that a suspension is required to protect investors and the public interest.

Circumstances that might lead to a trading suspension include:

- A lack of current, accurate, or adequate information about the company – for example, when a company has not filed any periodic reports for an extended period;

- Questions about the accuracy of publicly available information, including in company press releases and reports, about the company’s current operational status and financial condition; or

- Questions about trading in the stock, including trading by insiders,

potential market manipulation, and the ability to clear and settle transactions in the stock.

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According to the SEC’s Office of Investor Education and Advocacy, fraudsters may promote a stock in seemingly independent and unbiased sources including:

Social Media: Fraudsters may use social media to promote a stock anonymously or while pretending to be someone else.

Investment Newsletters: In some cases, an investment newsletter may promote a particular stock because the newsletter publisher has been paid to do so.

Online Advertisements: Fraudsters may purchase pop-up ads or banner ads that are targeted to a particular group based on demographics or interests. Ads may be fraudulent even if they appear on legitimate websites, including on the online financial pages of news organizations.

Email: Email spam may indicate an email scam.

Internet Chat Rooms: Fraudsters often use aliases in Internet chat rooms to hide their identities and post messages urging investors to buy stock in microcap companies based on supposedly “inside” information about impending developments at the companies.

Direct Mail: Fraudsters may send you high-end glossy mailers promoting certain stocks.

Welcome to the Top 10 list. Best regards,

George Lekatis President of the IARCP General Manager, Compliance LLC 1200 G Street NW Suite 800, Washington DC 20005, USA Tel: (202) 449-9750 Email: [email protected] Web: www.risk-compliance-association.com HQ: 1220 N. Market Street Suite 804, Wilmington DE 19801, USA Tel: (302) 342-8828

mailto:[email protected]

http://www.risk-compliance-association.com/

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Number 1 (Page 8)

Fourth FSB Annual Report

This fourth annual report provides an update on the key activities of the FSB and its audited annual financial statements for the 12-month period ended 31 March 2017.

Number 2 (Page 9)

2017 Annual Report Financial Stability Oversight Council

The Financial Stability Oversight Council (Council) was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and is charged with three primary purposes:

Number 3 (Page 13)

Opening Remarks at the Securities Regulation Institute Chairman Jay Clayton

“I want to take a few moments to highlight two issues: (1) my expectations for market professionals, particularly when dealing with new products or new forms of old products, and (2) the SEC's approach to remaining Dodd-Frank rulemaking mandates.”

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Number 4 (Page 19)

Revised Single Programming Document 2017-2019

EIOPA’s work is designed and developed to provide value to Europe and its citizens. The way to do so is to act as a modern, competent and professional organisation, with sound and effective governance arrangements, efficient processes and a positive reputation.

Number 5 (Page 22)

New report assesses structural change in global banking

Bank profitability has fallen from pre-crisis peaks but banks have become more resilient to risks, finds a new report by the Committee on the Global Financial System (CGFS).

Number 6 (Page 24)

A level playing field in banking Agustín Carstens, General Manager of the BIS, at the Institute of International Finance Board of Directors dinner, Zurich.

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Number 7 (Page 30)

EBA launches 2018 EU-wide stress test exercise

The European Banking Authority (EBA) launched its 2018 EU-wide stress test and released the macroeconomic scenarios. The adverse scenario implies a deviation of EU GDP from its baseline level by 8.3% in 2020, resulting in the most severe scenario to date.

Number 8 (Page 33)

SEC Halts Alleged Initial Coin Offering Scam

The Securities and Exchange Commission obtained a court order halting an allegedly fraudulent initial coin offering (ICO) that targeted retail investors to fund what it claimed to be the world’s first “decentralized bank.” According to the SEC’s complaint, filed in federal district court in Dallas on Jan. 25, Dallas-based AriseBank used social media, a celebrity endorsement, and other wide dissemination tactics to raise what it claims to be $600 million of its $1 billion goal in just two months.

Number 9 (Page 36)

2017 Market development report on occupational pensions and cross-border IORPs

The 2017 Market Development Report is the 11th report in a series of market development reports.

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It provides an overview of the landscape for Institutions for Occupational Retirement Provision (IORPs) and Article 4 ring-fenced funds in the European Economic Area (EEA). In addition, it draws attention to some market trends over the past years as well as on the developments in cross-border arrangements of IORPs.

Number 10 (Page 40)

Reading the Body’s History of Threat Exposure Epigenetic technology would provide new tool in fight against WMD proliferation

Picture an intelligence officer in the field. She is trying to piece together a suspected threat, and has access to someone who may have a role in carrying it out. There may be traces of biological or chemical agents on his clothing or hair. She can look for them, but they’re transient, and often present in such low concentrations that she’ll need to send samples to a laboratory.

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Number 1

Fourth FSB Annual Report

This fourth annual report provides an update on the key activities of the FSB and its audited annual financial statements for the 12-month period ended 31 March 2017. The report describes the increasing focus of the FSB’s work on monitoring implementation and evaluating the effects of the G20 financial regulatory reforms. It provides an update on the activities, publications and decisions by the FSB during the course of the year, and sets out details on the FSB’s governance. The FSB separately publishes an annual report for G20 Leaders on the implementation and effects of the agreed post-crisis international regulatory reforms, the most recent version of which was published in July 2017 and delivered to the G20 Leaders’ Summit in Hamburg.

