BCBS: Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions

BCBS: Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions
February 15 2013
http://www.bis.org/publ/bcbs241.htm

The purpose of this guidance is to provide updated guidance to supervisors and the banks they supervise on approaches to managing the risks associated with the settlement of FX transactions. This guidance expands on, and replaces, the BCBS's Supervisory guidance for managing settlement risk in foreign exchange transactions published in September 2000.

Since the BCBS's Supervisory guidance for managing settlement risk in foreign exchange transactions (2000) was published, the foreign exchange market has made significant strides in reducing the risks associated with the settlement of FX transactions. Substantial FX settlement-related risks remain, however, not least because of the rapid growth in FX trading activities.

The document provides a more comprehensive and detailed view on governance arrangements and the management of principal risk, replacement cost risk and all other FX settlement-related risks. In addition, it promotes the use of payment-versus-payment arrangements, where practicable, to reduce principal risk.

The guidance is organized into seven "guidelines" that address governance, principal risk, replacement cost risk, liquidity risk, operational risk, legal risk, and capital for FX transactions. The key recommendations emphasize the following:

• A bank should ensure that all FX settlement-related risks are effectively managed and that its practices are consistent with those used for managing other counterparty exposures of similar size and duration.
• A bank should reduce its principal risk as much as practicable by settling FX transactions through the use of FMIs that provide PVP arrangements. Where PVP settlement is not practicable, a bank should properly identify, measure, control and reduce the size and duration of its remaining principal risk.
• A bank should ensure that when analysing capital needs, all FX settlement-related risks should be considered, including principal risk and replacement cost risk and that sufficient capital is held against these potential exposures, as appropriate.
• A bank should use netting arrangements and collateral arrangements to reduce its replacement cost risk and should fully collateralise its mark-to-market exposure on physically settling FX swaps and forwards with counterparties that are financial institutions and systemically important non-financial entities.

An annex to the final guidance provides detailed explanation of FX settlement-related risks and how they arise.

A Banking Union for the Euro Area. IMF Staff Discussion Note

A Banking Union for the Euro Area. By Rishi Goyal, Petya Koeva Brooks, Mahmood Pradhan, Thierry Tressel, Giovanni Dell'Ariccia, Ross Leckow, Ceyla Pazarbasioglu, and an IMF Staff Team
IMF Staff Discussion Note 13/01
February 13, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40317.0

Summary: The SDN elaborates the case for, and the design of, a banking union for the euro area. It discusses the benefits and costs of a banking union, presents a steady state view of the banking union, elaborates difficult transition issues, and briefly discusses broader EU issues. As such, it assesses current plans and provides advice. It is accompanied by three background technical notes that analyze in depth the various elements of the banking union: a single supervisory framework; a single resolution and common safety net; and urgent issues related to repair of weak banks in Europe.

ISBN/ISSN: 9781475521160 / 2221-030X
Stock No: SDNEA2013001


Executive summary:

• A banking union—a single supervisory-regulatory framework, resolution mechanism, and safety net—for the euro area is the logical conclusion of the idea that integrated banking systems require integrated prudential oversight.

• The case for a banking union for the euro area is both immediate and longer term. Moving responsibility for potential financial support and bank supervision to a shared level can reduce fragmentation of financial markets, stem deposit flight, and weaken the vicious loop of rising sovereign and bank borrowing costs. In steady state, a single framework should bring a uniformly high standard of confidence and oversight, reduce national distortions, and mitigate the buildup of concentrated risk that compromises systemic stability. Time is of the essence.

• Progress is required on all elements. A single supervisory mechanism (SSM) must ultimately supervise all banks, with clarity on duties, powers and accountability, and adequate resources. But without common resolution and safety nets and credible backstops, an SSM alone will do little to weaken vicious sovereign-bank links; they are necessary also to limit conflicts of interest between national authorities and the SSM. A single resolution authority, with clear ex ante burden-sharing mechanisms, must have strong powers to close or restructure banks and be required to intervene well ahead of insolvency. A common resolution/insurance fund, sized to resolve some small to medium bank failures, with access to common backstops for systemic situations, would add credibility and facilitate limited industry funding.

