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Page |1 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 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 Member, When I decided to spend the entire day at the beach, I couldn't imagine that I will have no time to swim. Early in the morning, sitting under a sun umbrella with my feet in the sand, I started reading the new US Department of Defense Law or War Manual, especially the part that is covering Cyber Operations and the application of the Law of War to Cyber Operations. It was such an amazing reading, and it is so important for risk management. It addresses how law of war principles and rules apply to relatively novel cyber capabilities and the cyber domain. As a doctrinal matter, DoD has recognized cyberspace as an operational domain in which the armed forces must be able to defend and operate, just like the land, sea, air, and space domains. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |2 Cyberspace may be defined as “[a] global domain within the information environment consisting of interdependent networks of information technology infrastructures and resident data, including the Internet, telecommunications networks, computer systems, and embedded processors and controllers.” Cyber operations include those operations that use computers to disrupt, deny, degrade, or destroy information resident in computers and computer networks, or the computers and networks themselves. Cyber operations can be a form of advance force operations, which precede the main effort in an objective area in order to prepare the objective for the main assault. For example, cyber operations may include reconnaissance (e.g., mapping a network), seizure of supporting positions (e.g., securing access to key network systems or nodes), and pre-emplacement of capabilities or weapons (e.g., implanting cyber access tools or malicious code). In addition, cyber operations may be a method of acquiring foreign intelligence unrelated to specific military objectives, such as understand technological developments or gaining information about an adversary’s military capabilities and intent. Article 2(4) of the Charter of the United Nations states that “[a]ll Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state, or in any other manner inconsistent with the Purposes of the United Nations.” Cyber operations may in certain circumstances constitute uses of force within the meaning of Article 2(4) of the Charter of the United Nations and customary international law. For example, if cyber operations cause effects that, if caused by traditional physical means, would be regarded as a use of force under jus ad bellum, then such cyber operations would likely also be regarded as a use of force. Such operations may include cyber operations that: (1) trigger a nuclear plant meltdown; (2) open a dam above a populated area, causing destruction; or _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |3 (3) disable air traffic control services, resulting in airplane crashes. Similarly, cyber operations that cripple a military’s logistics systems, and thus its ability to conduct and sustain military operations, might also be considered a use of force under jus ad bellum. Other factors, besides the effects of the cyber operation, may also be relevant to whether the cyber operation constitutes a use of force under jus ad bellum. Cyber operations that constitute uses of force within the meaning of Article 2(4) of the Charter of the United Nations and customary international law must have a proper legal basis in order not to violate jus ad bellum prohibitions on the resort to force. Read more at Number 1 below. 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 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |4 Cyber Operations US Department of Defense, Law or War Manual This Chapter addresses the law of war and cyber operations. It addresses how law of war principles and rules apply to relatively novel cyber capabilities and the cyber domain. On the centrality of the current account in international economics Keynote speech by Mr Claudio Borio, Head of Monetary and Economic Department of the BIS, at the ECB-Central Bank of Turkey conference "Balanced and sustainable growth - operationalising the G20 framework", Frankfurt, The current account occupies a central position in international economics and policy debates. Indeed, in G20 policy debates the term "global imbalances" is treated as almost synonymous with "current account imbalances". Macroprudential policy - from Tiberius to Crockett and beyond Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, at TheCityUK, London Historians still argue about the exact causes of the financial crash of AD 33 that rocked the Roman Empire. The commentators of the day did not unfortunately have, let alone record, the vast amounts of data that we have become used to today. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |5 Assessing the new phase of unconventional monetary policy at the European Central Bank Panel remarks by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the Annual Congress of the European Economic Association, University of Mannheim It is a great pleasure to participate in this policy panel and to share the stage with such distinguished fellow participants. My plan today is to present some key features of the monetary policy measures recently implemented by the ECB. As you all know, in January this year the ECB launched the most recent addition to its suite of tools – the public sector purchase programme (PSPP), popularly referred to as quantitative easing. Australian Prudential Regulation Authority (APRA) Letter to industry (August 2015) The review of board requirements On 7 October 2014, APRA released a letter noting its intent to review the clarity of its requirements of boards in the prudential standards and supporting guidance materials. The letter noted that in conducting this review, APRA would seek to ensure that its requirements of boards are communicated in a way that clearly recognises the respective roles of the board and management. The consultation closed on 30 November 2014. Ten submissions were received in response, four of which are non-confidential.Submissions were widely supportive of the review and identified a number of areas for improvement in relation to the clarity of APRA’s board requirements. This letter summarises the key issues from submissions, responds to the main issues and outlines the process planned for the review. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |6 If You See Something, Say Something Campaign Occupational pensions stress test Stress tests are an important supervisory tool to examine the sensitivity of the occupational pensions sector to adverse market developments and to reach robust conclusions for the stability of the financial system as a whole and to enhance consumer protection. The aim of the exercise in 2015 is to test the resilience of defined benefit (DB) and hybrid pension schemes against adverse market scenarios and increase in life expectancy as well as to identify potential vulnerabilities of defined contribution (DC) schemes. Official directory of the European Union Renminbi and China's global future Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the HSBC Reminbi Forum "Renminbi and China's Global Future", Kuala Lumpur _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |7 Dodd-Frank at Five: A Capital Markets Swan Song Commissioner Daniel M. Gallagher U.S. Chamber of Commerce, Washington, D.C. “This will likely be my last formal speech as an SEC Commissioner, and I can think of no better audience than the Chamber’s Center for Capital Markets Competitiveness.” “Last month marked the fifth anniversary of the Dodd-Frank Act, meaning that my entire tenure as a Commissioner has occurred in the midst of the first Five-Year Plan for our national economy. And, as is always the case with grandiose central plans, Dodd-Frank has backfired, strangling our economy, increasing the fragility of the financial system, and politicizing our independent financial regulators.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |8 Cyber Operations US Department of Defense, Law or War Manual XVI – Cyber Operations Chapter Contents 16.1 Introduction 16.2 Application of the Law of War to Cyber Operations 16.3 Cyber Operations and Jus ad Bellum 16.4 Cyber Operations and the Law of Neutrality 16.5 Cyber Operations and Jus in Bello 16.6 Legal Review of Weapons That Employ Cyber Capabilities 16.1 INTRODUCTION This Chapter addresses the law of war and cyber operations. It addresses how law of war principles and rules apply to relatively novel cyber capabilities and the cyber domain. As a matter of U.S. policy, the United States has sought to work internationally to clarify how existing international law and norms, including law of war principles, apply to cyber operations. ((1) below) Precisely how the law of war applies to cyber operations is not well-settled, and aspects of the law in this area are likely to continue to develop, especially as new cyber capabilities are developed and States determine their views in response to such developments. ((2) below) {(1) See, e.g., United States Submission to the U.N. Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security (2014–15), (“But the challenge is not whether existing international law applies to State behavior in cyberspace. As the 2012–13 GGE affirmed, international law does apply, and such law is essential to regulating State conduct in this domain. The challenge is providing decision-makers with considerations that may be taken into account when determining how existing international law _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) Page |9 applies to cyber activities. Despite this challenge, history has shown that States, through consultation and cooperation, have repeatedly and successfully applied existing bodies of law to new technologies. It continues to be the U.S. view that all States will benefit from a stable international ICT [information and communication technologies] environment in which existing international law is the foundation for responsible State behavior in cyberspace.”); Barack Obama, International Strategy for Cyberspace: Prosperity, Security, and Openness in a Networked World, (May 2011) (“The development of norms for state conduct in cyberspace does not require a reinvention of customary international law, nor does it render existing international norms obsolete. (2) Department of Defense, Office of the General Counsel, An Assessment of International Legal Issues in Information Operations (2nd ed., Nov. 1999), reprinted in 76 U.S. NAVAL WAR COLLEGE INTERNATIONAL LAW STUDIES 459, 464-65 (2002) (“The international community ordinarily does not negotiate treaties to deal with problems until their consequences have begun to be felt. This is not all bad, since the solution can be tailored to the actual problems that have occurred, rather than to a range of hypothetical possibilities. One consequence, however, is that the resulting law, whether domestic or international, may be sharply influenced by the nature of the events that precipitate legal developments, together with all their attendant policy and political considerations. … Similarly, we can make some educated guesses as to how the international legal system will respond to information operations, but the direction that response actually ends up taking may depend a great deal on the nature of the events that draw the nations’ attention to the issue. If information operations techniques are seen as just another new technology that does not greatly threaten the nations’ interests, no dramatic legal developments may occur. If they are seen as a revolutionary threat to the security of nations and the welfare of their citizens, it will be much more likely that efforts will be made to restrict or prohibit information operations by legal means. These are considerations that national leaders should understand in _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 10 making decisions on using information operations techniques in the current formative period, but it should also be understood that the course of future events is often beyond the control of statesmen.”).} Long-standing international norms guiding state behavior—in times of peace and conflict—also apply in cyberspace. Nonetheless, unique attributes of networked technology require additional work to clarify how these norms apply and what additional understandings might be necessary to supplement them. We will continue to work internationally to forge consensus regarding how norms of behavior apply to cyberspace, with the understanding that an important first step in such efforts is applying the broad expectations of peaceful and just interstate conduct to cyberspace.”); DEPARTMENT OF DEFENSE, Department of Defense Cyberspace Policy Report: A Report to Congress Pursuant to the National Defense Authorization Act for Fiscal Year 2011, Section 934, 7-8 (Nov. 2011) (“The United States is actively engaged in the continuing development of norms of responsible state behavior in cyberspace, making clear that as a matter of U.S. policy, long-standing international norms guiding state behavior also apply equally in cyberspace. Among these, applying the tenets of the law of armed conflict are critical to this vision, although cyberspace’s unique aspects may require clarifications in certain areas.”). 16.1.1 Cyberspace as a Domain. As a doctrinal matter, DoD has recognized cyberspace as an operational domain in which the armed forces must be able to defend and operate, just like the land, sea, air, and space domains. ((3) below). Cyberspace may be defined as “[a] global domain within the information environment consisting of interdependent networks of information technology infrastructures and resident data, including the Internet, telecommunications networks, computer systems, and embedded processors and controllers.” ((4) below) {(3) William J. Lynn III, Deputy Secretary of Defense, Defending a New Domain: The Pentagon’s Cyberstrategy, 89 FOREIGN AFFAIRS 97, 101 (Sept./Oct. 2010) (“As a doctrinal matter, the Pentagon has formally recognized cyberspace as a new domain of warfare. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 11 Although cyberspace is a man-made domain, it has become just as critical to military operations as land, sea, air, and space. As such, the military must be able to defend and operate within it.”). (4) JOINT PUBLICATION 3-12, Cyberspace Operations, GL-4 (Feb. 5, 2013) (“(U) Cyberspace. A global domain within the information environment consisting of interdependent networks of information technology infrastructures and resident data, including the Internet, telecommunications networks, computer systems, and embedded processors and controllers.”).} 16.1.2 Description of Cyber Operations. Cyberspace operations may be understood to be those operations that involve “[t]he employment of cyberspace capabilities where the primary purpose is to achieve objectives in or through cyberspace.” Cyber operations: (1) use cyber capabilities, such as computers, software tools, or networks; and (2) have a primary purpose of achieving objectives or effects in or through cyberspace. 16.1.2.1 Examples of Cyber Operations. Cyber operations include those operations that use computers to disrupt, deny, degrade, or destroy information resident in computers and computer networks, or the computers and networks themselves. Cyber operations can be a form of advance force operations, which precede the main effort in an objective area in order to prepare the objective for the main assault. For example, cyber operations may include reconnaissance (e.g., mapping a network), seizure of supporting positions (e.g., securing access to key network systems or nodes), and pre-emplacement of capabilities or weapons (e.g., implanting cyber access tools or malicious code). In addition, cyber operations may be a method of acquiring foreign _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 12 intelligence unrelated to specific military objectives, such as understand technological developments or gaining information about an adversary’s military capabilities and intent. 16.1.2.2 Examples of Operations That Would Not Be Regarded as Cyber Operations. Cyber operations generally would not include activities that merely use computers or cyberspace without a primary purpose of achieving objectives or effects in or through cyberspace. For example, operations that use computer networks to facilitate command and control, operations that use air traffic control systems, and operations to distribute information broadly using computers would generally not be considered cyber operations. Operations that target an adversary’s cyberspace capabilities, but that are not achieved in or through cyberspace, would not be considered cyber operations. For example, the bombardment of a network hub, or the jamming of wireless communications, would not be considered cyber operations, even though they may achieve military objectives in cyberspace. 16.1.3 Cyber Operations – Notes on Terminology. DoD doctrine and terminology for cyber operations continue to develop. 16.1.3.1 “Cyber” Versus “Cyberspace” as an Adjective. The terms “cyber” and “cyberspace” when used as an adjective (e.g., cyber attack, cyber defense, cyber operation) are generally used interchangeably. 16.1.3.2 Cyber Attacks or Computer Network Attacks. The term “attack” often has been used in a colloquial sense in discussing cyber operations to refer to many different types of hostile or malicious cyber activities, such as the defacement of websites, network intrusions, the theft of private information, or the disruption of the provision of internet services. Operations described as “cyber attacks” or “computer network attacks,” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 13 therefore, are not necessarily “attacks” for the purposes of applying rules on conducting attacks during the conduct of hostilities. Similarly, operations described as “cyber attacks” or “computer network attacks” are not necessarily “armed attacks” for the purposes of triggering a State’s inherent right of selfdefense under jus ad bellum. 16.2 APPLICATION OF THE LAW OF WAR TO CYBER OPERATIONS Specific law of war rules may apply to cyber operations, even though those rules were developed before cyber operations were possible. When no more specific law of war rule or other applicable rule applies, law of war principles provide a general guide for conduct during cyber operations in armed conflict. 16.2.1 Application of Specific Law of War Rules to Cyber Operations. Specific law of war rules may be applicable to cyber operations, even though these rules were developed long before cyber operations were possible. The law of war affirmatively anticipates technological innovation and contemplates that its existing rules will apply to such innovation, including cyber operations. {Harold Hongju Koh, Legal Adviser, Department of State, International Law in Cyberspace: Remarks as Prepared for Delivery to the USCYBERCOM Inter-Agency Legal Conference (Sept. 18, 2012), reprinted in 54 HARVARD INTERNATIONAL LAW JOURNAL ONLINE, 3 (Dec. 2012) (“Cyberspace is not a ‘law-free’ zone where anyone can conduct hostile activities without rules or restraint. Think of it this way. This is not the first time that technology has changed and that international law has been asked to deal with those changes. In particular, because the tools of conflict are constantly evolving, one relevant body of law—international humanitarian law, or the law of armed conflict—affirmatively anticipates technological innovation, and contemplates that its existing rules will apply to such innovation.”).} _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 14 Law of war rules may apply to new technologies because the rules often are not framed in terms of specific technological means. For example, the rules on conducting attacks do not depend on what type of weapon is used to conduct the attack. Thus, cyber operations may be subject to a variety of law of war rules depending on the rule and the nature of the cyber operation. For example, if the physical consequences of a cyber attack constitute the kind of physical damage that would be caused by dropping a bomb or firing a missile, that cyber attack would equally be subject to the same rules that apply to attacks using bombs or missiles. {Harold Hongju Koh, Legal Adviser, Department of State, International Law in Cyberspace: Remarks as Prepared for Delivery to the USCYBERCOM Inter-Agency Legal Conference (Sept. 18, 2012), reprinted in 54 HARVARD INTERNATIONAL LAW JOURNAL ONLINE, 3-4 (Dec. 2012) (“In analyzing whether a cyber operation would constitute a use of force, most commentators focus on whether the direct physical injury and property damage resulting from the cyber event looks like that which would be considered a use of force if produced by kinetic weapons. For example, cyber activities that proximately result in death, injury, or significant destruction would likely be viewed as a use of force. … Only a moment’s reflection makes you realize that this is common sense: if the physical consequences of a cyber attack work the kind of physical damage that dropping a bomb or firing a missile would, that cyber attack should equally be considered a use of force.”).