Financial Stability Board in numbers 68 member institutions, comprising ministries of finance, central banks, and supervisory and regulatory authorities from 25 jurisdictions as well as 10 international organisations and standard-setting bodies, 6 Regional Consultative Groups reaching out to 65 other jurisdictions around the world; 33 Secretariat staff; 7 public consultations on policy recommendations during 2016/17. To read more: http://www.fsb.org/wp-content/uploads/P160118.pdf

http://www.fsb.org/wp-content/uploads/P160118.pdf

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Number 2

2017 Annual Report Financial Stability Oversight Council

The Financial Stability Oversight Council (Council) was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and is charged with three primary purposes: 1. To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace. 2. To promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure.

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3. To respond to emerging threats to the stability of the U.S. financial system. Pursuant to the Dodd-Frank Act, the Council consists of ten voting members and five nonvoting members and brings together the expertise of federal financial regulators, state regulators, and an insurance expert appointed by the President.

Executive Summary U.S. financial market conditions have generally been stable since the publication of the Council’s last annual report. Asset prices generally increased, commodity prices partially recovered after falling in previous years, and commercial real estate (CRE) valuations remained high, according to certain measures. Short-term funding markets experienced significant changes over the past two years as SEC reforms of money market mutual funds (MMFs) went into effect. While low interest rates have supported growth in recent years, interest rates have generally increased across maturities since the Council’s last annual report, against the backdrop of continued gradual improvement in economic fundamentals. Developed economies grew at relatively subdued levels, and emerging market economic growth picked up slightly, as the global economy has continued to rebound slowly in the post-crisis period. At the same time, several factors continue to generate global economic uncertainty, including developments following the referendum in the United Kingdom (UK) to leave the European Union (EU), problems affecting European banks, and rapid corporate credit growth in China. Since the Council’s last annual report, actions by financial regulatory agencies have included the continued implementation of capital and liquidity standards for financial institutions; application of supervisory and company-run stress tests; supervisory review and feedback on large banking organizations’ resolution plans; implementation of additional reforms of the derivatives markets and of asset management practices; enhanced safeguards related to operational risks for technological systems

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and cybersecurity; and improvements in data scope, quality, and accessibility. Over the past 18 months, the Council rescinded its designations of two nonbank financial companies for supervision by the Federal Reserve. In June 2016, the Council rescinded its determination regarding GE Capital Global Holdings, LLC (GE Capital), based on its determination that changes at GE Capital since the Council’s July 2013 determination significantly reduced the potential for GE Capital’s material financial distress to threaten U.S. financial stability. The Council rescinded its determination regarding AIG in September 2017, based on decreased capital markets exposures to the company; the company’s exit from certain important financial markets; and additional Council analyses indicating that there is not a significant risk that a forced asset liquidation by AIG would disrupt market functioning and thereby pose a threat to U.S. financial stability. The Council continues to serve as a forum to facilitate coordination among federal and state financial regulatory agencies to monitor market developments and identify potential threats to financial stability. As a result of post-crisis regulatory reforms, the U.S. financial system is clearly stronger and much better positioned to withstand a market shock or an economic downturn than it was before the financial crisis. Maintaining a resilient financial system is important in large part because economic growth—and the economic well-being of Americans—depends on the financial system’s ability to provide capital to businesses and individuals, to provide vehicles for savings, and to intermediate financial transactions even in the face of adverse events. Indeed, the crisis had a significant and lasting effect on U.S. economic growth. Nearly ten years after the crisis began, with most of the post-crisis regulatory reforms required by the Dodd-Frank Act having been implemented, this is an appropriate time to assess the effectiveness of the reforms and to consider any unintended consequences that could have negative effects on financial stability or economic growth. To read it:

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https://www.treasury.gov/initiatives/fsoc/studies-reports/Documents/FSOC_2017_Annual_Report.pdf



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Number 3

Opening Remarks at the Securities Regulation Institute Chairman Jay Clayton

Thank you for that warm welcome. I am delighted to join you today by videoconference. I know Meredith [Cross] has prepared questions. I look forward to answering those, as well as questions from this distinguished audience. When I was teaching at UPenn law school, the best classes were the ones where students asked difficult, but informed, questions. With Meredith and this audience, I know that I am in for a treat. Before we get to the question and answer session, I want to take a few moments to highlight two issues: (1) my expectations for market professionals, particularly when dealing with new products or new forms of old products, and (2) the SEC's approach to remaining Dodd-Frank rulemaking mandates. I believe you and investors should know my perspective on these topics, and how that perspective is being influenced by a variety of factors.

Expectations for Professionals My first message is simple and a bit stern. Market professionals, especially gatekeepers, need to act responsibly and hold themselves to high standards.