• The challenge for policymakers is to stem the crisis while ensuring that actions dovetail seamlessly into the future steady state. Hence, agreeing at the outset on the elements, modalities, and resources for a banking union can help avoid the pitfalls of a piecemeal approach and an outcome that is worse than at the start. The December 2012 European Council agreement on an SSM centered at the European Central Bank (ECB) is an important step, but raises challenges that should not be underestimated. Meanwhile, to delink weak sovereigns from future residual banking sector risks, it will be important to undertake as soon as possible direct recapitalization of frail domestically systemic banks by the European Stability Mechanism (ESM). Failing, non-systemic banks should be wound down at least cost, and frail, domestically systemic banks should be resuscitated by shareholders, creditors, the sovereign, and the ESM.

• A banking union is necessary for the euro area, but accommodating the concerns of non-euro area European Union (EU) countries will augur well for consistency with the EU single market.

Views from Japan: Comments on the incidents with China's naval forces

Q&A session with "aki", a Japanese citizen, on contemporary politics

Q: Maybe you'd like to publish some short comments on the incidents with China's naval forces

A: yes, i've been interested in it indeed.

Chinese government seems pushing themselves to the edge of cliff. they are scared of that their citizens make disorder against the them, so they need to make "scapegoats" outside of the country to distract the people's view to protect themselves.

recently Chinese citizens' been tending to show their frustration to the government, because of the corruptions of politics and unfair distribution of wealth.

they are trying to make Japan the "scapegoat" now. but the government of Japan never reacted their provocations, just do what we should do in internationally "right" way. that makes China nervous - if they stimulate japan more, they will be censured in the world, but never can show their citizens compromising attitude... these days, their behavior looks like north Korea's. never look they are the economically 2nd biggest country.

need to watch it carefully. (personally, a sort of fun to see how they do)

aki

Mortgage insurance: market structure, underwriting cycle and policy implications - Consultative paper released by the Joint Forum

February 2013

This consultative report on Mortgage insurance: market structure, underwriting cycle and policy implications examines the interaction of mortgage insurers with mortgage originators and underwriters. The report sets out the following recommendations directed at policymakers and supervisors with the aim of reducing the likelihood of mortgage insurance stress and failure in such tail events.

1. Policymakers should consider requiring that mortgage originators and mortgage insurers align their interests;
2. Supervisors should ensure that mortgage insurers and mortgage originators maintain strong underwriting standards;
3. Supervisors should be alert to - and correct for - deterioration in underwriting standards stemming from behavioural incentives influencing mortgage originators and mortgage insurers;
4. Supervisors should require mortgage insurers to build long-term capital buffers and reserves during the valleys of the underwriting cycle to cover claims during its peaks;
5. Supervisors should be aware of and mitigate cross-sectoral arbitrage which could arise from differences in the accounting between insurers' technical reserves and banks' loan loss provisions, and from differences in the capital requirements for credit risk between banks and insurers; and
6. Supervisors should apply the FSB Principles for Sound Residential Mortgage Underwriting Practices ("FSB Principles") to mortgage insurers noting that proper supervisory implementation necessitates both insurance and banking expertise.

Comments on this consultative report should be submitted by Tuesday 30 April 2013 either by email to baselcommittee@bis.org or by post to the Secretariat of the Joint Forum (BCBS Secretariat), Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the websites of the Bank for International Settlements (www.bis.org), IOSCO (www.iosco.org) and the IAIS (www.iaisweb.org) unless a commenter specifically requests confidential treatment.

A Jersey Lesson in Voter Fraud. By Thomas Fleming

A Jersey Lesson in Voter Fraud. By Thomas Fleming
My grandmother died there in 1940. She voted Democratic for the next 10 years.The Wall Street Journal, February 6, 2013, on page A11
http://online.wsj.com/article/SB10001424127887323829504578272250730580018.html

Some youthful memories were stirred by the news this week that the president plans to use his State of the Union speech next Tuesday to urge Congress to make voter registration and ballot-casting easier. Like Mr. Obama, I come from a city with a colorful history of political corruption and vote fraud.

The president's town is Chicago, mine is Jersey City. Both were solidly Democratic in the 1930s and '40s, and their mayors were close friends. At one point in the early '30s, Jersey City's Frank Hague called Chicago's Ed Kelly to say he needed $2 million as soon as possible to survive a coming election. According to my father—one of Boss Hague's right-hand men—a dapper fellow who had taken an overnight train arrived at Jersey City's City Hall the next morning, suitcase in hand, cash inside.