} Cyber operations may pose challenging legal questions because of the variety of effects they can produce. For example, cyber operations could be a non-forcible means or method of conducting hostilities (such as information gathering), and would be regulated as such under rules applicable to non-forcible means and methods of warfare. Other cyber operations could be used to create effects that amount to an attack and would be regulated under the rules on conducting attacks. Moreover, another set of challenging issues may arise when considering whether a particular cyber operation might be regarded as a seizure or _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 15 destruction of enemy property and should be assessed as such. 16.2.2 Application of Law of War Principles as a General Guide to Cyber Operations. When no specific rule applies, the principles of the law of war form the general guide for conduct during war, including conduct during cyber operations. For example, under the principle of humanity, suffering, injury, or destruction unnecessary to accomplish a legitimate military purpose must be avoided in cyber operations. Certain cyber operations may not have a clear kinetic parallel in terms of their capabilities and the effects they create. Such operations may have implications that are quite different from those presented by attacks using traditional weapons, and those different implications may well yield different conclusions. {Harold Hongju Koh, Legal Adviser, Department of State, International Law in Cyberspace: Remarks as Prepared for Delivery to the USCYBERCOM Inter-Agency Legal Conference (Sept. 18, 2012), reprinted in 54 HARVARD INTERNATIONAL LAW JOURNAL ONLINE, 7 (Dec. 2012) (“I have also noted some clear-cut cases where the physical effects of a hostile cyber action would be comparable to what a kinetic action could achieve: for example, a bomb might break a dam and flood a civilian population, but insertion of a line of malicious code from a distant computer might just as easily achieve that same result. As you all know, however, there are other types of cyber actions that do not have a clear kinetic parallel, which raise profound questions about exactly what we mean by ‘force.’”). Department of Defense, Office of the General Counsel, An Assessment of International Legal Issues in Information Operations (2nd ed., Nov. 1999), reprinted in 76 U.S. NAVAL WAR COLLEGE INTERNATIONAL LAW STUDIES 459, 490 (2002) (“In the process of reasoning by analogy to the law applicable to traditional weapons, it must always be kept in mind that computer network attacks are likely to present implications that are quite different from the implications presented by attacks with traditional weapons. These different implications may well yield different conclusions.”).} _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 16 16.3 CYBER OPERATIONS AND JUS AD BELLUM Cyber operations may present issues under the law of war governing the resort to force (i.e., jus ad bellum). 16.3.1 Prohibition on Cyber Operations That Constitute Illegal Uses of Force Under Article 2(4) of the Charter of the United Nations. Article 2(4) of the Charter of the United Nations states that “[a]ll Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state, or in any other manner inconsistent with the Purposes of the United Nations.” Cyber operations may in certain circumstances constitute uses of force within the meaning of Article 2(4) of the Charter of the United Nations and customary international law. For example, if cyber operations cause effects that, if caused by traditional physical means, would be regarded as a use of force under jus ad bellum, then such cyber operations would likely also be regarded as a use of force. Such operations may include cyber operations that: (1) trigger a nuclear plant meltdown; (2) open a dam above a populated area, causing destruction; or (3) disable air traffic control services, resulting in airplane crashes. Similarly, cyber operations that cripple a military’s logistics systems, and thus its ability to conduct and sustain military operations, might also be considered a use of force under jus ad bellum. Other factors, besides the effects of the cyber operation, may also be relevant to whether the cyber operation constitutes a use of force under jus ad bellum. Cyber operations that constitute uses of force within the meaning of Article 2(4) of the Charter of the United Nations and customary international law must have a proper legal basis in order not to violate jus ad bellum prohibitions on the resort to force. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 17 {Department of Defense, Office of the General Counsel, An Assessment of International Legal Issues in Information Operations (2nd ed., Nov. 1999), reprinted in 76 U.S. NAVAL WAR COLLEGE INTERNATIONAL LAW STUDIES 459, 483 (2002) (“Even if the systems attacked were unclassified military logistics systems, an attack on such systems might seriously threaten a nation’s security. For example, corrupting the data in a nation’s computerized systems for managing its military fuel, spare parts, transportation, troop mobilization, or medical supplies may seriously interfere with its ability to conduct military operations. In short, the consequences are likely to be more important than the means used.”). Harold Hongju Koh, Legal Adviser, Department of State, International Law in Cyberspace: Remarks as Prepared for Delivery to the USCYBERCOM Inter-Agency Legal Conference (Sept. 18, 2012), reprinted in 54 HARVARD INTERNATIONAL LAW JOURNAL ONLINE, 4 (Dec. 2012) (“In assessing whether an event constituted a use of force in or through cyberspace, we must evaluate factors including the context of the event, the actor perpetrating the action (recognizing challenging issues of attribution in cyberspace), the target and location, effects and intent, among other possible issues.”).} 16.3.2 Peacetime Intelligence and Counterintelligence Activities. International law and long-standing international norms are applicable to State behavior in cyberspace, and the question of the legality of peacetime intelligence and counterintelligence activities must be considered on a case-by-case basis. Generally, to the extent that cyber operations resemble traditional intelligence and counter-intelligence activities, such as unauthorized intrusions into computer networks solely to acquire information, then such cyber operations would likely be treated similarly under international law. The United States conducts such activities via cyberspace, and such operations are governed by long-standing and well-established considerations, including the possibility that those operations could be interpreted as a hostile act. 16.3.3 Responding to Hostile or Malicious Cyber Operations. A State’s inherent right of self-defense, recognized in Article 51 of the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 18 Charter of the United Nations, may be triggered by cyber operations that amount to an armed attack or imminent threat thereof. As a matter of national policy, the United States has expressed the view that when warranted, it will respond to hostile acts in cyberspace as it would to any other threat to the country. Measures taken in the exercise of the right of national self-defense in response to an armed attack must be reported immediately to the U.N. Security Council in accordance with Article 51 of the Charter of the United Nations. {Harold Hongju Koh, Legal Adviser, Department of State, International Law in Cyberspace: Remarks as Prepared for Delivery to the USCYBERCOM Inter-Agency Legal Conference (Sept. 18, 2012), reprinted in 54 HARVARD INTERNATIONAL LAW JOURNAL ONLINE, 4 (Dec. 2012) (“Question 4: May a state ever respond to a computer network attack by exercising a right of national self-defense? Answer 4: Yes. A state’s national right of self-defense, recognized in Article 51 of the UN Charter, may be triggered by computer network activities that amount to an armed attack or imminent threat thereof.”); Barack Obama, International Strategy for Cyberspace: Prosperity, Security, and Openness in a Networked World, 10 (May 2011) (“Right of Self-Defense: Consistent with the United Nations Charter, states have an inherent right to self-defense that may be triggered by certain aggressive acts in cyberspace.”). Barack Obama, International Strategy for Cyberspace: Prosperity, Security, and Openness in a Networked World, 14 (May 2011) (“When warranted, the United States will respond to hostile acts in cyberspace as we would to any other threat to our country. All states possess an inherent right to self-defense, and we recognize that certain hostile acts conducted through cyberspace could compel actions under the commitments we have with our military treaty partners. We reserve the right to use all necessary means—diplomatic, informational, military, and economic—as appropriate and consistent with applicable international law, in order to defend our Nation, our allies, our partners, and our interests. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 19 In so doing, we will exhaust all options before military force whenever we can; will carefully weigh the costs and risks of action against the costs of inaction; and will act in a way that reflects our values and strengthens our legitimacy, seeking broad international support whenever possible.”).} 16.3.3.1 Use of Force Versus Armed Attack. The United States has long taken the position that the inherent right of self-defense potentially applies against any illegal use of force. Thus, any cyber operation that constitutes an illegal use of force against a State potentially gives rise to a right to take necessary and proportionate action in self-defense. {Harold Hongju Koh, Legal Adviser, Department of State, International Law in Cyberspace: Remarks as Prepared for Delivery to the USCYBERCOM Inter-Agency Legal Conference (Sept. 18, 2012), reprinted in 54 HARVARD INTERNATIONAL LAW JOURNAL ONLINE, 7 (Dec. 2012) (“To cite just one example of this, the United States has for a long time taken the position that the inherent right of self-defense potentially applies against any illegal use of force. In our view, there is no threshold for a use of deadly force to qualify as an “armed attack” that may warrant a forcible response. But that is not to say that any illegal use of force triggers the right to use any and all force in response—such responses must still be necessary and of course proportionate.”).} 16.3.3.2 No Legal Requirement for a Cyber Response to a Cyber Attack. There is no legal requirement that the response in self-defense to a cyber armed attack take the form of a cyber action, as long as the response meets the requirements of necessity and proportionality. {Harold Hongju Koh, Legal Adviser, Department of State, International Law in Cyberspace: Remarks as Prepared for Delivery to the USCYBERCOM Inter-Agency Legal Conference (Sept. 18, 2012), reprinted in 54 HARVARD INTERNATIONAL LAW JOURNAL ONLINE, 4 (Dec. 2012) (“There is no legal requirement that the response to a cyber armed attack take the form of a cyber action, as long as the response meets the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 20 requirements of necessity and proportionality.”).} 16.3.3.3 Responses to Hostile or Malicious Cyber Acts That Do Not Constitute Uses of Force. Although cyber operations that do not constitute uses of force under jus ad bellum would not permit injured States to use force in self-defense, those injured States may be justified in taking necessary and appropriate actions in response that do not constitute a use of force. Such actions might include, for example, a diplomatic protest, an economic embargo, or other acts of retorsion. {Department of Defense, Office of the General Counsel, An Assessment of International Legal Issues in Information Operations (2nd ed., Nov. 1999), reprinted in 76 U.S. NAVAL WAR COLLEGE INTERNATIONAL LAW STUDIES 459, 482 (2002) (“There is also a general recognition of the right of a nation whose rights under international law have been violated to take countermeasures against the offending state, in circumstances where neither the provocation nor the response involves the use of armed force. For example, an arbitral tribunal in 1978 ruled that the United States was entitled to suspend French commercial air flights into Los Angeles after the French had suspended U.S. commercial air flights into Paris. Discussions of the doctrine of countermeasures generally distinguish between countermeasures that would otherwise be violations of treaty obligations or of general principles of international law (in effect, reprisals not involving the use of armed force) and retorsions – actions that may be unfriendly or even damaging, but which do not violate any international legal obligation. The use of countermeasures is subject to the same requirements of necessity and proportionality as apply to self-defense.”).} 16.3.3.4 Attribution and Self-Defense Against Cyber Operations. Attribution may pose a difficult factual question in responding to hostile or malicious cyber operations because adversaries may be able to hide or disguise their activities or identities in cyberspace more easily than in the case of other types of operations. A State’s right to take necessary and proportionate action in self-defense in _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 21 response to an armed attack originating through cyberspace applies whether the attack is attributed to another State or to a non-State actor. {DEPARTMENT OF DEFENSE, Department of Defense Cyberspace Policy Report: A Report to Congress Pursuant to the National Defense Authorization Act for Fiscal Year 2011, Section 934, 4 (Nov. 2011) (“The same technical protocols of the Internet that have facilitated the explosive growth of cyberspace also provide some measure of anonymity. Our potential adversaries, both nations and non-state actors, clearly understand this dynamic and seek to use the challenge of attribution to their strategic advantage. The Department recognizes that deterring malicious actors from conducting cyber attacks is complicated by the difficulty of verifying the location from which an attack was launched and by the need to identify the attacker among a wide variety and high number of potential actors.”). United States Submission to the U.N. Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security 2012-2013, 2 (“As the United States noted in its 2010 submission to the GGE, the following established principles would apply in the context of an armed attack, whether it originated through cyberspace or not: • The right of self-defense against an imminent or actual armed attack applies whether the attacker is a State actor or a non-State actor.”). Refer to § 1.11.5.4 (Right of Self-Defense Against Non-State Actors).} 16.3.3.5 Authorities Under U.S. Law to Respond to Hostile Cyber Acts. Decisions about whether to invoke a State’s inherent right of self-defense would be made at the national level because they involve the State’s rights and responsibilities under international law. For example, in the United States, such decisions would generally be made by the President. The Standing Rules of Engagement for U.S. forces have addressed the authority of the U.S. armed forces to take action in self-defense in response to hostile acts or hostile intent, including such acts perpetrated in or through cyberspace. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 22 {See, e.g., CHAIRMAN OF THE JOINT CHIEFS OF STAFF INSTRUCTION 3121.01B, Standing Rules of Engagement/Standing Rules for the Use of Force for U.S. Forces, ¶6b(1) (June 13, 2005), reprinted in INTERNATIONAL AND OPERATIONAL LAW DEPARTMENT, THE JUDGE ADVOCATE GENERAL’S LEGAL CENTER & SCHOOL, U.S. ARMY, OPERATIONAL LAW HANDBOOK 95 (2007) (“Unit commanders always retain the inherent right and obligation to exercise unit self-defense in response to a hostile act or demonstrated hostile intent. Unless otherwise directed by a unit commander as detailed below, military members may exercise individual self-defense in response to a hostile act or demonstrated hostile intent.”).} 16.4 CYBER OPERATIONS AND THE LAW OF NEUTRALITY The law of neutrality may be important in certain cyber operations. For example, under the law of neutrality, belligerent States are bound to respect the sovereign rights of neutral States. Because of the interconnected nature of cyberspace, cyber operations targeting networked information infrastructures in one State may create effects in another State that is not a party to the armed conflict. {Harold Hongju Koh, Legal Adviser, Department of State, International Law in Cyberspace: Remarks as Prepared for Delivery to the USCYBERCOM Inter-Agency Legal Conference (Sept. 18, 2012), reprinted in 54 HARVARD INTERNATIONAL LAW JOURNAL ONLINE, 6 (Dec. 2012) (“States conducting activities in cyberspace must take into account the sovereignty of other states, including outside the context of armed conflict. The physical infrastructure that supports the Internet and cyber activities is generally located in sovereign territory and subject to the jurisdiction of the territorial state. Because of the interconnected, interoperable nature of cyberspace, operations targeting networked information infrastructures in one country may create effects in another country. Whenever a state contemplates conducting activities in cyberspace, the sovereignty of other states needs to be considered.”).} _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 23 16.4.1 Cyber Operations That Use Communications Infrastructure in Neutral States. The law of neutrality has addressed the use of communications infrastructure in neutral States, and in certain circumstances, these rules would apply to cyber operations. The use of communications infrastructure in neutral States may be implicated under the general rule that neutral territory may not serve as a base of operations for one belligerent against another. In particular, belligerent States are prohibited from erecting on the territory of a neutral State any apparatus for the purpose of communicating with belligerent forces on land or sea, or from using any installation of this kind established by them before the armed conflict on the territory of a neutral State for purely military purposes, and which has not been opened for the service of public messages. However, merely relaying information through neutral communications infrastructure (provided that the facilities are made available impartially) generally would not constitute a violation of the law of neutrality that belligerent States would have an obligation to refrain from and that a neutral State would have an obligation to prevent. This rule was developed because it was viewed as impractical for neutral States to censor or screen their publicly available communications infrastructure for belligerent traffic. Thus, for example, it would not be prohibited for a belligerent State to route information through cyber infrastructure in a neutral State that is open for the service of public messages, and that neutral State would have no obligation to forbid such traffic. This rule would appear to be applicable even if the information that is being routed through neutral communications infrastructure may be characterized as a cyber weapon or otherwise could cause destructive effects in a belligerent State (but no destructive effects within the neutral State or States). {Colonel Borel, Report to the Conference from the Second Commission on Rights and Duties of Neutral States on Land, in JAMES BROWN SCOTT, THE REPORTS TO THE HAGUE CONFERENCES OF 1899 AND 1907, 543 (1917) (“We are here dealing with cables or apparatus belonging either to a _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 24 neutral State or to a company or individuals, the operation of which, for the transmission of news, has the character of a public service. There is no reason to compel the neutral State to restrict or prohibit the use by the belligerents of these means of communication. Were it otherwise, objections of a practical kind would be encountered, arising out of the considerable difficulties in exercising control, not to mention the confidential character of telegraphic correspondence and the rapidity necessary to this service. Through his Excellency Lord Reay, the British delegation requested that it be specified that ‘the liberty of a neutral State to transmit messages, by means of its telegraph lines on land, its submarine cables or its wireless apparatus, does not imply that it has any right to use them or permit their use in order to render manifest assistance to one of the belligerents’. The justice of the idea thus stated was so great as to receive the unanimous approval of the Commission.”).