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To be blunt, from what I have seen recently, particularly in the initial coin offering ("ICO") space, they can do better. Our securities laws – and 80 plus years of practice – assume that securities lawyers, accountants, underwriters, and dealers will act responsibly. It is expected that they will bring expertise, judgment, and a healthy dose of skepticism to their work. Said another way, even when the issue presented is narrow, market professionals are relied upon to bring knowledge of the broad legal framework, accounting rules, and the markets to bear. Legal advice (or in the cases I will cite, the lack thereof) surrounding ICOs helps illustrate this point. Let me posit a few scenarios. First, and most disturbing to me, there are ICOs where the lawyers involved appear to be, on the one hand, assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but call it an "ICO," which sounds pretty close to an "IPO." On the other hand, those lawyers claim the products are not securities, and the promoters proceed without compliance with the securities laws, which deprives investors of the substantive and procedural investor protection requirements of our securities laws. Second are ICOs where the lawyers appear to have taken a step back from the key issues – including whether the "coin" is a security and whether the offering qualifies for an exemption from registration – even in circumstances where registration would likely be warranted. These lawyers appear to provide the "it depends" equivocal advice, rather than counseling their clients that the product they are promoting likely is a security. Their clients then proceed with the ICO without complying with the securities laws because those clients are willing to take the risk. With respect to these two scenarios, I have instructed the SEC staff to be on high alert for approaches to ICOs that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar. I recognize that in some ICOs there is no market professional involved. The SEC is undertaking significant efforts to educate the public that unregistered securities investments offered by unregistered promoters,

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with no securities lawyers or accountants on the scene, are, in a word, dangerous. Before I move on to the next topic I want to raise one more narrow, distributed ledger or "blockchain"-related legal issue by means of a hypothetical. I doubt anyone in this audience thinks it would be acceptable for a public company with no meaningful track record in pursuing the commercialization of distributed ledger or blockchain technology to (1) start to dabble in blockchain activities, (2) change its name to something like "Blockchain-R-Us," and (3) immediately offer securities, without providing adequate disclosure to Main Street investors about those changes and the risks involved. The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering.

Perspective on Remaining Dodd-Frank Mandates I will now turn to another topic, which has been around for a while and, experience proves, is not easy: finishing rulemaking mandates under the Dodd-Frank Act ("Dodd-Frank"). As many in this room know, including those who devoted substantial time to Dodd-Frank rules while they served at the SEC, if crafting these rules was straightforward, they would be done. Since arriving at the Commission, I have been working with my fellow Commissioners and the SEC's able and dedicated staff to pursue an agenda that is true to the agency's mission as viewed through the lens of long-term Main Street investors. In the area of rulemaking, this means efficiently allocating the Commission's limited resources to a combination of statutory mandates and the needs of the day (such as the broad dissatisfaction with the current regulatory approach to retail investment advice, which is commonly referred to as the "fiduciary rule").

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In other words, how quickly we can complete the remaining Dodd-Frank rules is a multi-variable function and two of the key variables – there are many – are mission-critical demands and the complexity of the mandates themselves. With that as context, I will try to shed further light on how I believe we should proceed on the remaining Dodd-Frank rules. These rules for the most part fall into four categories, each of which has characteristics that inform how I believe we should approach that category and the specific rules in it. The first category is the remaining rules to stand-up the security-based swap regime. The SEC has finalized many, but not all, of the Title VII rules that Congress directed it to establish. As we seek to complete the Title VII rules, I believe that final implementation should be done holistically – as a coherent package. The rules are substantially interrelated and this approach should allow for more efficient implementation and internal consistency. I should also note that, in some instances – in part because of statutory variances and differences in products and markets – the SEC's final and proposed rules governing security-based swaps have differed, in some cases significantly, from the rules governing swaps that the Commodity Futures Trading Commission ("CFTC") adopted pursuant to its own Title VII mandates. We are seeking to harmonize our ultimate securities-based swap rules with the CFTC, where appropriate, to increase effectiveness as well as reduce complexity and costs. This requires deliberate and constructive engagement with our CFTC brethren, which I am pleased to report is well underway. The second category is executive compensation rules for both public companies and SEC-regulated entities. Those rules are challenging for various reasons, including that we are writing on an already very colorful canvas and different constituencies see the rules as serving different, and sometimes inconsistent, goals. Here, as a result of the complexity and scope of the existing executive compensation disclosure regime, as well as the nature of the mandates, I believe a serial approach is likely to be most efficient and best serve the SEC's mission.

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I am pleased that we recently issued interpretive guidance to help companies comply with the new pay ratio rules. This guidance was true to the statutory mandate, practical, and intended to help companies reduce compliance costs. With those same themes in mind, I am discussing with my fellow Commissioners and the staff how best to address the remaining mandatory executive compensation rules. The third category is specialized disclosure rules, such as resource extraction disclosure. I do not need to tell you there are many strong and divergent views on how these rules should be approached. I also will remind you that, beyond the statutory text, they pose additional challenges, including how the SEC can meet its obligations under the Administrative Procedure Act and, as various court cases demonstrate, still survive legal challenge. In the case of resource extraction, we also must comply with the parameters of the Congressional Review Act. In short, the task is difficult and it is clear some stand poised to challenge our work, whatever its outcome. Yet that does not relieve us of our responsibility. With that perspective, I have asked the staff to craft rules for consideration by the Commission that meet the objectives of Congress, take into account this array of procedural and substantive constraints, and bring finality to these matters. The last category, which in some instances overlaps with the others, is mandates for which market developments – including developments resulting from shareholder engagement – have, at least in part, mitigated some of the concerns that motivated the statutory requirements. For example, several companies already have made public their policies regarding compensation clawbacks. Some of these policies go beyond what would be required under Dodd-Frank. We have seen a few companies attempt to claw back compensation from their executives under these policies. Our rulemaking priorities, as well as the rules themselves, should reflect these observable developments. All that said, it is the SEC's obligation to complete the rules mandated by Congress in Dodd-Frank, and I intend to do so. By necessity, as we – me, my fellow Commissioners, and the staff – develop and finalize the rules we will have to be flexible in timing, in sequence, and in content, because there

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are many factors beyond our control that can dictate how to apply the agency's limited resources.