Those were the days when it was glorious to be a Democrat. As a historian, I give talks from time to time. In a recent one, called "Us Against Them," I said it was we Irish and our Italian, Polish and other ethnic allies against "the dirty rotten stinking WASP Protestant Republicans of New Jersey." By thus demeaning the opposition, we had clear consciences as we rolled up killer majorities using tactics that had little to do with the election laws.

My grandmother Mary Dolan died in 1940. But she voted Democratic for the next 10 years. An election bureau official came to our door one time and asked if Mrs. Dolan was still living in our house. "She's upstairs taking a nap," I replied. Satisfied, he left.

Thousands of other ghosts cast similar ballots every Election Day in Jersey City. Another technique was the use of "floaters," tough Irishmen imported from New York who voted five, six and even 10 times at various polling places.

Equally effective was cash-per-vote. On more than one Election Day, my father called the ward's chief bookmaker to tell him: "I need 10 grand by one o'clock." He always got it, and his ward had a formidable Democratic majority when the polls closed.

Other times, as the clock ticked into the wee hours, word would often arrive in the polling places that the dirty rotten stinking WASP Protestant Republicans had built up a commanding lead in South Jersey, where "Nucky" Johnson (currently being immortalized on TV in HBO's "Boardwalk Empire") had a small Republican machine in Atlantic City.

By dawn, tens of thousands of hitherto unknown Jersey City ballots would be counted and another Democratic governor or senator would be in office, and the Democratic presidential candidate would benefit as well. Things in Chicago were no different, Boss Hague would remark after returning from one of his frequent visits.

I have to laugh when I hear current-day Democrats not only lobbying against voter-identification laws but campaigning to make voting even easier than it already is. More laughable is the idea of dressing up the matter as a civil-rights issue.

My youthful outlook on life—that anything goes against the rotten stinking WASP Protestant Republicans—evaporated while I served in the U.S. Navy in World War II. In that conflict, millions of people like me acquired a new understanding of what it meant to be an American.

Later I became a historian of this nation's early years—and I can assure President Obama that no founding father would tolerate the idea of unidentified voters. These men understood the possibility and the reality of political corruption. They knew it might erupt at any time within a city or state.

The president's party—which is still my party—has inspired countless Americans by looking out for the less fortunate. No doubt that instinct motivated Mr. Obama in his years as a community organizer in Chicago. Such caring can still be a force, but that force, and the Democratic Party, will be constantly soiled and corrupted if the right and the privilege to vote becomes an easily manipulated joke.

Mr. Fleming is a former president of the Society of American Historians.

Liquidity and Transparency in Bank Risk Management. By Lev Ratnovski

Liquidity and Transparency in Bank Risk Management. By Lev Ratnovski
IMF Working Paper No. 13/16
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40258.0

Summary: Banks may be unable to refinance short-term liabilities in case of solvency concerns. To manage this risk, banks can accumulate a buffer of liquid assets, or strengthen transparency to communicate solvency. While a liquidity buffer provides complete insurance against small shocks, transparency covers also large shocks but imperfectly. Due to leverage, an unregulated bank may choose insufficient liquidity buffers and transparency. The regulatory response is constained: while liquidity buffers can be imposed, transparency is not verifiable. Moreover, liquidity requirements can compromise banks' transparency choices, and increase refinancing risk. To be effective, liquidity requirements should be complemented by measures that increase bank incentives to adopt transparency.

Conclusion

The paper emphasized that both liquidity buffers and — in a novel perspective — bank transparency (better communication that enhances access to external refinancing) are important in bank liquidity risk management. In a liquidity event, a liquidity buffer can cover small withdrawals with certainty. Transparency allows the bank to refinance large withdrawals too, but it is not always effective. Banks may choose insufficient liquidity and transparency; the optimal policy response is constrained by the fact that bank transparency is not verifiable.

The paper offers important policy implications, particularly for the ongoing liquidity regulation debate. The results caution that the focus on liquidity requirements needs to be complemented by measures to improve bank transparency and access to market refinancing. Without such measures, liquidity requirements may not achieve the full potential of improvements in social welfare, and under some conditions may have unintended effects. We also highlight the need for better corporate governance as a way to improve bank transparency, and the scope to use net stable funding ratios to increase the effectiveness of liquidity requirements.

Q&A session with a Japanese citizen on contemporary politics

The comments of a Japanese citizens on politics and our questions:

[...]