Conclusion In closing, I cannot overstate the importance of the role of those who provide legal advice and other professional services in our markets. Securities lawyers and other market professionals play a fundamental role in protecting American investors, and the thorough provision of your services is essential to the operation of fair, orderly, and efficient U.S. markets. And with respect to outstanding Dodd-Frank rulemakings, let me assure you that the SEC is actively looking for ways to navigate the clear challenges presented and satisfy the statutory mandates.

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Number 4

Revised Single Programming Document 2017-2019

Foreword EIOPA’s work is designed and developed to provide value to Europe and its citizens. The way to do so is to act as a modern, competent and professional organisation, with sound and effective governance arrangements, efficient processes and a positive reputation. To achieve its goal our Authority is following the principles of independence, transparency and accountability. To develop EIOPA further as a credible supervisory Authority within the European System of Financial Supervision we are following three main strategic priorities: First, enhancing supervisory convergence, second, reinforcing preventive consumer protection and third, preserving financial stability. Supervisory convergence becomes key in a period where effective implementation of Solvency II is both a challenge and an opportunity, and we want to make the utmost out of the latter. A true Single Market demands level playing field and quality regulation and supervision. The trust of consumers in the area of financial sector, including insurance and pensions, deserves being enhanced, and EIOPA is targeting a range of measures to be a key contributor to its enhancement, with the customer interest at its centre. Coming out of an unprecedented financial crisis, that has severely affected the economy and the people, we are fully committed to contribute

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anticipating and mitigating unintended developments for the financial sector and will make use of stress tests, risk indicators and other tools to be in the frontline of action for the Insurance and Pensions sectors. The Single Programming Document (SPD) consists of two parts. The first part sets up the direction of the development of our Authority and the relevant business strategic objectives and actions for the period 2017 - 2019. The second part outlines the tasks EIOPA is mandated to, and will perform, in the course of the specific year in which the SPD applies (2017, 2018 and then 2019). The current document combines the aim of providing clear information to stakeholders on our goal and mandate, including a transparent description of deliverables, together with concrete business objectives for the teams and individuals working at EIOPA, key for internal management. This SPD is the reflection of efficient internal governance, planning and coordination followed within EIOPA in the past years. All the actions and deliverables indicated have undergone a solid prioritisation assessment and were carefully checked against required and available financial and human resources, expertise and skills. Each work stream and project indicated in the SPD is monitored by robust performance indicators supported by clear internal control standards. In order to ensure business continuity and high-quality deliverables, dedicated focus is given to associated risks and how they are managed within EIOPA. In line with EIOPA’s principles of transparency and accountability, the SPD presents our revenues, expenditures, staffing and organisational structure in a detailed and comprehensive manner. Full transparency, efficiency and accountability are building blocks for managing public resources, as they belong to all European citizens. The needle in our compass when performing our tasks has been, and will continue to be, bringing added value to the European Union financial supervision and by that contributing to financial stability and addressing the needs of European citizens.

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To read more: https://eiopa.europa.eu/Publications/Administrative/EIOPA%20SPD%202017-2019%20including%20AWP%202018.pdf

https://eiopa.europa.eu/Publications/Administrative/EIOPA%20SPD%202017-2019%20including%20AWP%202018.pdf

https://eiopa.europa.eu/Publications/Administrative/EIOPA%20SPD%202017-2019%20including%20AWP%202018.pdf

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Number 5

New report assesses structural change in global banking

Bank profitability has fallen from pre-crisis peaks but banks have become more resilient to risks, finds a new report by the Committee on the Global Financial System (CGFS). Over the past decade, banks' balance sheets, cost base, scope of activities and geographic presence have been shaped by the impact of the crisis, as well as the resulting changes in regulation, competition and the macroeconomic landscape. The report, Structural changes in banking after the crisis, outlines common trends but also differences across 21 countries. The banking system data, spanning the years 2000-16, are published alongside the report as a comprehensive reference tool. "In response to their new operating landscape, banks have been re-assessing and adjusting their business strategies and models," said CGFS chair William C Dudley, also President and Chief Executive Officer of the Federal Reserve Bank of New York. "At the same time, a number of advanced economy banking systems have to confront low profitability and legacy problems." The report finds that, since the crisis, banks have significantly strengthened their capital and liquidity buffers, as well as their funding structures, in line with the intended direction of regulatory reforms. A stronger banking sector now generally supports the flow of credit to the real economy, although conditions vary across the globe. Many banks directly affected by the crisis have shifted their businesses away from complex and trading activities and have become more selective in their international activities. In contrast, banks less affected by the crisis, including those in many emerging markets, have expanded internationally. The decline in bank return-on-equity from historically high pre-crisis rates partly reflects lower leverage and risk-taking, but also sluggish revenues and high costs. Longer-term profitability challenges could also signal

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overcapacity and the need for further structural adjustment supported by robust bank resolution frameworks. Looking forward, bank supervisors point to scope for further improving risk management. Central banks must also remain alert to evolving system-wide risks. To read more: https://www.bis.org/publ/cgfs60.pdf

https://www.bis.org/publ/cgfs60.pdf

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Number 6

A level playing field in banking Agustín Carstens, General Manager of the BIS, at the Institute of International Finance Board of Directors dinner, Zurich.

Introduction Thank you very much for giving me the opportunity to address you on this occasion. Special thanks are due to my former central bank colleague, Axel Weber, and to Tim Adams and the IIF for their hospitality. I've been asked to cover the closely related topics of the future of regulatory cooperation and institutions, and the risks of regulatory fragmentation. Linking these two topics is the issue of level playing field, and I will concentrate on this. I won't go into the details of why this is an important topic - there is no group of people who appreciate this more than you do. Just to say here: there is widespread agreement that a level playing field in banking is a key condition for a competitive banking sector that rewards the more efficient business models - not the most risky ones or those protected by implicit guarantees. But before addressing this topic, let me get something very important out of the way. As you know, the BIS is not only about regulatory cooperation. Indeed, we spend plenty of time talking about macroeconomic developments, financial market conditions and monetary policy. On this basis, allow me to share a few observations from our recent economic discussions at the BIS which I think will be of interest to you.

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Conjunctural developments The global upswing has continued at a strong pace, with growth in most advanced economies at or above potential and labour markets tightening further. Conditions across emerging market economies are seen as somewhat less buoyant, but overall quite positive. Inflation is still low, especially when judged against real activity indicators. At the same time, uncertainty persists as to how far this is explained by structural or conjunctural factors. Globalisation and technological progress may partly account for low inflation and wage growth. For example, the share of temporary and part-time jobs is up, and the bargaining power of labour has generally declined. Various transitory factors are (also) keeping inflation down in a number of economies, raising the possibility of inflationary surprises ahead. This implies that central banks might be facing difficult trade-offs. On the one hand, there may be a desire to bring inflation back to target rather quickly and push rates away from the zero lower bound - to gain some room for manoeuvre in case of future economic weakness. On the other hand, accommodative policies could further lift equity and other asset prices and maintain easy credit conditions, which may complicate any future adjustment. Well, how to handle this will be for each central bank to figure out. For commercial banks, however, growth is up on a broad basis - supporting the demand for bank loans and other financial services. Interest margins, in turn, are bound to gradually widen. In short, even though there are risks (including that of a snapback in rates), banks are enjoying broadly improving business conditions, which should help them to finally emerge from the shadow of the Great Financial Crisis (GFC).

Level playing field: good news/achievements With that, let me turn to the level playing field issue. As with any interesting story, this is one of good and bad news; of opportunities and risks, of achievements and challenges. I'll start with the good news, and then move on to the challenges.

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The international policy framework My starting point is the recent crisis experience. It brought home the point that while crises often span borders, the pain is always domestic. At the political level, therefore, the temptation is for a narrow, national policy response that tends to make the playing field uneven - the very opposite of what we should be aspiring to. When the GFC hit in 2007-09, for example, national approaches prevailed - notably in the form of ad hoc ring-fencing and recapitalisation of domestic banks by governments. Cross-border banking receded significantly. To work against such tendencies and to avoid the associated costs is not easy. This is where the BIS and other international forums play a role in coming to common understandings that limit the fragmentation brought about by policy responses that take a narrow, national approach. A key achievement is that this international framework for policy cooperation has grown much more robust - for example, with the Financial Stability Board becoming accountable to the G20, thus bridging between elected politicians, on the one hand, and experts and standard setters, on the other. There is some hope, therefore, that future crises will not only be less likely - I'll return to this point in a moment - but also less likely to trigger uneven policy responses.

Minimum standards This brings me to the next point: regulation. Recall that the original Basel Accord was introduced back in 1988 with the very aim of harmonising capital regulation across jurisdictions. In other words: to keep the playing field level. How? Via internationally agreed minimum standards. This was a great leap forward. Of course, the Basel framework has evolved significantly since, not least because of the need to respond to the GFC. The latest step, as you know, was taken in December, when the Committee of Governors and Heads of Supervision (GHOS) - the Basel Committee's oversight body - finalised the Basel III framework.

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This decision brought to a close eight years of rule-making, and leaves banks able to plan with less regulatory uncertainty. The agreed regulatory framework redresses the key shortcomings exposed by the GFC, such as insufficient bank capital, too much leverage, insufficient liquidity buffers and overstretched maturity transformation. What's more, it employs multiple regulatory metrics, with complementary constraints backstopping each other and providing protections against undue variation in risk weights across banks. The resulting, more robust regulatory approach better deals with the inherent uncertainties of risk management and measurement. Let me add one point on calibration, which, as you are aware, was the main sticking point in the final negotiations. It is sometimes argued that the capital shortfalls (relative to new minimum requirements) that have been generated by the recent decision indicate an un-level playing field. That's true only in the sense that an un-level playing field was the starting point, not the end point. Levelling out these differences ought to affect banks differently. The recent measures are precisely intended to move outliers towards their peers.

Level playing field: bad news/challenges Having achieved so much, what are the challenges we now face? One issue, of course, is that the political climate appears to have changed. There are signs that economic nationalism might be entering the scene, which may influence regulation. We need to keep an eye on three areas.

The environment for international policy reforms As I have just argued, the international policy framework is much improved. In principle, we now have a mechanism in place that can offer future policy responses to difficult circumstances and that will help safeguard agreed standards. The main risk is that support for further measures may be waning. You may say none too soon. But not so fast. It is important not to take just a narrow banking perspective. Policy work continues, and for good reasons: from resolution frameworks for central counterparties, through shadow banking monitoring and regulation, to cyber-security and similar issues.