- what do supporters of Tokyo's governor say about him? I always read comments against him, but he wins the elections, so there are lots of (silent) supporters.

our present PM Shinzo Abe is supported by citizens pretty well so far. he showed a policy for economics called "Abenomics" lately. then even though nothing's done yet just show it to us, stock prises' been rising and rising, curency rate's been much better (Yen got too much strong and international exporting companies as even Sony, Panasonic or Toyota were getting big loss for these 3 years).

also, his strategy of international is evaluated. former government always compromised to Chinese or Korean's unreasonable accusations just for economical reasons. but he is trying to build a strong relationships between South-east Asian countries, Australia, India and Russia. especially SE Asian countries welcome this because they've been threatened by Chinese forces, they've actually wanted Japan to have leadership against China.

he seems doing very fine now.

i have to say many of japanese medias have big problems... many people in medias are kind of "traitor". they pick up "noisy minority" and show it just like the majority to give Japan bad names to the world... it's fine if their opinions are to make things better, but just critisise. it will be too long if i explain this.

Question: what do supporters of nuclear arms say? I always read assurances about the Japanese not wanting the A-bomb, but from time to time some politician says that Japan is considering protecting herself (against North Korea and China)

i think there are not many supporters of nuclear arms. some polititians and scholars are saying to discuss it. because almost all of Japanese has a sort of allergy for nuclear weapons (it comes from trauma of WW2) and even discussions are taboo. indeed, even though we have been aimed by Chinese and maybe Korean A-missiles. so they are claiming to get out of trauma now. also they say even only discussion will be a detterent to the countries. (personally i agree with them, we don't need to have it, but it's nonsense not to even talk). recently it seems peoples who agree with it has been increasing.

PM Abe is trying to have a good relationship between US, but on the other hand, trying to protect ourself with proper forces. and it's generally supported by majority (at least it seems so to me). almost all of people likes US better than China in politics, but lately people started to think stand by ourselvs.

actually now is the turning point of Japan after WW2 i think...

if you want to understand how Japanese are, it might be important to understand "Shinto". it's a domestic thoughts/philosophy of Japan, quite religious but not religion. it says we have 8 million gods in our land - god of fire, god of wood, god of sea, god of marrige, god of traffic, god of study... so we should thank to everything, be good and respect others. it is the base of moral of Japanese, we are brought up with it by our parents. it's easy to accept other religion for Shinto, because any god or buddha of other religions can be one of the god. (Japanese buddism are a lot influenced and mixed with Shinto). our Tenno (emperor) is regarded as offspring of the god. http://en.wikipedia.org/wiki/Shinto

last year, South Korean president insulted Tenno, then all of Japanese citizens got angry, (i have never seen such angry Japanese ever!), i understood Tenno is the symbol of this country and Shinto at the moment.

sorry it's getting out of focus.

[...]

take care,

[...]

---
Remember Ozawa: "If Japan desires, it can possess thousands of nuclear warheads." 2009. https://www.bipartisanalliance.com/2009/06/remember-ozawa-if-japan-desires-it-can.html

Are there clear affinities of Communism with Fascism?

Political philosopher John N. Gray on liberals' totalitarian temptation
Times Literary Supplement, Jan 02, 2013:

One of the features that distinguished Bolshevism from Tsarism was the insistence of Lenin and his followers on the need for a complete overhaul of society. Old-fashioned despots may modernize in piecemeal fashion if doing so seems necessary to maintain their power, but they do not aim at remaking society on a new model, still less at fashioning a new type of humanity. Communist regimes engaged in mass killing in order to achieve these transformations, and paradoxically it is this essentially totalitarian ambition that has appealed to liberals. Here as elsewhere, the commonplace distinction between utopianism and meliorism is less than fundamental. In its predominant forms, liberalism has been in recent times a version of the religion of humanity, and with rare exceptions— [Bertrand] Russell is one of the few that come to mind—liberals have seen the Communist experiment as a hyperbolic expression of their own project of improvement; if the experiment failed, its casualties were incurred for the sake of a progressive cause. To think otherwise—to admit the possibility that the millions who were judged to be less than fully human suffered and died for nothing—would be to question the idea that history is a story of continuing human advance, which for liberals today is an article of faith. That is why, despite all evidence to the contrary, so many of them continue to deny Communism's clear affinities with Fascism. Blindness to the true nature of Communism is an inability to accept that radical evil can come from the pursuit of progress.

John Gray is professor emeritus at the London School of Economics