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It is key not to neglect regulation of non-banks, where much remains to be done. Also, recall that consistent implementation does not preclude supervisors going beyond the agreed minimum standards, which brings me to the second area.

Implementation and supervision This is precisely implementation and supervision. Standards are one thing, implementation is another. Safeguarding Basel III's level playing field requires consistent and timely implementation. National authorities need to translate the new standards into legal requirements in their own jurisdictions. This has not always happened in the past, in terms of both timing and substance. The Basel Committee has established the Regulatory Consistency Assessment Programme (RCAP) to monitor this process and to align incentives across jurisdictions. This is a major step forward. But private financial institutions also have a role to play: achieving a level playing field requires upfront investment in IT systems and other tools to avoid unnecessary technical delays. Capacity building is needed among both banks and supervisors.

Financial innovation and regulation The third - closely related - area concerns the regulatory approach to financial innovation, especially fintech. Regulators have a difficult role to play here, as they have to provide a level playing field for all participants (banks and non-banks alike), while at the same time fostering an innovative, secure and competitive financial market. What defines a level playing field in this context? When banks and fintech firms vie for the same customers with similar services and by taking similar risks, they should be similarly regulated: "same risk, same regulation". But different players may be operating under very different regulatory regimes. This may create unintended regulatory gaps (eg with regard to the collection and sharing of client data), with new business models shifting critical activities outside their current regulatory environment. All of this puts a premium on regulatory and supervisory cooperation at both the international and the sectoral level. The Basel Process has much to

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offer here - for example, in the context of information-sharing on experience with new practices, such as innovation hubs and regulatory sandboxes. Support for such cooperative activities will be a key BIS focus in the coming years. Thank you very much.

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Number 7

EBA launches 2018 EU-wide stress test exercise

The European Banking Authority (EBA) launched its 2018 EU-wide stress test and released the macroeconomic scenarios. The adverse scenario implies a deviation of EU GDP from its baseline level by 8.3% in 2020, resulting in the most severe scenario to date. The EBA expects to publish the results of the exercise by 2 November 2018.

Key features of the exercise The stress test is designed to provide supervisors, banks and other market participants with a common analytical framework to consistently compare and assess the resilience of EU banks to economic shocks. For the first time, it incorporates IFRS 9 accounting standards. No pass-fail threshold has been included as the results of the exercise are designed to serve as an input to the Supervisory Review and Evaluation Process (SREP). The EBA's 2018 stress test methodology was published in November 2017 and is to be applied to the scenarios released today. The baseline scenario is in line with the December forecast published by the European Central Bank (ECB), while the adverse scenario assumes the materialisation of four systemic risks, which are currently deemed as representing the most material threats to the stability of the EU banking sector: - Abrupt and sizeable repricing of risk premia in global financial markets,

which would spill over to the European countries and lead to a tightening of financial conditions;

- Adverse feedback loop between weak bank profitability and low

nominal growth resulting from the decline in economic activity in the

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European Union. This will affect, in particular, banks in those countries facing structural challenges in their banking sector;

- Public and private debt sustainability concerns amid potential repricing

of risk premia and increased political uncertainty; - Liquidity risks in the non-bank financial sector with potential

spill-overs to the broader financial system. The adverse scenario is designed to ensure an adequate level of severity across all EU countries. The implied EU real GDP growth rates under the adverse scenario amount to -1.2%, -2.2% and +0.7%, in 2018, 2019 and 2020 respectively. Overall, the scenario implies a deviation of EU GDP from its baseline level by 8.3% in 2020, resulting in the most severe scenario in terms of GDP deviation from baseline levels compared with the previous EBA exercises. Detailed information about the scenario can be found in the note produced by the European Systemic Risk Board (ESRB).

Process The adverse macroeconomic scenarios have been developed by the ESRB and the ECB in close cooperation with the EBA, competent authorities, and national central banks. The EBA, which is responsible for coordinating the whole exercise, developed a common methodology and will act as a data hub for the final dissemination of the results, in line with its commitment to enhancing the transparency of the EU banking sector. Competent authorities will assure the quality of the results and decide on any necessary supervisory reaction measure as part of the SREP process.

Notes The EU-wide stress test will be conducted on a sample of 48 EU banks – 33 from countries under the jurisdiction of the Single Supervisory Mechanism (SSM) – covering roughly 70% of total banking sector assets in the euro area, each other EU Member State, and Norway, as expressed in terms of total consolidated assets as of end 2016.

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The exercise will be run at the highest level of consolidation. This exercise will involve close cooperation between the EBA and the competent authorities (including the SSM, the ECB and the ESRB).

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Number 8

SEC Halts Alleged Initial Coin Offering Scam

The Securities and Exchange Commission obtained a court order halting an allegedly fraudulent initial coin offering (ICO) that targeted retail investors to fund what it claimed to be the world’s first “decentralized bank.” According to the SEC’s complaint, filed in federal district court in Dallas on Jan. 25, Dallas-based AriseBank used social media, a celebrity endorsement, and other wide dissemination tactics to raise what it claims to be $600 million of its $1 billion goal in just two months. AriseBank and its co-founders Jared Rice Sr. and Stanley Ford allegedly offered and sold unregistered investments in their purported “AriseCoin” cryptocurrency by depicting AriseBank as a first-of-its-kind decentralized bank offering a variety of consumer-facing banking products and services using more than 700 different virtual currencies. AriseBank’s sales pitch claimed that it developed an algorithmic trading application that automatically trades in various cryptocurrencies. The SEC alleges that AriseBank falsely stated that it purchased an FDIC-insured bank which enabled it to offer customers FDIC-insured accounts and that it also offered customers the ability to obtain an AriseBank-branded VISA card to spend any of the 700-plus cryptocurrencies. AriseBank also allegedly omitted to disclose the criminal background of key executives. “We allege that AriseBank and its principals sought to raise hundreds of millions from investors by misrepresenting the company as a first-of-its-kind decentralized bank offering its own cryptocurrency to be used for a broad range of customer products and services. We sought emergency relief to prevent investors from being victimized by what we allege to be an outright scam,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

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“This is the first time the Commission has sought the appointment of a receiver in connection with an ICO fraud. We will use all of our tools and remedies to protect investors from those who engage in fraudulent conduct in the emerging digital securities marketplace,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office, said, “Attempting to conceal what we allege to be fraudulent securities offerings under the veneer of technological terms like ‘ICO’ or ‘cryptocurrency’ will not escape the Commission’s oversight or its efforts to protect investors.” The court approved an emergency asset freeze over AriseBank, Rice, and Ford and appointed a receiver over AriseBank, including over its digital assets. The SEC intervened to protect the digital assets before they could be dissipated, enabling the receiver to immediately secure various cryptocurrencies held by AriseBank including Bitcoin, Litecoin, Bitshares, Dogecoin, and BitUSD. AriseCoin’s public sale began around Dec. 26, 2017, and was originally scheduled to conclude on Jan. 27, 2018, with distribution to investors on Feb. 10, 2018. The SEC seeks preliminary and permanent injunctions, disgorgement of ill-gotten gains plus interest and penalties, and bars against Rice and Ford to prohibit them from serving as officers or directors of a public company or offering digital securities again in the future. The SEC’s investigation was conducted by David Hirsch and supervised by Jessica Magee and Eric Werner in the Fort Worth Regional Office in coordination with the Enforcement Division’s Cyber Unit. The litigation is being conducted by Timothy Evans, Christopher Davis, and Mr. Hirsch, and supervised by B. David Fraser. The SEC appreciates the assistance of the Federal Bureau of Investigation, U.S. Attorney’s Office for the Northern District of Texas, Federal Deposit Insurance Corporation, U.S. Patent and Trademark Office, and Texas Department of Banking. Investors in the AriseBank ICO who believe they may be a victim are asked to report it to the SEC as a tip or complaint.

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The SEC’s Office of Investor Education and Advocacy issued an Investor Alert in August 2017 warning investors about scams of companies claiming to be engaging in initial coin offerings. The alert: https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-public-companies-making-ico-related

https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-public-companies-making-ico-related

https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-public-companies-making-ico-related

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Number 9

2017 Market development report on occupational pensions and cross-border IORPs

Executive Summary The 2017 Market Development Report is the 11th report in a series of market development reports. It provides an overview of the landscape for Institutions for Occupational Retirement Provision (IORPs) and Article 4 ring-fenced funds in the European Economic Area (EEA). In addition, it draws attention to some market trends over the past years as well as on the developments in cross-border arrangements of IORPs.

Continued increased coverage of IORPs and Article 4 ring-fenced funds in the EEA The aggregated participation rate of occupational pension schemes provided by IORPs has continuously increased over the past years. Currently 15 percent of the employees in the EEA, excluding France and the UK, aged between 15 and 64 are an active member of an IORP or Article 4 ring-fenced funds. At the same time, IORPs’ and Article 4 ring-fenced funds’ assets totalled EUR 3.8 trillion at the end of 2016. This is a very slight decrease compared to the assets at the end of 2015. The main reason is the change in the euro/pound exchange rate. However, there are significant differences in terms of IORPs assets and participation rates across the EEA as a result of the diversity in national pension systems and regulations.

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Continued shift from DB to DC in many EEA countries Based on the number of active members, the vast majority of Member States – that are not solely operating DB or already DC schemes - show a shift from Defined Benefit (DB) to Defined Contribution (DC) schemes. As a result of this transition, financial risks and costs are transferred from employers and IORPs to scheme members. In addition, it often coincides with a trend towards lower overall contribution rates. These changes may directly impact the future retirement income of DC scheme members. Therefore, it is crucial that DC scheme members are adequately informed about the risks they bear and about the costs and charges involved. The IORP II Directive contains detailed requirements on information to be given to members and beneficiaries, and also on governance and risk management.

Further stagnation in the number of cross-border IORPs The number of active cross-border IORPs equalled 73 at the end of 2016. The number of cross-border IORPs initially grew albeit at a slow pace when the IORP Directive became applicable in 2005 and has stalled since 2010. Sponsors, cross-border practitioners, social partners and academia pointed out that an increase in the number of cross-border IORPs should not be expected further. They highlighted that while Social and Labour Law (SLL) sets the legal framework for the protection of members and beneficiaries at national level and has to be complied with; from an economic perspective it also remains a challenge for cross-border IORPs. The complexity of managing different SLLs may increase IORPs’ operational risks and make the reduction of operational costs for the effective management of pension plans more difficult.

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Increase in the number of multi-employer (cross-border) IORPs and expansion of multi-country cross-border IORPs Although the aggregate growth has come to a halt, two developments have recently emerged: (1) More IORPs are expanding (or seeking to expand) their cross-border activities in additional host countries and (2) The number of cross-border IORPs established by service providers to attract multiple unconnected employers is rising. Taking advantage of economies of scale and reducing costs could be driving forces behind their increase. At the end of 2016, the 14 multi-country cross-border IORPs operate in 13 of the 14 host countries to cross-border IORPs. Member States in which multi-employer cross border IORPs exist also attracted more sponsoring undertakings joining these cross border IORPs. The amended notification process set out in the IORP II Directive may further facilitate these multi-employer and multi-country cross-border IORPs. In addition, EIOPA is reviewing the process of cooperation and exchange of information between National Competent Authorities (NCAs). Its review aims to ensure alignment with the IORP II Directive and to improve procedural transparency and efficiency. Overall, the emerging trend of IORPs set up in a number of countries by service providers for multiple unrelated employers breaks with the traditional image of IORPs established by a sponsor or a group of sponsors (e.g. for industry-wide schemes) to manage the DB pension schemes of employees in these countries. Whilst that trend may contribute to market consolidation (for example, with the introduction of the General Pension Funds in the Netherlands), it should also be monitored whether, from a supervisory perspective, it affects the triangular relationship between the employee, the employer and the

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IORP and if so, how it could particularly impact on the governance and management of IORPs.

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Number 10

Reading the Body’s History of Threat Exposure Epigenetic technology would provide new tool in fight against WMD proliferation

Picture an intelligence officer in the field. She is trying to piece together a suspected threat, and has access to someone who may have a role in carrying it out. There may be traces of biological or chemical agents on his clothing or hair. She can look for them, but they’re transient, and often present in such low concentrations that she’ll need to send samples to a laboratory. Or she can check his epigenetic markers, read a history of any time he’s been exposed to threat agents, and start piecing together a chain of evidence right there in the field, in real time. DARPA’s new Epigenetic CHaracterization and Observation (ECHO) program aims to build a field-deployable platform technology that quickly reads someone’s epigenome and identifies signatures that indicate whether that person has ever—in his or her lifetime—been exposed to materials that could be associated with weapons of mass destruction (WMD). The epigenome is biology’s record keeper. Though DNA does not change over a single lifetime, a person’s environment may leave marks on the DNA that modify how that individual’s genes are expressed. This is one way that people can adapt and survive in changing conditions, and the epigenome is the combination of all of these modifications. Though modifications can register within seconds to minutes, they imprint the epigenome for decades, leaving a time-stamped biography of an individual’s exposures that is difficult to deliberately alter. Whereas current forensic and diagnostic screening technologies only detect the immediate presence of contaminants, the envisioned ECHO technology would read someone’s epigenome from a biological sample, such as a finger

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prick or nasal swab, to reveal possible exposure to WMD or WMD precursors, even when other physical evidence has been erased. “The human body registers exposures and logs them in the epigenome,” explained Eric Van Gieson, the ECHO program manager. “We are just beginning to understand this rich biographical record that we carry around with us. We hope that with the capabilities developed within ECHO, someone in the field will immediately know if a suspected adversary has handled or been exposed to threat agents. The same technology could also serve as a diagnostic tool for our own troops, to diagnose infectious disease or reveal exposure to threat agents, so that medical countermeasures can be applied in time to make a difference.” Researchers on the four-year ECHO program will have two primary challenges: to identify and discriminate epigenetic signatures created by exposure to threat agents; and to create technology that performs highly specific forensic and diagnostic analyses to reveal the exact type and time of exposure. To develop this capability, researchers will have to assemble a foundational training dataset of pre- and post-exposure epigenetic readouts in biological samples. They will also have to create a device capable of performing multiple molecular analyses and onboard bioinformatics in 30 minutes or less, compared to an average of two days using current lab-centered processes. By the end of the effort, DARPA’s goal is to deliver ECHO capability in a man-portable device that can be used by an operator with minimal training. “ECHO technology could open up new sources of forensic evidence and make battlefield collection of evidence safer, more efficient, and more accurate,” said Van Gieson. “Additionally, by making it possible to deploy an analytical capability to vastly more locations, we would enhance our ability to conduct global, near-real-time surveillance of emerging threats.” ECHO is focused specifically on diminishing the threat posed by WMD and improving diagnostics for troops who may have been exposed to threat agents. The ability to partially reconstruct an individual’s history through analysis of the epigenome, however, could have application well beyond national security and thus raise privacy concerns. Accordingly, DARPA intends to proactively engage with several independent ethical and legal experts to help inform the Agency’s research

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plans, think through potential issues, and foster broader dialogue in the scientific community on social implications. DARPA will host a Proposers Day on February 23, 2018, in Arlington, Virginia, to explain the ECHO program to potential proposers and answer questions. Details and registration are available at: https://www.fbo.gov/spg/ODA/DARPA/CMO/DARPA-SN-18-23/listing.html

https://www.fbo.gov/spg/ODA/DARPA/CMO/DARPA-SN-18-23/listing.html

https://www.fbo.gov/spg/ODA/DARPA/CMO/DARPA-SN-18-23/listing.html

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