} {See DEPARTMENT OF DEFENSE, Department of Defense Cyberspace Policy Report: A Report to Congress Pursuant to the National Defense Authorization Act for Fiscal Year 2011, Section 934, 8 (Nov. 2011) (“The issue of the legality of transporting cyber ‘weapons’ across the Internet through the infrastructure owned and/or located in neutral third countries without obtaining the equivalent of ‘overflight rights.’ There is currently no international consensus regarding the definition of a ‘cyber weapon.’ The often low cost of developing malicious code and the high number and variety of actors in cyberspace make the discovery and tracking of malicious cyber tools difficult. Most of the technology used in this context is inherently dual-use, and even software might be minimally repurposed for malicious action.”); Department of Defense, Office of the General Counsel, An Assessment of International Legal Issues in Information Operations (2nd ed., Nov. 1999), reprinted in 76 U.S. NAVAL WAR COLLEGE INTERNATIONAL LAW STUDIES 459, 489 (2002) (“There need be less concern for the reaction of nations through whose territory or communications systems a destructive message may be routed. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 25 If only the nation’s public communications systems are involved, the transited nation will normally not be aware of the routing such a message has taken. Even if it becomes aware of the transit of such a message and attributes it to the United States, there would be no established principle of international law that it could point to as being violated. As discussed above, even during an international armed conflict international law does not require a neutral nation to restrict the use of its public communications networks by belligerents. Nations generally consent to the free use of their communications networks on a commercial or reciprocal basis. Accordingly, use of a nation’s communications networks as a conduit for an electronic attack would not be a violation of its sovereignty in the same way that would be a flight through its airspace by a military aircraft.”).} 16.5 CYBER OPERATIONS AND JUS IN BELLO 16.5.1 This section addresses jus in bello rules and cyber operations. Cyber Operations That Constitute “Attacks” for the Purpose of Applying Rules on Conducting Attacks. If a cyber operation constitutes an attack, then the law of war rules on conducting attacks must be applied to those cyber operations. For example, such operations must comport with the requirements of distinction and proportionality. For example, a cyber attack that would destroy enemy computer systems could not be directed against ostensibly civilian infrastructure, such as computer systems belonging to stock exchanges, banking systems, and universities, unless those computer systems met the test for being a military objective under the circumstances. A cyber operation that would not constitute an attack, but would nonetheless seize or destroy enemy property, would have to be imperatively demanded by the necessities of war.48 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 26 16.5.1.1 Assessing Incidental Injury or Damage During Cyber Operations. The proportionality rule prohibits attacks in which the expected loss of life or injury to civilians, and damage to civilian objects incidental to the attack, would be excessive in relation to the concrete and direct military advantage expected to be gained. For example, in applying the proportionality rule to cyber operations, it might be important to assess the potential effects of a cyber attack on computers that are not military objectives, such as private, civilian computers that hold no military significance, but that may be networked to computers that are valid military objectives. In assessing incidental injury or damage during cyber operations, it may be important to consider that remote harms and lesser forms of harm, such as mere inconveniences or temporary losses, need not be considered in applying the proportionality rule. For example, a minor, brief disruption of internet services to civilians that results incidentally from a cyber attack against a military objective generally would not need to be considered in a proportionality analysis. In addition, the economic harms in the belligerent State resulting from such disruptions, such as civilian businesses in the belligerent State being unable to conduct e-commerce, generally would not need to be considered in a proportionality analysis. Even if cyber operations that constitute attacks are not expected to result in excessive incidental loss of life or injury or damage such that the operation would be prohibited by the proportionality rule, the party to the conflict nonetheless would be required to take feasible precautions to limit such loss of life or injury and damage in conducting those cyber operations. {Harold Hongju Koh, Legal Adviser, Department of State, International Law in Cyberspace: Remarks as Prepared for Delivery to the USCYBERCOM Inter-Agency Legal Conference (Sept. 18, 2012), reprinted in 54 HARVARD INTERNATIONAL LAW JOURNAL ONLINE, 8 (Dec. 2012) (“As you all know, information and communications infrastructure is often shared between state militaries and private, civilian communities. The law of war requires that civilian infrastructure not be used to seek to immunize military objectives from attack, including in the cyber realm. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 27 But how, exactly, are the jus in bello rules to be implemented in cyberspace? Parties to an armed conflict will need to assess the potential effects of a cyber attack on computers that are not military objectives, such as private, civilian computers that hold no military significance, but may be networked to computers that are valid military objectives. Parties will also need to consider the harm to the civilian uses of such infrastructure in performing the necessary proportionality review. Any number of factual scenarios could arise, however, which will require a careful, fact-intensive legal analysis in each situation.”). Refer to § 5.12.2 (Types of Harm – Loss of Life, Injury, and Damage). 52 Cf. Program on Humanitarian Policy and Conflict Research at Harvard University, Commentary on the HPCR Manual on International Law Applicable to Air and Missile Warfare, 28 (A.1.e.7) (2010) (“The definition of ‘attacks’ also covers ‘non-kinetic’ attacks (i.e. attacks that do not involve the physical transfer of energy, such as certain CNAs [computer network attacks]; see Rule 1(m)) that result in death, injury, damage or destruction of persons or objects. Admittedly, whether ‘non-kinetic’ operations rise to the level of an ‘attack’ in the context of the law of international armed conflict is a controversial issue. There was agreement among the Group of Experts that the term ‘attack’ does not encompass CNAs that result in an inconvenience (such as temporary denial of internet access).”).} 16.5.2 Cyber Operations That Do Not Amount to an “Attack” Under the Law of War. A cyber operation that does not constitute an attack is not restricted by the rules that apply to attacks. Factors that would suggest that a cyber operation is not an “attack” include whether the operation causes only reversible effects or only temporary effects. Cyber operations that generally would not constitute attacks include: • defacing a government webpage; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 28 • a minor, brief disruption of internet services; • briefly disrupting, disabling, or interfering with communications; and • disseminating propaganda. Since such operations generally would not be considered attacks under the law of war, they generally would not need to be directed at military objectives, and may be directed at civilians or civilian objects. Nonetheless, such operations must not be directed against enemy civilians or civilian objects unless the operations are militarily necessary. Moreover, such operations should comport with the general principles of the law of war. For example, even if a cyber operation is not an “attack” or does not cause any injury or damage that would need to be considered under the proportionality rule, that cyber operation still should not be conducted in a way that unnecessarily causes inconvenience to civilians or neutral persons. 16.5.3 Duty to Take Feasible Precautions and Cyber Operations. Parties to a conflict must take feasible precautions to reduce the risk of incidental harm to the civilian population and other protected persons and objects. Parties to the conflict that employ cyber operations should take precautions to minimize the harm of their cyber activities on civilian infrastructure and users. The obligation to take feasible precautions may be of greater relevance in cyber operations than other law of war rules because this obligation applies to a broader set of activities than those to which other law of war rules apply. For example, the obligation to take feasible precautions to reduce the risk of incidental harm would apply to a party conducting an attack even if the attack would not be prohibited by the proportionality rule. In addition, the obligation to take feasible precautions applies even if a party is not conducting an attack because the obligation also applies to a party that is subject to attack. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 29 16.5.3.1 Cyber Tools as Potential Measures to Reduce the Risk of Harm to Civilians or Civilian Objects. In some cases, cyber operations that result in non-kinetic or reversible effects can offer options that help minimize unnecessary harm to civilians. In this regard, cyber capabilities may in some circumstances be preferable, as a matter of policy, to kinetic weapons because their effects may be reversible, and they may hold the potential to accomplish military goals without any destructive kinetic effect at all. As with other precautions, the decision of which weapon to use will be subject to many practical considerations, including effectiveness, cost, and “fragility,” i.e., the possibility that once used an adversary may be able to devise defenses that will render a cyber tool ineffective in the future. Thus, as with special kinetic weapons, such as precision-guided munitions that have the potential to produce less incidental damage than other kinetic weapons, cyber capabilities usually will not be the only type of weapon that is legally permitted. {United States Submission to the U.N. Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security 2012-2013, 4 (“Cyber operations that result in non-kinetic or reversible effects can be an important tool in creating options that minimize unnecessary harm to civilians. In this regard, cyber capabilities may in some circumstances be preferable, as a matter of policy, to kinetic weapons because their effects may be reversible, and they may hold the potential to accomplish military goals without any destructive kinetic effect at all.”). Department of Defense, Office of the General Counsel, An Assessment of International Legal Issues in Information Operations (2nd ed., Nov. 1999), reprinted in 76 U.S. NAVAL WAR COLLEGE INTERNATIONAL LAW STUDIES 459, 490 (2002) (“Another possible implication of a defender’s technological prowess may arise when a nation has the capacity for graduated self-defense measures. Some may argue that a nation having such capabilities must select a response that will do minimal damage. This is a variant of the argument that a nation possessing precision-guided _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 30 munitions must always use them whenever there is a potential for collateral damage. That position has garnered little support among nations and has been strongly rejected by the United States. There is broad recognition that the risk of collateral damage is only one of many military considerations that must be balanced by military authorities planning an attack. One obvious consideration is that a military force that goes into a protracted conflict with a policy of always using precision-guided munitions whenever there is any potential for collateral damage will soon exhaust its supply of such munitions. Similarly, military authorities must be able to weigh all relevant military considerations in choosing a response in self-defense against computer network attacks. These considerations will include the probable effectiveness of the means at their disposal, the ability to assess their effects, and the “fragility” of electronic means of attack (i.e., once they are used, an adversary may be able to devise defenses that will render them ineffective in the future).”).} 16.5.4 Prohibition on Improper Use of Signs During Cyber Operations. Under the law of war, certain signs may not be used improperly. These prohibitions may also be applicable during cyber operations. For example, it would not be permissible to conduct a cyber attack or to attempt to disable enemy internal communications by making use of communications that initiate non-hostile relations, such as prisoner exchanges or ceasefires. Similarly, it would be prohibited to fabricate messages from an enemy’s Head of State falsely informing that State’s forces that an armistice or cease-fire had been signed. On the other hand, the restriction on the use of enemy flags, insignia, and uniforms only applies to concrete visual objects; it does not restrict the use of enemy codes, passwords, and countersigns. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 31 Thus, for example, it would not be prohibited to disguise network traffic as though it came from enemy computers or to use enemy codes during cyber operations. {Department of Defense, Office of the General Counsel, An Assessment of International Legal Issues in Information Operations (2nd ed., Nov. 1999), reprinted in 76 U.S. NAVAL WAR COLLEGE INTERNATIONAL LAW STUDIES 459, 473 (2002) (“Perfidy: It may seem attractive for a combatant vessel or aircraft to avoid being attacked by broadcasting the agreed identification signals for a medical vessel or aircraft, but such actions would be a war crime. Similarly, it might be possible to use computer ‘morphing’ techniques to create an image of the enemy’s chief of state informing his troops that an armistice or cease-fire agreement had been signed. If false, this would also be a war crime.”).} 16.5.5 Use of Civilian Personnel to Support Cyber Operations. As with non-cyberoperations, the law of war does not prohibit States from using civilian personnel to support their cyber operations, including support actions that may constitute taking a direct part in hostilities. Under the GPW, persons who are not members of the armed forces, but who are authorized to accompany them, are entitled to POW status. This category was intended to include, inter alia, civilian personnel with special skills in operating military equipment who support and participate in military operations, such as civilian members of military aircrews. It would include civilian cyber specialists who have been authorized to accompany the armed forces. Civilians who take a direct part in hostilities forfeit protection from being made the object of attack. 16.6 LEGAL REVIEW OF WEAPONS THAT EMPLOY CYBER CAPABILITIES DoD policy requires the legal review of the acquisition of weapons or weapon systems. This policy would include the review of weapons that employ cyber _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 32 capabilities to ensure that they are not per se prohibited by the law of war. {Harold Hongju Koh, Legal Adviser, Department of State, International Law in Cyberspace: Remarks as Prepared for Delivery to the USCYBERCOM Inter-Agency Legal Conference (Sept. 18, 2012), reprinted in 54 HARVARD INTERNATIONAL LAW JOURNAL ONLINE, 6 (Dec. 2012) (“States should undertake a legal review of weapons, including those that employ a cyber capability. Such a review should entail an analysis, for example, of whether a particular capability would be inherently indiscriminate, i.e., that it could not be used consistent with the principles of distinction and proportionality. The U.S. Government undertakes at least two stages of legal review of the use of weapons in the context of armed conflict: first, an evaluation of new weapons to determine whether their use would be per se prohibited by the law of war; and second, specific operations employing weapons are always reviewed to ensure that each particular operation is also compliant with the law of war.”).} Not all cyber capabilities, however, constitute a weapon or weapons system. Military Department regulations address what cyber capabilities require legal review. The law of war does not prohibit the development of novel cyber weapons. The customary law of war prohibitions on specific types of weapons result from State practice and opinio juris demonstrating that a type of weapon is illegal; the mere fact that a weapon is novel or employs new technology does not mean that the weapon is illegal. Although which issues may warrant legal analysis would depend on the characteristics of the weapon being assessed, a legal review of the acquisition or procurement of a weapon that employs cyber capabilities likely would assess whether the weapon is inherently indiscriminate. For example, a destructive computer virus that was programmed to spread and destroy uncontrollably within civilian internet systems would be prohibited as an inherently indiscriminate weapon. {United States Submission to the U.N. Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 33 Context of International Security 2012-2013, (“Weapons that cannot be directed at a specific military objective or whose effects cannot be controlled would be inherently indiscriminate, and per se unlawful under the law of armed conflict. In the traditional kinetic context, such inherently indiscriminate and unlawful weapons include, for example, biological weapons. Certain cyber tools could, in light of the interconnected nature of the network, be inherently indiscriminate in the sense that their effects cannot be predicted or controlled; a destructive virus that could spread uncontrollably within civilian internet systems might fall into this category. Attacks using such tools would be prohibited by the law of war.”).} _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 34 On the centrality of the current account in international economics Keynote speech by Mr Claudio Borio, Head of Monetary and Economic Department of the BIS, at the ECB-Central Bank of Turkey conference "Balanced and sustainable growth operationalising the G20 framework", Frankfurt, Abstract The current account occupies a central position in international economics and policy debates. Indeed, in G20 policy debates the term "global imbalances" is treated as almost synonymous with "current account imbalances". Current account imbalances do matter and they can be a problem. But this speech argues that this centrality is not that helpful in understanding how the global economy works, especially in a world of free and huge capital flows. And it may even lead to the wrong policy prescriptions, including not paying sufficient attention to potentially more disruptive financial imbalances. A key reason is that, analytically, the current account is asked to shed light on issues for which it is ill-suited, such as the amount of financing a country gets from, or provides to, others, the direction of that financing (who lends to whom) and financial instability. Speech I would like to thank the organisers for their kind invitation to this event. I am delighted to be here. The conference title highlights the G20's goal of achieving balanced and sustainable growth. This, in fact, has been the goal of international policy cooperation from the start. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 35 That said, the way this challenge is interpreted has evolved substantially over time, reflecting not just shifting geopolitical currents but - of greater relevance to this conference - changing analytical paradigms too. One aspect that remains unchanged is the critical importance of the international monetary and financial system (IMFS) in channelling policy efforts - or in reflecting their absence. This was inevitably the case during the Gold Standard era, the chaotic pre-war years of the retreat into trade and financial protectionism, the Bretton Woods phase and again, in more recent times, following the breakdown of those arrangements. Not surprisingly, the perennial challenge - and one that has given rise to heated debates - has been to identify the strengths and weaknesses of the IMFS with a view to improving it. In my remarks today I would like to address this issue, to which we devoted a whole chapter in the latest BIS Annual Report (BIS (2015)). But I would like to do so by taking a step back. My objective is to assess critically, and from an analytical perspective, why the current account occupies such a central position in international economics and policy debates. This centrality has a long tradition. It harks back at least to David Hume's view of the gold specie standard, in which current account balances were regarded as the source of cross-border gold flows (Hume (1898)). It is through this lens that the economic havoc in the interwar years is seen in terms of the transfer problem, as linked with war reparations (Keynes (1929) and Ohlin (1929)). This is the perspective that highlights a systematic contractionary bias in the global economy because deficit (borrowing) countries are forced to retrench when surplus (creditor) ones are no longer willing to lend to them (Keynes (1941)). It reappears in the view that traces the 1970s Latin American crisis to the recycling of oil exporters' surpluses (Lomax (1986), Congdon (1988)). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 36 And, more recently, it has re-emerged in the argument that a saving glut, reflected in large Asian current account surpluses, was at the root of the Great Financial Crisis (Bernanke (2005), Krugman (2009), King (2010)). I will argue that this centrality is not that helpful in understanding how the global economy works, especially in a world of free and huge capital flows. And it may even lead to the wrong policy prescriptions. We should not forget that, for quite some time now, the terms "global imbalances" and "current account imbalances" have been treated as almost synonymous in G20 policy discussions - so ingrained is the centrality of current accounts in the policy debate. To be clear: I do believe that current accounts matter greatly. If very large and persistent, they do provide information about long-term sustainability, they do raise the costs of financial crises, and they do pose the risk of trade protectionism. But current accounts have been asked to do too much and, as a consequence, focusing on them excessively can lead policy astray. Because this is a research conference, I would like to approach the topic at a rather high level of abstraction before I turn to policy. My basic thesis is that the current account is asked to shed light on issues for which it is ill-suited, such as the amount of financing a country gets from, or provides to, others; the direction of that financing (who lends to whom) - a key ingredient in the so-called Lucas Paradox (1990); the degree of capital mobility - a key ingredient in the Feldstein-Horioka Puzzle (1980); and financial instability - the risks thereof and the mechanisms involved - as highlighted in the notion of "sudden stops" (Calvo (1998)). I shall argue that this "overburdening" of the current account concept results from the failure to make a sufficiently clear distinction between saving and financing, and hence also between gross and net flows. In turn, this ultimately points to an under-appreciation of the monetary nature of our economies. And the problem is compounded by the tendency to extrapolate inferences from a two-country to a multi-country world - something which is, or at least should be, well known but is often overlooked. In the process, I shall take issue with familiar statements such as the following. The current account is a " ...measure of total external capital financing available for investment in a country... "(Prasad et al; p 120) or of _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 37 " ...the total amount of finance flowing in or out of a country... " (p 129). Or again, "(t)he largest and arguably most advanced world economy, the United States, has been a net capital importer since 1982 and has been increasingly financed by fast growing emerging economies" (Gourinchas and Rey (2013); p 5). The key point is that current account patterns are largely silent about the role a country plays in international borrowing, lending and financial intermediation Now, I do not expect you to leave this room fully convinced, given how deep-seated the convictions underlying these statements are and the limited time available. But I do hope to raise some questions in your mind and trigger your curiosity. You can take what I am saying to be not just about substance but also about rhetoric. More precisely, you can take it as exploring also how the way we talk about identities and our models can inadvertently shape the inferences we draw from them. The structure of my remarks is as follows. I shall first elaborate on the distinction between saving and financing, initially in a closed economy and then in an open economy. I shall then revisit the Lucas Paradox and the notion of sudden stops, arguing that the current account concept actually muddies the water. I shall finally draw some policy conclusions, including about the workings of the IMFS. Here I shall highlight how a current-account-centric analytical framework could lead policy astray. For those that would like to explore these issues further, let me say that they have been developed in detail, with help of a simple model, in a recent paper with Piti Disyatat (Borio and Disyatat (2015)). I understand that the paper, which is still preliminary, will be made available to participants at this conference. I - Saving and financing The origin of the problem - the "original sin", if you would like - is the conflation of two quite different concepts: saving and financing. Saving is a national accounts concept and denotes income (output) not consumed. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 38 Financing is a cash flow concept and denotes access to purchasing power in an accepted settlement medium (money), including through borrowing. In a causal sense, all expenditures, and hence also investment, require financing, not saving. Financing, in turn, is about gross, not net, financial flows. And it is required for both financial and real transactions, which may or may not add to output. Look at it another way. Saving alleviates an economy's real resource constraint: abstaining from consumption makes room for investment to take place without putting pressure on resources. Cash flows alleviate the economy's financing constraint: without cash flows, no spending can take place. Why are the two concepts conflated? Probably, this reflects the use of models that do not explicitly trace the financing (monetary) flows - what I would call real economies disguised as monetary ones. This includes many DSGE models as well as the benchmark consumption-smoothing model of the current account - the workhorse model of international finance these days. In the simplest form, with a representative agent and a single asset ("bonds"), the relevant distinctions disappear (eg Obstfeld and Rogoff (1995)): there is no need to model financing flows explicitly and gross flows collapse into net flows. Closed economy Before opening up the economy, it is easiest to see the difference between saving and financing in a closed economy. The key feature of this hypothetical economy is that it is a monetary economy, ie one in which all transactions must be settled in money, here assumed to be bank deposits. Moreover, while often overlooked, deposits are created by extending credit. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 39 More specifically, deposits are a claim issued by banks as the counterpart of the acquisition of some other claim, which typically takes the form of credit - just as cash nowadays must be issued by the government or the central bank as counterpart of the acquisition of some item. Critically, the role of banks, therefore, is to create purchasing power, not to allocate pre-existing real resources. A couple of implications follow. For one, there is no link between the volumes of saving and financing. Financing does not require saving, ie, abstaining from consumption. For instance, in an economy with no saving, and hence investment, one still needs financing for production, such as to pay factors of production. In addition, saving does not have to go into financial assets: strictly speaking, it cannot, because one would be comparing apples and oranges. Saving materialises once investment takes place but is silent about the flow of financial assets. To think otherwise probably results from a misleading extrapolation from an individual agent to whole economy. That is, an agent's "saving" his labour income simply amounts to, in the first instance, a deposit transfer from his employer: there is no link to "saving" in the national accounts sense. It is thus not meaningful to say that "country X can sustain a lot of government debt because it has a high saving rate" - a common enough statement in policy debates. Debt is sustained by the willingness of agents to hold it - a portfolio allocation decision. Saving is a just "hole" in aggregate demand that allows investment to take place without putting pressure on aggregate resources. There is no such thing as a "wall of saving" that pushes down interest rates as it sucks up financial assets: saving and investment balances at best determine natural rates, not market rates - a point to which I will return later. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 40 Open economy These conclusions carry through to an open economy. Three implications are worth highlighting. First, there need be no relationship between the current account position and the financing flows underpinning expenditures, and hence investment and output. A country may be in surplus, but have all its investment financed from abroad; or be in deficit but have it all financed at home. For instance, in a simple model in which banks are the only source of funding, it will depend on where they are located. In other words, the location of those who spend and produce determines current account positions while the location of those who provide the funding determines financing flows. Second, the nature of the credit risks is unrelated to the current account position: it depends exclusively on financing patterns. For instance, if the banks are located in the deficit countries, they will be the creditors and bear the credit risk in the first place. Thus, the irresistible image that surplus countries are "creditors" and are exposed to risk on deficit countries is misleading. True, balance of payments identities must hold: a surplus country is accumulating, on net, claims on others. And in a two-country world this would necessarily be on the deficit country. But answering the question whether any credit risk is involved and how it is distributed requires an understanding of financing patterns, by both location and instrument, and how they crystallise in outstanding stocks. Finally, moving from a two-country to a multi-country world undermines our straightforward intuition about bilateral relations. Now, even in net terms, surplus countries need not accumulate claims on deficit countries. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 41 In the extreme case, all the financing could come from a third country, which does not trade with the first two - think of it as a pure financial hub. By construction, net positions would be accumulated vis-à-vis this third country. II - Revisiting common notions It is now possible to revisit the Lucas Paradox and financial instability, with special reference to the popular notion of sudden stops. The Lucas Paradox The famous Lucas Paradox states that, based on current account positions, capital counterintuitively flows "uphill". This is because, on balance, advanced economies have current account deficits and less developed ones surpluses. But since the marginal productivity of capital should be higher in less capital intensive economies, this is not optimal. Typical explanations of the puzzle focus on reasons why the differential in returns on capital may be more apparent than real and/or not exploitable. This may well be true. But the previous analysis suggests a different possibility: the question may not be fully well-posed. For one, current account positions are not informative of the direction of financing: investment could be fully financed from advanced economies even if these are in deficit. One needs to look at the details of bilateral gross financing flows. In addition, in a multi-country world, even if bilateral net positions correspond to current account positions - and they need not - it does not follow that, in aggregate, surplus counties accumulate net claims on deficit ones. For example, assume that country A has a current account deficit with B; B a current account deficit with C and B is in balance. In this case, A is in deficit and C in surplus. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 42 Assume further that bilateral net positions do correspond to the current account positions, although, as discussed, they need not. Then country C, which has a surplus, is acquiring net claims on B, which is in balance, and which is in turn acquiring net claims on A, which is in deficit. Thus, there is no sense in which capital is flowing from C, in surplus, to A, in deficit. This is, in theory, a matter of identities. But what do the data actually say? Data on financing patterns are very limited; but what is available suggests that the puzzle may be more apparent than real. The size of gross flows dwarfs current accounts. FDI, which can be closely linked to investment, has tended to flow "downhill", from advanced economies to EMEs, not vice versa (eg, Prasad et al (2006)). The same is true of bank flows, at least over the last decade. And more generally, the data show little correspondence between bilateral trade positions and bilateral net financial positions, as the previous illustrative example postulates, or between bilateral net and gross financial positions. For instance, in the years up to the Great Financial Crisis, France had trade deficit - a current account proxy - with the rest of the euro area but was acquiring net claims on it, and a small surplus with the rest of the world but it was increasing its net liabilities to it (Hobza and Zeugner (2014)). Likewise, at end-2007, even as the United States had its largest bilateral net liability position vis-à-vis China and Japan, it had much larger gross positions vis-à-vis the euro area and the United Kingdom (Milesi-Ferretti et al (2010)). Financial instability What about the link between current accounts and financial instability? A common view sees current account deficits as a major source of financial vulnerabilities, from which current account surplus countries are spared. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 43 The reason is that deficits are regarded as exposing countries to foreign investors' and lenders' sentiment and hence to sudden stops. In fact, the previous analysis makes clear that both current account deficit and surplus countries are exposed to it. For one, since current accounts are largely silent about financing patterns, they can hardly say much about financial crises and the mechanisms involved. At most, they may say something about triggers, if economic agents perceive them as a vulnerability - which they often do - and about the macroeconomic costs once crises erupt. Surely the focus has to be on gross exposures, on their size and distribution. For instance, in the case of the Great Financial Crisis, the institutions exposed to it outside the United States were located in the United Kingdom, a country with a current account deficit, and the euro area, which was roughly in balance (Borio and Disyatat (2011)). In addition, the pivotal role current accounts are given in sudden stops surely cannot be right analytically. Current account reversals do not causally reflect a sudden stop in net capital flows - this is simply what current accounts are, by definition. We should look for causal mechanisms elsewhere. If we think of the current account items, a current account "sudden stop" could only take place if foreigners decided not to export to the country any longer, giving up on the corresponding revenues, or residents freely decided to purchase fewer goods. Both of these mechanisms are implausible. Surely the sudden stop must be in gross financing flows, domestic and external, which force agents to cut imports and pre-finance exports. Thus, current account reversals are more like the tail that is wagged by the dog. The empirical evidence is consistent with this perspective. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 44 In particular, it suggests that the best single leading indicators of financial crises are credit booms (Jordà et al (2011), Gourinchas and Obstfeld (2012), Borio and Lowe (2002)). The information content of current accounts tends to vanish once the booms are controlled for. The evidence also indicates that external sources of credit expansion do tend to outpace domestic ones as these booms proceed (eg Borio et al (2011)) and it suggests that the bust in financing flows causes activity to come to a halt. In fact, some of the most damaging credit booms in history have occurred in current account surplus countries, including the United States prior to the Great Depression and Japan in the late 1980s. Today, several current account surplus countries have been experiencing outsize booms, not least China. And analytically, the main link is not between the sign of the current account and credit booms, but between changes in the current account and credit booms, to the extent that booms go hand in hand with strong domestic demand. III - Policy implications Let me just highlight three policy implications of the analysis. First, there is a need to rebalance the focus of international macroeconomic cooperation away from current account imbalances towards financial imbalances. In G20 circles the term "global imbalance" has been treated as almost synonymous with "current account imbalance" for too long. In a world of huge capital flows, financial imbalances are a more important source of macroeconomic dislocations. The latest financial crisis is just the most recent reminder of their potentially disruptive force. Second, in some cases, a focus on current account imbalances may even be counterproductive. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 45 This can be the case when surplus countries are pushed to boost aggregate demand regardless of domestic financial vulnerabilities - as happened to Japan in the 1980s, at the cost of adding fat to the fire of a hugely damaging financial boom (Shirakawa (2011)). And this might be what has happened to China following the Great Financial Crisis. Finally, once attention shifts from current account imbalances to financial imbalances, central banks take centre stage (Borio et al (2014)). This is because of their first-order influence on financial conditions through monetary policy and their typically important role in prudential policy, not least macroprudential policy. Indeed, as suggested by this analysis and as argued in detail elsewhere (Borio (2014)), the Achilles heel of the IMFS is less its inability to constrain the size and persistence of current account imbalances than its inability to constrain financial imbalances - what with Piti Disyatat we have called its "excess financial elasticity" (Borio and Disyatat (2011)). Such imbalances typically take the form of unsustainable increases in credit and asset prices, especially property prices, on the back of aggressive risk-taking. And external financing, as a source of credit expansion, tends to play a key role (Borio et al (2011)). Once these imbalances collapse, they cause huge economic damage. To be sure, this excess elasticity originates in inadequacies of domestic policy regimes, especially monetary and prudential ones; but it is amplified by their interaction through the IMFS. As domestic monetary regimes pay little attention to the build-up of financial imbalances, their interaction can spread the corresponding easing bias from the core economies to the rest of the world. This occurs through the extensive reach of international currencies - above all, the US dollar - beyond national borders and through resistance to exchange rate appreciation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 46 For example, US dollar credit to non-US residents has grown at a much faster pace than US domestic credit post-crisis (eg, McCauley et al (2015)). Moreover, there is growing evidence that US policy rates have had an influence on policy rates in the rest of the world over and above that of domestic conditions (Taylor (2013) and Hofmann and Takats (2015)). And the interaction of financial regimes, through the free mobility of capital across currencies and borders, reinforces and channels these effects, by adding a key external source of funding during domestic financial booms and by making exchange rates subject to "overshooting" for exactly the same reasons as domestic asset prices are, ie owing to loosely anchored perceptions of value, risk-taking and ample funding. "Global liquidity", or the ease of financing in international markets, moves in irregular but powerful waves (Borio (2013), Shin (2013), Caruana (2014)). Through these mechanisms, easy monetary and financial conditions can, and have, spread to countries that do not need them, fuelling the build-up of financial imbalances there. This is not the place to develop and document these arguments in detail, given the space available (for an elaboration, see eg Borio (2014) and BIS (2015)). But one aspect is worth exploring further because of its possible connection with current accounts: one symptom of the weakness inherent in the interaction of monetary regimes is that, at the global level, inflation-adjusted interest rates have trended down and appear quite low regardless of benchmarks. Those focusing on current accounts would argue that their decline, in fact, reflects an excess of ex ante saving over ex ante investment at the global level, which has been pushing down market rates alongside equilibrium (or natural) real interest rates. This is precisely a key mechanism highlighted by those who argue that a global saving glut was at the heart of the Great Financial Crisis: low interest rates, so determined, boosted the US mortgage boom whose collapse contributed to widespread financial stress. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 47 From the perspective outlined in my remarks, such a view can be questioned. One objection concerns the link between saving and investment, on the one hand, and market interest rates, on the other. The second concerns the relationship between market and equilibrium or natural interest rates. Saving and investment imbalances do not directly influence interest rates. There is general agreement that, in a monetary economy, market interest rates are determined by a combination of central banks' and market participants' actions. Central banks set the nominal short-term rate and influence the nominal long-term rate, through signals of future policy rates and purchases of assets. Market participants adjust their portfolios based on their expectations of central bank policy, their views about the other factors driving long-term rates, their attitude towards risk and various balance sheet constraints. Given these nominal interest rates, actual inflation determines ex post real rates and expected inflation determines ex ante real rates. Thus, the influence of saving and investment is only indirect, through these proximate factors and, in particular, through their influence on central banks' and market participants' perceptions of equilibrium or natural rates. The question then comes down to what determines those equilibrium rates and whether the market rates prevailing at any given point in time are equilibrium ones. This is necessarily an analytical issue and the answer must be model-dependent. The prevailing view, shared by proponents of the saving glut and secular stagnation hypothesis (Summers (2014)), is that the equilibrium or natural rate equates saving and investment at full employment and that when this does not happen, inflation rises (if there is excess demand) or falls (if there is excess supply). The behaviour of inflation is the key signal of unsustainability. But from the perspective proposed here another possible signal of unsustainability is the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 48 build-up of financial imbalances (Borio and Disyatat (2011, 2014), BIS (2015)). After all, it is hard to argue that the interest rate is at its equilibrium level and that this rate is a cause of major financial instability, hugely damaging to the economy. Seen in this light, such a narrow definition of the equilibrium rate is more a reflection of the incompleteness of the analytical frameworks used to define the concept than one of an inherent tension between natural rates and financial stability. Conclusion To conclude, current accounts have been at the centre of international economics and policy for a very long time. There are, of course, very good reasons for this. Current accounts tell us whether a country is spending more than it is producing. They are followed closely by market participants and can influence their mood changes. They can affect the macroeconomic costs of crises. And they can give rise to dangerous protectionist pressures. In short, in this respect I do agree with Maurice Obstfeld (2012), who gives an affirmative answer to the provocative question that heads up his Richard T Ely Lecture: "Does the current account still matter?" But, more generally, current accounts have been asked to tell us more than they can about several key macroeconomic magnitudes - about the volume and direction of capital flows; about how economic activity is financed; about the role countries play in financial intermediation, lending and borrowing; and about the risks of financial instability and the mechanisms involved. In my remarks, I have argued that this ultimately stems from the failure to distinguish with sufficient clarity between saving and financing, and hence between net and gross flows, and, ultimately, to recognise the fundamentally monetary nature of our economies. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 49 In turn, this problem is compounded by the tempting tendency to extrapolate reasoning that holds in a two-country world to a multi-country world, where it does not apply. This state of affairs shapes in unhelpful ways both the rhetoric we employ to talk about the economy and the policy conclusions themselves. And it is one reason why, within the G20, international policy cooperation has focused so heavily on current account imbalances at the expense of financial imbalances. There is a need to rebalance this situation, as regards both analytics and policy. Post-crisis in particular, there have been some positive signs. Within the academic community, for instance, greater attention has been paid to gross capital flows and their nexus with financial booms and busts (eg Shin (2012), Obstfeld (2011, 2012), Rey (2014)). And within the G20, the concept of global liquidity has made a timid appearance. But progress has been too slow. The sooner we recognise this, the better. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 50 Macroprudential policy - from Tiberius to Crockett and beyond Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, at TheCityUK, London Historians still argue about the exact causes of the financial crash of AD 33 that rocked the Roman Empire. The commentators of the day did not unfortunately have, let alone record, the vast amounts of data that we have become used to today. But in a world still painfully extricating itself from the crash of 2008, the key features look eerily familiar, as a number of modern day commentators have observed. An extension of credit across the empire, a sudden deleveraging, debtors failing and bank closures in a number of Roman provinces, the total drying up of liquidity in the financial system and widespread panic. The remedies look familiar too. The Emperor Tiberius was not able to rely on a modern independent central bank with the ability to print money to staunch the crisis. But notwithstanding that immense shortcoming, Tiberius took effective action, injecting into the system a huge amount of liquidity stored in coin in his treasury, setting interest rates at zero for a three year period - an early example of forward guidance - and doubling loan to value requirements for property loans. He also executed those he thought most responsible: though some might advocate that today, I think in that respect at least we have moved on from AD 33. Systemic financial crises, as this episode shows, are not new. The invention of credit and the development of banking and financial systems have been key to the improvement of human living standards throughout history. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 51 But they bring with them the boom and bust extremes of the credit cycle, driven by greed and fear, and the risk of systemic crises which can badly damage the real economy. As financial systems have developed and spread, public authorities, from Tiberius' administration to the Financial Policy Committee (FPC) of the modern Bank of England today, have had to adapt both to deal with financial crises when they occur and to try to prevent them occurring in the first place. It has often been an unequal struggle. I want today to review a little of that history from the Bank of England's perspective. I will draw out the development of what - following the great financial crisis of 2008-9 - has become known as "macroprudential" policy. Put simply, this is the regulation and supervision of the financial system as a whole rather than just the "micro" regulation and supervision of the firms and the markets that go to make up the system. In doing so, I want to review the progress of macroprudential policy and the FPC of the Bank, which is the UK macroprudential authority. Have we built a more resilient financial system and one that can provide the financial stability that is essential for sustainable economic growth? I hope I will be able to show that while many of the problems we face and the tools we have are familiar, the development of macroprudential policy and the FPC since the crisis is not just old wine in new bottles. There is new and important wine here also. The Bank and financial stability The Bank of England is not, of course, a newcomer to this scene. In the centuries following the Bank's creation in 1694, the British financial system mushroomed as the industrial revolution took hold and the empire grew. As the financial system grew, so did the incidence of crises and panics that required the Bank - often reluctantly - to intervene. In the financial crisis of 1825 - a crisis attributed by many to low interest rates, abundant liquidity and a search for yield that drove investors into emerging market bonds - England was said by one observer to be "within 24 hours of a state of barter". _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 52 To get liquidity into the system and restore confidence, the Bank according to one of its directors "lent money by every possible means and in modes we had never adopted before". Again, much of this sounds eerily familiar. The Bank since its inception has been at the centre of the response to every financial crisis in the UK. And since its inception, the Bank has played a role in shaping the development of the financial sector in the UK and using its influence to promote financial stability. For much of its history, that role was not one of statutory regulation and supervision. The Bank exercised its influence behind the scenes on the small club of actors that dominated the financial system. Indeed, the UK came rather late to the idea that banks and financial firms needed to be regulated by law rather than steered by the eyebrows of the Governor of the Bank of England. The Macmillan Committee (1931), which inquired into financial policy in the wake of the Wall Street Crash, did not advocate statutory regulation. Rather it endorsed the informal role of the Bank in guiding the banking sector, commenting that "financial policy can only be carried into effect by those whose business it is". 30 years, a Great Depression and a world war later, the 1959 Report of the Radcliffe inquiry into the monetary system concluded similarly that "it is on this relationship, and on the mutual trust and confidence that are the basis of the relationship, rather than on formal power-that the Bank has relied in seeking to inform itself about and influence the policies of the clearing banks". In the immediate post war period it was not necessary to do a great deal to promote financial stability or the supervision of financial firms. In the post war economy with closed capital and current accounts the banking system was tightly controlled by government. It was an instrument of macroeconomic management and of financial repression in order to repay the national debt. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 53 As the Chairman of Lloyds Bank at the time described it, "It was like driving a powerful car at twenty miles an hour. The banks were anaesthetised - it was a kind of dream life". But, from the beginning of the 1970s, as the financial sector was increasingly liberalised and globalised, the old risks returned. It became apparent by 1979 that the Governor's eyebrows needed to be bolstered with statutory regulation and supervision of banks. As capital accounts were increasingly opened up and cross border competition grew, the need for a more level playing field between internationally active banks became more apparent. Liberalisation led to a shift towards more explicit prudential standards starting with the 1975 Basel Concordat - the forerunner of today's Basel standards. The focus was very much on promoting the safety and soundness of individual firms. Much less attention was given to the fact that the risks in the financial system are greater than the sum of the risks in its parts. Central banks were no strangers to such systemic risks. Indeed, they were recognised at the time - the forerunner of today's Basel Committee identified them and even coined the term "macro-prudential" risks to distinguish and separate them from "micro-prudential" or firm specific risks that were the subject of the Basel Accords. They then concluded it was for someone else to address macroprudential risk. The trail of macroprudential policy goes rather cold at this point. The prevailing view seems to have been that if the regulation and supervision of individual firms was right and if central banks had the necessary Tiberius-like instruments to intervene in crises, sufficient stability could be ensured. It was the realisation in the last years of the last century that an ever more liberalised and globalised financial sector was generating ever more difficult financial crises that led to the reawakening of interest in macroprudential policy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 54 This was led by Andrew Crockett, then the General Manager of the Bank for International Settlements and a former Executive Director of the Bank of England. The development of macroprudential policy As set out by Crockett and others, the basic principles of macroprudential policy are that: - assuring the stability of individual financial firms will not by definition assure the stability of the overall financial system; indeed there will be times in which what makes good sense for a specific firm makes bad sense for the system as a whole; - the underlying prudential standards - the reserves of capital and liquid assets that individual banks and other firms need to hold to enable them to withstand bad times - should be set not simply in relation to the risks in the individual firm, but also to reflect the importance of the firm to the financial system and the cost to the economy as a whole if the system fails; - the financial system does not simply respond to the economic cycle, growing as the economy grows and vice versa. It also feeds on its own exuberance in good times and on its fear in bad times which can in turn drive the real economy to extremes, as we have witnessed in recent years. The underlying causes of this phenomenon are interactions, feedback loops and amplifiers that exist within the financial system that can act as turbo chargers in both directions; - the aim of macroprudential authorities should be to prevent these dynamics from driving up financial stability risks in good times and driving the system down in bad times. That requires not only setting the overall framework of standards and regulation in the right place to address systemic risk; it requires also adjusting the framework in response to the buildup of risk as the turbo chargers inherent in the financial system begin to kick in; and - a recognition that what distinguishes "macroprudential" from "microprudential" and from "macroeconomic" is its objective of financial system stability rather than the instruments it deploys. Macroprudential authorities like the FPC use many of the same instruments as microprudential regulators such as bank capital standards. And in the very final resort, monetary policy may need to be _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 55 used to counter financial stability risk. But the objective of ensuring the financial system as a whole is stable is different to the objective of promoting the safety and soundness of individual firms or that inflation is kept at target. With the benefit of hindsight, policymakers and regulators should all have paid a great deal more attention to these ideas in the early years of the century while the great financial crisis was in the making. In fact, it is difficult to find any newspaper reference at all to macroprudential policy in those years. The opposite is true today. Last year there were over 350 newspaper references in the UK alone. The great financial crisis validated these ideas for many policymakers world-wide. It was clear with hindsight that we had not only mis-estimated the risks in individual institutions. More importantly, we had not really understood the risks created by the dynamics of the system including from outside the core banking system, namely the amplifiers and feedback mechanisms that drove the system down in the same way that they had driven it up. Or the devastating effect all of this would have not just on the financial system but on the broader economy. The dynamics of the system itself create risks and costs that markets and firms do not - and cannot - take fully into account in their decisions and their pricing. For example, in a financial crisis individual banks will try to cut lending - to deleverage - to preserve their funds. But if all banks do that then, as we saw, the economy will suffer which damages all banks. I suspect central banks over the centuries had an intuitive understanding of these risks. But they were never so great before the development of a truly global, liberalised financial sector in a digital age. And they were never clearly identified but instead were wrapped up with many other risks in the historically opaque world of the central banker. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 56 One key outcome of the crisis was the recognition that in the modern global economy, there is a need for international standards to cover macroprudential as well as microprudential risk. These have been developed and coordinated by the Financial Stability Board, which was itself created in response to the crisis. And there is likewise a need for national public authorities that are clearly responsible for managing these risks. Macroprudential bodies, in various shapes and sizes, have been set up in around 40 jurisdictions. In the UK, the FPC of the Bank of England was formally established in 2013 having existed in an interim form since 2011. How well have we done? Seven years on from the crisis and four years from the establishment of the FPC in the UK it is fair to ask: how well have we done so far? Have we put in place the machinery - the institutions and the rules - to manage macroprudential risk? Have we, as some argue with increasing volume, gone too far and achieved stability at the expense of growth? The first area to look at is whether the framework of regulation has now been set to address systemic as well as firm specific risks. The new framework has largely been set by international standards, and for the UK by the incorporation of those standards in EU law. The Basel reforms to bank capital and liquidity standards have very materially strengthened the protection of capital and liquidity reserves that individual banks hold to meet bad times. Regulatory capital requirements are set to be up to ten times higher than before the crisis for the most systemically important institutions and banks will face internationally agreed liquidity ratios for the first time. In the UK and other jurisdictions, leverage ratios have been introduced in advance of an international standard that is in train and structural separation measures are being implemented. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 57 These reforms have strengthened the position of individual firms and in doing so the resilience of the system as a whole. But the Basel and other reforms have also recognised explicitly that these levels of protection need to be set not only to protect investors in individual firms but also to protect all of us, the whole economy, from the damage to the system that can be done when systemic firms get into trouble. Banks that are globally systemic are now required to hold more resources equity capital - that can absorb losses if and when things go wrong. The extra protection is graded by the systemic importance of the firm. The aim is that these systemically important players can continue to operate within the system, serving the real economy, even in bad states of the world. And if, despite all the extra protection they do fail, we need to ensure they can be "resolved" - by which I mean revived or sold or broken up or wound down - in a way that does the least damage to the economy and that does not require taxpayer bailouts. We are now close to the agreement of an international standard requiring systemic banks to hold a set amount of debt in a form that can be readily "bailed-in" to recapitalise and stabilise the firm if it fails, so that it can be resolved over time without doing wider damage. Macroprudential policy is about more than banks. Other parts of the financial system can drive up booms and amplify busts. Derivatives traded between financial firms acted as an amplifier of the crisis when their values changed very quickly and the firms did not have the resources to compensate each other for the change. We are now shifting bilaterally traded derivatives onto central counterparties where there is better identification and protection against the risks of sudden changes in value. Similarly, minimum standards on lending against securities, another amplifier in the crisis, are being introduced to reduce the impact on firms when the value of those securities changes quickly. Seven years on from the crisis, the contours of the new regulatory framework are clear and in the main agreed; we are well into the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 58 implementation of many of its main standards. The standards not only reinforce the safety and soundness of individual firms. In contrast to the development of prudential framework before 2007, we now endeavour to address specifically the risks generated by the financial system as a whole. In other words, the framework is not just stronger. It is macroprudential in a way that was not true at all before the crisis. Of course, knowing where to set the detailed prudential standards that make up the framework is as much an art as a science. It is one thing to know that before the crisis systemic banks were not holding enough capital to absorb losses and keep functioning - one has only to look at the failures, the bailouts and the impact on the real economy. It is quite another to determine how much capital a systemic bank needs to hold to be able to continue to operate through a crisis. As with most things in life, policymakers have looked to the past - for example to the losses suffered by banks and others in this and in previous crises - to guide the future. But we know that it is a useful but an imperfect guide. To paraphrase Mark Twain, history only rhymes, it does not repeat itself. That brings me to the second main element of macroprudential policy. The standing framework can only go so far in addressing risk. The role of macroprudential authorities, like the FPC, is not just to ensure the framework addresses systemic risk. It is to monitor and identify the buildup of risk and the development of new types of risk. And to take action to address them. Here I think macroprudential policy is at a much earlier stage of development. In part this is probably because having crystallised in the crisis, the risks in the core banking system have been muted in the aftermath. And because the development of the new framework of regulation has consumed so much of policymaker and regulator energy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 59 The FPC has certainly spent much of its short life so far on the development and implementation of the new framework of regulation. But it is also due to the fact that there is still a great variety of views as to how macroprudential policy should identify and respond to changing risks in the financial system. There is no consensus about which risks it should care about and which instruments are most effective in addressing them. There is not yet the extensive body of practice and of theoretical and empirical research that exists, for example, in the world of monetary policy. As I mentioned, there are now macroprudential authorities in around 40 jurisdictions. But there are very different views among policymakers as to what time-varying, countercyclical macroprudential should and could do. Some believe macroprudential policy should actively tighten regulation to lean heavily against the powerful dynamics of the credit cycle as the amplifiers in the financial system drive up credit booms and risks. A more restrained approach would be to use countercyclical policy not so much to lean against the cycle but to increase the resilience of the system further by putting in more protection as risks build up in exuberant times. Others remain unconvinced that there is much of a role for time-varying macroprudential policy at all and argue that it is better to bake all the necessary resilience into a very strong standing framework of standards and rules. There is certainly no easy way to estimate where we are in the credit cycle and the impact of macroprudential tools - while there are guides there are no simple rules. Against that background, I want to highlight some of the steps the FPC has taken in this area. First, using macroprudential policy to address changing risks depends upon a clear assessment of risks and of the action necessary to address them. The institutional incentives will inevitably tend to drive macroprudential authorities to the identification of all possible - and if we are not careful, some impossible - risks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 60 Failure to spot a risk is worse than spotting one too many. The outcome of this dynamic, however, can too easily be a lack of clarity and focus: an assessment that identifies everything but actually identifies nothing. With this in mind, the FPC has changed the structure and content of its bi-annual Financial Stability Report (FSR). The FSR aims to set out publicly the FPC's view on risks, its assessment of the resilience of the system and to explain its policy. In its new form, the FSR will focus on no more than a handful of risks, the ones the Committee judges are the most important and the most prominent. And it will then set out what, given the level of resilience in the system, the Committee thinks should be done about those risks. The intention is that such a shorter, more focused report will create a discipline for the FPC's thinking, help to communicate what the FPC is truly concerned about and make it easier for others to hold us to account. Second, the Committee is developing the use of stress testing to assess macroprudential as well as microprudential risk. Last year, the FPC, together with the PRA ran the first ever stress test of the UK banking sector as a whole. The aim was to test not just the resilience of individual banks but what happened to the system if all of the major banks faced a severe but plausible stress scenario at the same time. We are conducting a similar test this year. The Committee intends to set out later this year how we want to develop macroprudential stress testing to help us respond to the ever changing level of risks in the financial system. At present we are using stress testing to help us judge how resilient the banking system is to different severely adverse, but plausible, scenarios. A development of this approach would be to use stress testing more countercyclically. Rather than testing every year against a scenario of constant severity, the severity of the test, and the resilience banks need to pass it, would be greater in boom times when credit and risk is building up in the financial system and it has further to fall and then reduced in weaker periods when _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 61 there is less risk in the system and the economy needs the banking system to maintain lending. Third, macroprudential risk goes wider than the banking system. Risks can arise in other parts of the financial system and in the real economy. A year ago, the UK housing market was clearly developing significant momentum. Prices were growing much faster than incomes. Borrowers were increasingly driven to borrow a greater amount relative to their annual income. The amount of such new mortgages at high loan to income (LTI) ratios borrowers borrowing over 4 times their annual income - had exceeded its pre-crisis peak. The risk the Committee saw was that if the number of high LTI mortgages continued to grow, there would be increasing numbers of highly indebted households very vulnerable to a change in economic circumstances. This would increase both macroeconomic volatility and systemic risk. The Committee came to the view that this was a macroprudential risk that needed to be insured against. It recommended the introduction of limits on the proportion of new mortgages at high LTI ratios. The momentum in the housing market cooled and the limits have not so far been reached. It is impossible to say how much this was a result of the Committee's action; a number of other important factors were also in play. But it is an example of the FPC's approach to adjusting policy to respond to changing risks. And it is also an example of the Committee taking a broad view of financial stability that goes wider than direct risks to the banking system. A further example of how macroprudential risk can develop outside the banking system is the lending and investment that happens through financial markets rather than through banks. To take one example, the global asset management sector has grown by 60% since 2003 and is now a similar size to the global commercial banking _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 62 system. This will probably be one of the new frontiers of macro (and micro) prudential regulation. The FPC is exploring whether there are significant risks from changes in these markets and in particular how asset managers manage liquidity to meet redemptions in times of stress. There is also work underway on this internationally. Macroprudential policy is still a work in development. Over the past few years much of the FPC's work has been learning by doing. As we learn, we will have to set out clearly and publicly the development of our overall policy framework - how resilient we believe the system needs to be, how we think about macroprudential risk, what risks we believe fall into the domain of macroprudential and how we will use our policy instruments. As part of this, the Committee intends to set out by the end of the year our view on the adequacy of the overall capital framework for banks, now that the main post crisis reforms have been set. Have we gone too far? Financial crises are unruly affairs. The great crisis of 2008-9 was certainly no exception. Risks crystallised in unexpected ways and moved between parts of the financial system that we had not appreciated were connected. A large number of regulatory reforms were launched to address the many and dangerous fault-lines that the crisis exposed. It is only now, as we move through the implementation of these reforms, that we can start to see the whole picture of how they work together in practice. Inevitably, as the new framework starts to bite, the question is asked whether the reforms, as they interact in practice, produce "unintended consequences" that are worse than the risks they are trying to reduce. And, more fundamentally, with economic activity still below pre-crisis trends, whether we have gone too far and whether regulation is now preventing the financial system from doing its job to support growth in the real economy? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 63 I imagine this debate will be widespread internationally and will last for some time. In the light of how and why macroprudential policy has developed and where we now are, I would make the following observations. First, we should accept that the complex, interlocking set of reforms of recent years will need fine tuning and adjustment as they are implemented. There will be issues we have to revisit. Indeed, this process is already beginning. The Bank of England and the ECB have together launched a review of the treatment of securitisation. The FPC and the international community is looking at the issue of liquidity in financial markets which many argue has been adversely affected by regulation. Following up the Fair and Effective Markets Review, the Bank of England will host an Open Forum to take stock of the reform agenda in financial markets. And the European Commission has just launched its review of the EU regulation on bank capital. Indeed, given the depth and complexity of the financial crisis and the corresponding depth and complexity of the reforms, we should expect rather than be surprised that we will need to refine and adjust some of the regulatory reforms. Second, however, while we may need to look at how the key elements of the reforms work in practice and interact, we should not change our overall appetite for the risk of financial instability or seek to trade off between financial stability and growth. Indeed, the more time that elapses since the crisis the more we learn about its cost, not just in financial terms but in terms of lost economic activity and, perhaps even more important, loss of growth potential. The financial system plays a crucial role in a modern economy directing resources to where they can be most productive and can generate the greatest return. When the dynamics of the system itself distort incentives and judgments of risk and return, there can be a huge misallocation of resources in the economy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 64 And when the bubble bursts and the economy has to adjust, a damaged financial system cannot guide the necessary reallocation of resources indeed, as we have witnessed, it can slow it down. The overall economic cost is well known. As we now know, the impact of the crisis on UK productivity growth as well as economic growth has been devastating. Seven years on and output per person has only just reached its pre-crisis level. We have not even recovered the pre-crisis rate of annual growth in productivity of around 2.3% and the level of productivity of our economy is around 15% lower than it would have been on pre-crisis trends. There is now a growing body of evidence on the very damaging impact of financial crises on the productive capacity of economies. Third, we should not imagine that there is some recent halcyon world of banks supporting the real economy to which we can quickly return if the regulatory straitjacket is loosened. The system was badly distorted in the long run up to the crisis. The post crisis world requires a major adjustment in bank business models. This is not some unintended consequence of overzealous regulation. It is a necessary, if painful adjustment to a new reality. Some numbers from the UK illustrate this point starkly. In the long upswing of the credit cycle, the stock of domestic lending by UK banks in the UK grew enormously from 95% in 1997 to 170% of GDP in 2008. The stock of non-property lending to companies as a proportion of GDP, however, grew only modestly from 19% in 1997 to 23% in 2008. Meanwhile, mortgage lending increased from 45% to 70% of GDP; lending to real estate tripled from 5% to 15% of GDP; and lending to the UK non-bank financial sector - including institutions like hedge funds, securities dealers and insurance companies - shot up from 25% of GDP to 60%. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 65 And these numbers do not count the explosion in UK-owned banks' overseas exposures which more than quadrupled between the end of the 1990s and 2008. In other words the massive increase in the stock of lending - an increase of £1.7 trillion in absolute terms - did not lead to very much of an increase in productive investment at all. Of course there are benefits in enabling people to buy their homes. And much of the financing of financial markets almost certainly came back to productive investment in the form of market investments in business. But as we discovered in the crisis much of the lending appears to have financed the increase in house prices and a large part of the market investment was simply misallocated and lost. Nor did this increase in lending drive a commensurate increase in economic growth in this particular credit cycle. Over the period 2000-2007 GDP growth averaged little more than its long-run average of around 2.8%. In fact, business investment over the period averaged just 1.3% a year and it appears that most of this was related to commercial real estate. Conclusion The financial system can be a powerful engine for growth and prosperity. But its ability to generate systemic crises means it can also be a powerful destroyer of those as well. This has been true throughout history but never more so than for today's highly complex, globalised and digitalised financial system. We should not therefore see economic growth, or productivity as somehow opposed to effective financial regulation. Strong sustainable growth requires not only a strong and vibrant financial system; it requires the controls and safety buffers to ensure that the dynamics of the system do not generate periods of illusory growth and prosperity followed by periods of destruction of the same. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 66 The financial system has come a long way since the time of Emperor Tiberius. While we have relearned some familiar lessons in recent years, we have also learned some new ones. We have had to develop a new regulatory framework, macroprudential institutions like the FPC and new policy approaches. Over the next few years we will certainly need to refine all of these. The implementation of the detailed reforms will inevitably throw up unforeseen effects in particular places and where it is justified we will need to revisit issues. But we should be careful about talking about turning back the overall regulatory dial or trying to trade off the risk of financial instability for short term growth. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 67 Assessing the new phase of unconventional monetary policy at the European Central Bank Panel remarks by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the Annual Congress of the European Economic Association, University of Mannheim It is a great pleasure to participate in this policy panel and to share the stage with such distinguished fellow participants. My plan today is to present some key features of the monetary policy measures recently implemented by the ECB. As you all know, in January this year the ECB launched the most recent addition to its suite of tools – the public sector purchase programme (PSPP), popularly referred to as quantitative easing. Together with a programme of targeted liquidity provision and a programme of private sector asset purchases, the PSPP marked a new phase of the ECB’s unconventional monetary policy. Previous non-standard measures were mainly aimed at redressing impairments in the monetary policy transmission mechanism and fostering a regular pass-through of the monetary policy stance. Their implications for the ECB’s balance sheet were accommodated in a merely passive way to satisfy the liquidity demand created by banks. In contrast, with the new measures implemented since June 2014, the Governing Council is more actively steering the size of the ECB’s balance sheet towards much higher levels in order to avoid the risks of too prolonged a period of low inflation in a situation where policy rates have reached their effective lower bound. General considerations underlying the new phase of unconventional monetary policy The launch of the new phase of non-standard measures in June 2014 must _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 68 be viewed in the context of the decline in inflation rates since the second half of 2013, which was accompanied by persistently fragile euro area growth prospects, even after the sovereign debt crisis abated over the course of 2012. The economy was still in recession for most of 2013 and annual GDP growth figures only became positive in late 2013, leaving significant economic slack. A weak recovery took hold over the course of 2014 with growth rates around and below 1%, but the outlook deteriorated again during the autumn, with inflation turning negative later that year. The 2015 GDP growth forecasts for the euro area in the ECB staff macroeconomic projections had declined from 1.7% in June to 1% by December. At the same time, and in contrast to previous developments, weak growth was accompanied by a prolonged period of declining inflation, which went from 3% at the end of 2011 to -0.2% in December 2014. Credit supply conditions in the euro area remained tight, despite signs of improvement, as indicated by the responses to bank lending surveys. These developments were particularly worrying because they were accompanied by a decline in longer-term inflation expectations. This combination of very low growth in both output and prices was clearly suggestive of a shortfall in aggregate demand and called for further easing of the monetary policy stance. Key ECB interest rates reached their lower bound – with a negative rate for the deposit facility – and further unconventional measures were deployed, drawing in part on the experience of other central banks. Besides lowering key interest rates in June and September 2014, which took the deposit facility rate into negative territory, the Governing Council has implemented the following set of unconventional monetary policy measures over the past year. In June 2014, as part of a set of credit easing measures, the Governing Council announced the introduction of targeted longer-term refinancing operations (TLTROs), offering medium-term credit at fixed rates to banks _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 69 that are willing to extend credit to the private sector. In September and October 2014 the Governing Council initiated a programme of outright purchases of private sector assets, in particular of covered bonds and asset-backed securities. In January 2015 the Governing Council expanded the purchase programme to include public sector assets. The Governing Council explicitly committed to purchasing a total amount of EUR 60 billion every month from March 2015 until at least until September 2016. Furthermore, the Governing Council has kept the programme open-ended by committing to keep it in place until we see a sustained adjustment in the path of inflation that is consistent with our medium-term inflation objective. The programme aims to maintain market neutrality by purchasing assets across the whole maturity spectrum between two and 30 years. The purchases are allocated across countries according to the ECB’s capital key and any losses emanating from the programmes would be shared between the national central banks and the ECB in an 80%/20% ratio. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 70 The effects of the measures have to be assessed jointly and taking into consideration that some of the measures started to produce results before the decisions were actually taken. This is particularly true of the PSPP, which was adopted in January; a survey of market participants conducted in October 2014 showed that over 50% were already anticipating that such a programme would shortly be adopted. The distinguishing feature of the new phase of our unconventional monetary policy is the switch to a more active steering of the ECB’s balance sheet. It is important to emphasise the nature of this new phase. Our intention is not to expand our monetary base in the expectation that, through the workings of a stable multiplier, this will result in an increase in monetary aggregates, which will in turn cause an upward movement in inflation by whatever means conceived by the traditional quantitative approach. Our main reason for adopting a large-scale asset purchase programme was to harness several new channels for the transmission of an expansionary monetary policy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 71 The expansion in the monetary base and total balance sheet is rather a consequence of these new types of monetary stimulus. Recent experience shows abundantly that those traditional relationships are not working well in the new realities of the financial system (see Figure 2). The first channel through which these new unconventional monetary policy measures are expected to stimulate aggregate demand is by signalling the ECB’s commitment to maintain an accommodative monetary policy stance. The TLTROs are a particularly clear example of this signalling channel. With their pre-specified interest rate and their maturity extending over many years, these operations provided information on the likely path of future interest rates. In the case of asset purchase programmes, the signalling channel operates more indirectly, through the expansion of the Eurosystem’s balance sheet. The second channel results in part from the first, and relates to the direct impact on medium-term inflation expectations that a LSAP programme implies. It is expected that when forming expectations about future inflation, market players factor in the effect of this non-standard policy measure. Non-standard measures can also stimulate activity through a third channel, specifically by lowering the effective cost and availability of credit to the non-financial private sector. Again, the TLTRO programme does this, providing explicit incentives for banks to extend their credit supply. The effectiveness of this programme was reinforced by the conclusion of our comprehensive assessment of the quality of banks’ balance sheets in autumn 2014, which provided strong incentives for banks to speed up the repair of their balance sheets. The fourth channel of transmission of the new unconventional monetary policy, which is specific to the asset purchase programmes, operates through portfolio rebalancing. By means of its purchase programmes, the ECB exchanges longer-term and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 72 relatively less liquid assets for very short-term and highly liquid central bank money. This mitigates liquidity and duration risks in private sector portfolios and, given liquidity and Value at Risk constraints, reduces the required compensation for holding risky and illiquid assets. As a result, the programmes encourage portfolio rebalancing and support asset prices. The ensuing improvement in the balance sheet position of investors and banks eases leverage constraints and allows banks to extend more credit at lower costs to the private sector. Better financing conditions improve growth prospects, increase profitability and mitigate default probabilities in the non-financial sector. These positive feedback effects further improve the condition of the balance sheets of investors and banks, and increase their willingness to extend new credit in a self-reinforcing positive spiral. Evaluating the new phase of unconventional monetary policy In order to correctly assess the effects of our policies, we should use what would have happened had we not adopted these measures as a benchmark _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 73 for comparison. Of course, this is virtually impossible to do since there are no sufficiently reliable and complete models to construct the counterfactual world. We can only analyse how the variables related to the transmission channels or the end results have evolved since we started the new policy. This is what I will do below. Figure 3 shows the evolution of lending rates in the euro area. It shows that the sequence of interest rate cuts implemented by the Governing Council between mid-2012 and mid-2014 was not transmitted to the effective borrowing costs faced by firms. By June 2014 we had cut the main refinancing operation (MRO) rate by 95 basis points, bringing it to 0.05%, down from 1% in June 2012. However, the decline in lending rates for loans in most countries was much smaller, with the median lending rate applied to small-sized loans in the median country having declined by not more than 30 basis points. Since June 2014 the transmission of policy rates to lending rates has improved considerably, with declines in lending rates becoming more pronounced as well as more widely distributed across euro area countries. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 74 Our quarterly bank lending survey confirms the improvements in broader credit conditions since the introduction of our new non-standard measures. The survey, addressed to the senior loan officers of a representative sample of euro area banks, provides information on financing conditions in euro area credit markets and on banks’ lending policies. The left-hand chart in Figure 4 shows that banks have consistently eased their credit standards for loans to non-financial corporations over the past year. The easing of credit standards stems, notably, from the lower cost of funds and balance sheet constraints, as well as from greater competition among banks. Both developments were clearly objectives of our measures, in particular of the TLTROs. The right-hand chart in Figure 4 shows net credit demand conditions and their contributing factors. Easier access to credit has been coupled with a consistent increase in firms’ demand for loans. The general level of interest rates, according to the survey respondents, is contributing most to the recovery in loan demand. As I have already mentioned, an important transmission channel for asset purchases relates to the fact that different assets are imperfect substitutes. Consequently, interventions by the central bank that affect the supply of various assets available to private investors influence the prices of many other assets, including investment grade bonds, equities, real estate and foreign assets, with consequences for the exchange rate. To read more: http://www.ecb.europa.eu/press/key/date/2015/html/sp150825.en.html _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 75 Australian Prudential Regulation Authority (APRA) Letter to industry (August 2015) To: All authorised deposit-taking institutions, general insurers and life companies The review of board requirements On 7 October 2014, APRA released a letter noting its intent to review the clarity of its requirements of boards in the prudential standards and supporting guidance materials. The letter noted that in conducting this review, APRA would seek to ensure that its requirements of boards are communicated in a way that clearly recognises the respective roles of the board and management. The consultation closed on 30 November 2014. Ten submissions were received in response, four of which are non-confidential. Submissions were widely supportive of the review and identified a number of areas for improvement in relation to the clarity of APRA’s board requirements. This letter summarises the key issues from submissions, responds to the main issues and outlines the process planned for the review. Improvements to the language used to communicate APRA’s requirements Submissions suggested that the use of certain language in prudential standards may create the impression boards are expected to assume responsibilities that would normally be assigned to management. For example, the phrase ‘the board and senior management’ is used widely across prudential standards. Submissions argued that this language creates ambiguity in relation to the actions a board is expected to take to meet its responsibilities, and may lead _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 76 to the impression that the board and management are expected to have the same role. APRA’s approach to supervision is built on the premise that the board and management are primarily responsible for an entity’s financial soundness and prudent risk management. With this in mind, APRA imposes various requirements and duties on boards, in addition to those that apply to all entities under the Corporations Act 2001. However, in meeting the additional obligations imposed under APRA’s prudential framework, APRA does not expect that the board will take on responsibilities that fall within the province of management under generally accepted practice. APRA therefore intends to review the clarity of its requirements of boards in the prudential standards, to ensure that the language used appropriately reflects the respective roles of the board and management. Submissions stressed the importance of consistency in the language used to communicate requirements of boards. As an example, submissions noted that a number of similar requirements for the board to receive reports or information are communicated using a range of terms. Using a smaller set of terms across the prudential standards to communicate APRA’s requirements of boards was recommended. Consistency in the language, it was argued, would avoid the impression that variations in wording reflect differing levels of board responsibility across requirements. In future, APRA will therefore seek to use a narrower set of terms when describing requirements of boards. Variations in language will only be retained where there are strong reasons to do so. Some submissions requested that APRA include further terms in its definitions standards. In particular, submissions argued that it would be appropriate to define the term ‘ultimate responsibility’. However, the term ‘ultimately responsible’ is commonly used not just within APRA’s prudential standards, but also more widely in other _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 77 guidance such as the ASX Corporate Governance Principles and Recommendations. APRA prefers in these circumstances to rely on the generally accepted definition rather than seek to create its own definition of the term. Greater reliance on Prudential Standard CPS 220 Risk Management to describe board obligations Submissions suggested that greater reliance can be placed on Prudential Standard CPS 220 Risk Management (CPS 220) to describe the obligations of the board, as an alternative to specifying board responsibilities in each prudential standard relating to specific types of risk. The prudential standards noted include credit risk (under APS 113), operational risk (under APS 115), market risk (under APS 116) and credit risk management policies and procedures (under APS 220). Submissions argued that the over-arching requirements of the board in respect of risk management in CPS 220 mean that the requirements of boards in these other standards can be removed. Although this feedback referred mainly to ADI prudential standards, it can also be extended to cross-industry and insurance prudential standards. For example, board requirements are contained in specific areas of risk including outsourcing and business continuity management, and reinsurance management for general insurers. APRA agrees that, as a general principle, the requirements of boards set out in prudential standards should be aligned to board obligations under CPS 220 where appropriate and that duplication should be avoided. APRA will review the extent of responsibilities placed on boards in the areas identified in relation to risk management, to determine whether there are opportunities for greater reliance on CPS 220 without compromising the soundness of the prudential framework. Delegation Some submissions suggested it is often unclear across APRA’s prudential standards when a board is able to delegate a matter to a board committee or management. It was suggested that APRA provide further clarity in this regard. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 78 APRA has previously noted that where a board is assigned a specific responsibility under a prudential standard, the board is not able to delegate its responsibility for ensuring that matter is adequately addressed. The process followed, and the advice, input and support needed by the board to meet these responsibilities, remain a matter for the board to determine. If the board has been assigned specific responsibility for the matter in APRA’s prudential standard then, even after a board has referred certain functions to management, the board retains the responsibility to satisfy itself that the matter has been properly addressed. The review process Given the wide reach of this review, APRA will review the prudential framework over time and make amendments to prudential standards as opportunities arise. APRA anticipates that planned reviews will result in a reasonable proportion of the ADI, general insurance and life insurance prudential standards (that contain relevant board requirements) being reviewed over the next three years or so. Submissions suggested a large number of specific changes to board requirements across a number of prudential standards. APRA appreciates the time and effort taken to provide this feedback. The specific issues have been captured and will be considered as part of the review process referred to above. Further opportunities to provide feedback will be available through subsequent consultations on any changes to prudential standards. APRA will also apply the general drafting considerations noted in this letter as it reviews other materials in future. Although all submissions received through this consultation referred exclusively to prudential standards, the drafting considerations noted in this letter would apply equally to APRA’s guidance materials. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 79 Conclusion APRA thanks the industry respondents who have engaged with the consultation process to date. APRA intends to apply the general drafting principles noted in this letter as opportunities arise for APRA to make amendments to the existing suite of prudential standards and supporting guidance materials. Entities are encouraged to speak to their responsible supervisor should they have any questions regarding APRA’s expectations of the board. APRA looks forward to ongoing engagement with industry as it seeks to ensure its prudential framework is robust, effective, and clearly communicated. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 80 If You See Something, Say Something Campaign Secretary of Homeland Security Jeh Johnson announced a “If You See Something, Say Something™” public awareness campaign with the Washington Nationals at the Nationals Park today. Secretary Johnson threw out the ceremonial first pitch at the Washington Nationals game at the Department’s first-ever “DHS Night at the Nats” event. The Secretary was joined by approximately 1,100 DHS employees and their families from the National Capital Region. The event highlighted the Department’s work to protect the homeland, including continued efforts to partner with the sports industry to ensure the safety and security of employees, players and fans. “Partnering with the Washington Nationals is another way that DHS is engaging with the American public in our shared efforts to ensure the safety of every fan, player, and employee. I thank the Nationals for hosting DHS and its frontline employees tonight to highlight this important message,” said Secretary of Homeland Security Jeh Johnson. This initiative brings the “If You See Something, Say Something™” message to athletes at Nationals Park, as well as employees, spectators and visitors during home games. A Public Service Announcement has aired on the scoreboard every home game. Messages have also been shared on posters throughout Nationals Park, in the Nationals program Inside Pitch Magazine, and via in-game announcements. The “If You See Something, Say Something™” campaign - originally implemented by New York City’s Metropolitan Transportation Authority and now licensed to DHS for a nationwide campaign - is a simple and effective program to engage the public to recognize and report indicators of _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 81 terrorism and terrorism-related crime to the proper transportation and law enforcement authorities. Earlier this year, Secretary Johnson announced the re-launch of the campaign, including new campaign materials with re-designed imagery and a new website. DHS will continue to expand the “If You See Something, Say Something™” campaign nationally to raise awareness among America’s businesses, communities, and citizens about how they can remain vigilant and play an active role in keeping the country safe. You Play a Role in Protecting Your Community Across the nation, we're all part of communities. In cities, on farms, and in the suburbs, we share everyday moments with our neighbors, colleagues, family, and friends. It's easy to take for granted the routine moments in our every day—going to work or school, the grocery store or the gas station. But your every day is different than your neighbor’s—filled with the moments that make it uniquely yours. So if you see something you know shouldn't be there—or someone's behavior that doesn't seem quite right—say something. Because only you know what’s supposed to be in your everyday. Informed, alert communities play a critical role in keeping our nation safe. "If You See Something, Say Something™" engages the public in protecting our homeland through awareness–building, partnerships, and other outreach. Suspicious activity Suspicious activity is any observed behavior that could indicate terrorism or terrorism-related crime. This includes, but is not limited to: - Unusual items or situations: A vehicle is parked in an odd location, a package/luggage is unattended, a window/door is open that is usually closed, or other out-of-the-ordinary situations occur. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 82 - Eliciting information: A person questions individuals at a level beyond curiosity about a building’s purpose, operations, security procedures and/or personnel, shift changes, etc. - Observation/surveillance: Someone pays unusual attention to facilities or buildings beyond a casual or professional interest. This includes extended loitering without explanation (particularly in concealed locations); unusual, repeated, and/or prolonged observation of a building (e.g., with binoculars or video camera); taking notes or measurements; counting paces; sketching floor plans, etc. Some of these activities could be innocent—it's up to law enforcement to determine whether the behavior warrants investigation. The activities above are not all-inclusive, but have been compiled based on studies of pre-operational aspects of both successful and thwarted terrorist events over several years. Protecting Citizens' Privacy & Civil Liberties The "If You See Something, Say Something™" campaign respects citizens' privacy, civil rights, and civil liberties by emphasizing behavior, rather than appearance, in identifying suspicious activity. Factors such as race, ethnicity, and/or religious affiliation are not suspicious. The public should only report suspicious behavior and situations (e.g., an unattended backpack or package, or someone breaking into a restricted area). Only reports that document behavior that is reasonably indicative of criminal activity related to terrorism will be shared with federal partners. How to Report Suspicious Activity Public safety is everyone's responsibility. If you see suspicious activity, report it to local law enforcement or a person of authority. Describe specifically what you observed, including: Who or what you saw; When you saw it; Where it occurred; and Why it's suspicious. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 83 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 84 Occupational pensions stress test Stress tests are an important supervisory tool to examine the sensitivity of the occupational pensions sector to adverse market developments and to reach robust conclusions for the stability of the financial system as a whole and to enhance consumer protection. The aim of the exercise in 2015 is to test the resilience of defined benefit (DB) and hybrid pension schemes against adverse market scenarios and increase in life expectancy as well as to identify potential vulnerabilities of defined contribution (DC) schemes. In parallel with the stress test EIOPA carries out a Quantitative Assessment (QA) on its work on solvency for IORPs to further educate its advice to the European Commission. The timing of the stress test and the Quantitative Assessment has been aligned to minimise the administrative burden for participating IORPs and NSAs (common technical specifications, templates and processes, including launching and submission dates, Q&A and quality assurance processes). The stress test has been designed for the countries where the IORP sector exceeds 500 million euros in assets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 85 The following Member States fall within this scope: Austria, Belgium, Cyprus, Germany, Denmark, Spain, Finland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Sweden, Slovenia, Slovakia and the United Kingdom. The exercise is conducted in close cooperation with the national supervisory authorities (NSAs): the NSAs will identify and contact prospective participants in the test. As of now, EIOPA will provide industry participants with the regular updates on the status and all the upcoming steps of the stress test. To learn more: https://eiopa.europa.eu/financial-stability-crisis-prevention/financial-stab ility/occupational-pensions-stress-test _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 86 Official directory of the European Union This publication contains the organisation charts and contact information of the institutions, bodies and agencies of the European Union. An electronic version, updated every week, can be consulted on the site: http://whoiswho.europa.eu _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 87 Renminbi and China's global future Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the HSBC Reminbi Forum "Renminbi and China's Global Future", Kuala Lumpur The increasing role of the renminbi in the global financial system from a trade currency to an investment currency and now its potential role as a global reserve currency will have significant global implications. I am delighted to be here this morning to speak at this Renminbi Forum. The renminbi sphere has indeed extended beyond the Asian region, extending to other continents, to Europe, Latin America and the Middle East. The renminbi is no longer an Asian story, but it has now become a global story. It reflects China's importance and influence in the changing contour of the global economic and financial landscape, and the steps that have been taken to enhance its international role. My remarks today will focus on the increasing trend of the internationalisation of the renminbi despite the recent challenges faced in the Chinese economy; the implications of this trend to the region and finally on the steps that Malaysia has taken as the region transitions into this environment. Long-term prospects for the Chinese economy and the renminbi After decades of rapid growth, the Chinese economy is now transitioning to a growth path that is more sustainable. It is important to recognise that the moderation in the Chinese economy has been in part, policy-driven, through conscious reforms to restructure the economy to become more balanced and domestic demand-centric. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 88 These economic reforms have been accompanied by financial and exchange rate reforms, geared towards modernising the economy and financial system that is increasingly more integrated with the global economy. These reforms are mutually reinforcing as the transformation of the structure of the Chinese economy is necessary to support its integration with the world economy and the international financial system. The commitment to these reforms is crucial in securing the long-term growth prospects for China, even as the Chinese economy faces short-term challenges in the recent period. The recent one-off adjustment of the renminbi reflects a conscious effort by China to align the renminbi to a market-driven mechanism as a part of a crucial reform to allow the renminbi to reflect financial market developments and economic fundamentals. In an environment of continued weakness in global trade, these short-term challenges include managing the ongoing corrections in the real estate sector, leverage in the financial system and more recently, the volatility in the stock market. While these uncertainties may generate concerns over the renminbi in the near term, it needs to be recognised that the long-term growth prospects for China remain intact, and that this will continue to strengthen the foundations that will support the transition of the renminbi as an international reserve currency. China has a high rate of savings, healthy external position, an inherent competitive mass manufacturing advantage and a large educated workforce to sustain its long-term potential economic growth. Importantly, the narrative of the global future of China cannot be explained in isolation - it is part of a broader account of the growing importance and greater integration of Asia, and the stronger interlinkages with other emerging economies in the global economic landscape. China and the region are becoming more than just global exporters. The increased efforts are seen in the steps to develop more extensive investment and financial linkages in the region as well as the rest of the world through key strategic initiatives such as the One Belt One Road initiative, the Asian Infrastructure Investment Bank and the New _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 89 Development Bank. Reflecting its expanding role in the global economy and the international financial system, the renminbi will assume greater strategic importance in facilitating the development of these new investment and financial linkages, including meeting the greater demand for infrastructure spending. This is also reinforced by the transition of Asia from a global producer to a global consumer thus becoming an important driver of growth in the world economy. The rise of the renminbi is often associated with expectations of rapid capital account liberalisation. In this regard, the historical experience of the major currencies over the recent fifty years holds important lessons for the renminbi. Many advanced economies continued to retain significant capital account restrictions until early 1980s, later than the internationalisation process of their currencies that began in earlier decades. Such evidence suggests that the transition of the renminbi as an international currency can commence with the gradual and sequential liberalisation of the capital account. China's position on a 'managed convertibility' approach instead of the traditional 'fully or freely convertible' can therefore be appreciated given the lessons from the Global Financial Crisis and the risks associated with volatile capital flows even for such a large emerging economy like China. It is important to note that China has made significant progress in this area. This is even acknowledged by the IMF in its recent reports as they note that China has already achieved full or partial convertibility in 35 out of 40 items under the capital account. The rise of the renminbi and its implications While the path for the renminbi to be a fully international currency will remain gradual, the renminbi has already achieved significant milestones. It is now the second most used currency globally for trade finance and the fifth most used currency for global payments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 90 One-quarter of China's total trade is now invoiced in renminbi, and this is expected to double within the next five years. By some accounts, more than sixty central banks around the world already hold renminbi in their official reserves. The rise of the renminbi as an international currency would facilitate trade, investment and financial activities that are commensurate with the continued growing importance of China in the global landscape. Of significance to the Asian region, the rising importance of the renminbi will reinforce the trend towards greater regional financial and economic integration. China is already the main trading partner for most economies in the region. The increased usage of the renminbi and the more developed regional financial markets for the renminbi provides an opportunity to recycle savings within the region and thus support the increased intra-regional investment activities. More renminbi-based trade within the region will create pools of renminbi liquidity which would create a demand for instruments which would in turn spur the development of more efficient and integrated renminbi capital markets in the region that can contribute towards better intermediation between the surplus and deficit units in the region. In addition, the renminbi can be a source of stability for the global monetary system. The increasing use and recognition of the renminbi as an international reserve asset will strengthen the foundations of the current global monetary system that is currently reliant on too few major currencies. With the increased economic and financial interconnectivity in the world today and the greater potential for international policy spillovers, a more multipolar global monetary system with more diverse sources of global liquidity would contribute towards a more stable international financial system. Looking ahead, these developments present tremendous opportunities for the private sector. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 91 Indeed, trade invoicing in renminbi has already begun to spread beyond predominantly Chinese enterprises to multinational companies (MNCs) turning to China as a key market for their products and services. Notably, despite the initial difficulties in operationalising the renminbi-based system, some MNCs have successfully upgraded their global invoicing and payment systems to settle trade and working capital in renminbi with their Chinese counterparts. This allows for significant cost-savings on foreign exchange transactions in addition to efficiency gains from matching trade receipts to funding working capital requirements. The increased use of the renminbi for their investment activities in China is supported by the flexibility provided in China for movements of global funds in and out of the country. The potential longer-term benefits from using the renminbi-based system for their trade, working capital requirements and FDI in China is thus seen to clearly outweigh the implementation costs. In the more recent decade, financial investments have also gathered momentum as foreign investors commenced investment activities in Chinese financial markets since 2003 through the Qualified Foreign Institutional Investor (QFII) program. Wide-ranging measures, including the introduction of China Interbank Bond Market (CIBM) foreign quota in 2009, the Renminbi Qualified Foreign Institutional Investor (RQFII) in 2011 and the operationalisation of the Hong Kong-Shanghai Stock Connect in 2014, are all aimed at encouraging greater participation of foreign investors in China's mainland financial markets. At the same time, China is improving the global renminbi settlement and clearing system through a wider network of renminbi clearing banks and the upcoming Cross-Border Interbank Payment System (CIPS) to lower the transaction costs for the renminbi relative to other major currencies. Currently, there are at least five hundred global investors, including sixty or more foreign central banks and sovereign wealth funds, that have gained direct access to China's financial markets. Many more have access through the Hong Kong-Shanghai Stock Connect. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 92 Malaysian institutional investors seeking to internationally diversify their investments would need to intensify the learning curve process in the Chinese financial markets to realise its benefits. Malaysia: A pioneer in the cross-border use of the renminbi Malaysia was one of the earliest countries to recognize the potential role of the greater cross-border use of renminbi. Given China's significance as Malaysia's largest trading partner, the settlement of trade and investment in renminbi significantly lowers costs and promotes greater cross-border trade and investment activity. In turn, fund-raising activity in renminbi has become a means for Malaysia to utilise the renminbi liquidity obtained through trade settlements. Malaysia has a comparative advantage in this area, as the largest debt securities market in Southeast Asia and as a leading centre for sukuk issuance. As an early pioneer of renminbi initiatives, Bank Negara Malaysia (BNM) was the first ASEAN central bank to sign a currency swap agreement with the People's Bank of China (PBC) in February 2009. In the same year, BNM was also the first Asian central bank to become a QFII investor and among the first wave of foreign investors in CIBM. In 2010, the Malaysian ringgit became the first emerging currency to be directly traded with the renminbi in the China Foreign Exchange Trading System (CFETS). In 2013, BNM signed a Cross-Border Collateral Arrangement (CBCA) with PBC to enable the use of home currency collateral to obtain domestic liquidity in the host country. In November 2014, BNM signed an MOU on a renminbi clearing bank arrangement. The Bank of China Malaysia was appointed as the renminbi clearing bank in January 2015. Going forward, BNM will work towards further enhancing financial co-operation with PBC in the area of Renminbi Qualified Foreign _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 93 Institutional Investor (RQFII) to provide an alternative avenue for Malaysian investors to invest in onshore Chinese financial markets. BNM has also worked to integrate the renminbi into the domestic financial system by incorporating the renminbi in Malaysia's Real Time Gross Settlement System (RENTAS). In November 2013, BNM introduced the Renminbi Liquidity Facility (RLF) to licensed onshore banks to facilitate more effective renminbi liquidity management in Malaysia. Today, the usage of renminbi in Malaysia has grown rapidly, with the daily size of renminbi foreign exchange volume at RMB6.7 billion. Malaysian institutions and corporations such as Khazanah, Cagamas, Axiata and Maybank have issued renminbi bonds. With the various renminbi financial infrastructure that has been put in place to support trade, investment and financial flows between Malaysia and China, this trend is expected to increase. Malaysian entities with large regional network should consider using Malaysia as the centre for their regional renminbi transactions and thus contribute towards greater economies of scale over time. This would in turn enable the transactions to be conducted in the most efficient and cost effective way. Conclusion Let me conclude my remarks. In a short time span of six years since 2009, the renminbi has accomplished much of its goals but there is still a long journey ahead as most international currencies have evolved over several decades. The impact of the Chinese economy on Asia has been significant with many countries now counting China as their largest trading partner, and in some cases, among the largest foreign investors. Reflective of the underlying fundamental economic changes, the rise of the renminbi, although gradual, is inevitable with important implications not only to Asia but to the rest of the world. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 94 Undoubtedly, the renminbi is more important to Asia than anywhere else. Given this, Asia including Malaysia must be ready for this transition of the increased internationalisation of the renminbi and its potential role with Asia's integration path and thus contributing towards further unlocking the potential of the region. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 95 Dodd-Frank at Five: A Capital Markets Swan Song Commissioner Daniel M. Gallagher U.S. Chamber of Commerce, Washington, D.C. Thank you, David [Hirschmann] for that overly kind introduction. I appreciate the invitation to speak to you today. This will likely be my last formal speech as an SEC Commissioner, and I can think of no better audience than the Chamber’s Center for Capital Markets Competitiveness. The Center has remained a zealous and effective advocate for capital formation and free markets during a period in which these bedrocks of our economy have constantly been under attack, and it is an honor to be here today to share my thoughts with you. It is also special to have Commissioner Piwowar here today. I would like to thank him for his friendship and collegiality during our time together on the Commission. After four years of sprinting through a marathon course, my time at the Commission is drawing to a close. It has been an honor and a privilege to serve as a member of the Commission, and I hope my contributions have helped further the debate on how best to accomplish the mission of the SEC. Last month marked the fifth anniversary of the Dodd-Frank Act, meaning that my entire tenure as a Commissioner has occurred in the midst of the first Five-Year Plan for our national economy. And, as is always the case with grandiose central plans, Dodd-Frank has backfired, strangling our economy, increasing the fragility of the financial system, and politicizing our independent financial regulators. *** _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 96 While, as I’ll discuss further shortly, the Fed, FDIC and OCC were busy leveraging the financial crisis to grow their prudential empires, the SEC became the implementing tool for the long pent-up dreams of liberal policymakers and special interest groups. Indeed, Dodd-Frank stands as the only piece of major securities legislation in U.S. history that was rammed through Congress without bipartisan support. Prior to the enactment of the Dodd-Frank Act, every major piece of securities legislation since the New Deal — including the Exchange Act which created the Commission, as well as the 1940 Acts, the 1975 Act amendments, the Remedies Act of 1990, NSMIA, and notably Sarbanes-Oxley — enjoyed bipartisan support. Obtaining such support for Dodd-Frank, however, would have entailed tempering the statute by legislative compromise, meaning its authors would have had to listen to competing ideas and jettison some of the “progressive” wish-list items jammed into the 2300-page behemoth. If the SEC seems political nowadays, it is because of Dodd-Frank. Not only is it an incredibly ideological piece of legislation ill-suited to an independent agency explicitly constituted in a manner designed to ensure a bipartisan — or non-partisan — approach to regulation — but it is also largely just a series of ill-formed mandates that need to be interpreted and implemented to have any practical effect. In passing Dodd-Frank, Congress delivered a message to the Commission similar to that of Henry Ford concerning the aesthetics of the Model T: “Any customer can have a car painted any color he wants so long as it is black.” Dodd-Frank established the SEC as the scrivener for a hundred Congressional mandates stemming from one side of the political spectrum. Is it any wonder that since its passage, these mandates — ambrosia to members of one party, anathema to those of the other — have drawn out the different philosophies of the Commissioners? Is it any wonder that Commissioners from the party devoted to free market ideals chafe at being mandated to paint Congress’s Model T — or, more appropriately, their Edsel? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 97 Dodd-Frank by its very nature has made the Commission look to the outside world like a microcosm of Congress itself. Indeed, it has called into question the very notion of “independent” agencies. In addition to politicizing the agency internally, Dodd-Frank has impaired the work of the SEC by placing it at a decided disadvantage to prudential regulators. Just as “collectivization” served as both the means and the ends of Soviet Five-Year Plans, so too has “prudential regulation” provided additional tools for central bank apparatchiks to unleash their inner central planners in an attempt to fundamentally alter the very nature of our capital markets. This came as no surprise to some of us, as Dodd-Frank’s jurisdictional grants of authority to bank regulators were in large part the result of an unwitting Congress buying into a narrative contrived in large part by those very same regulators. The narrative held that, unlike clunky capital markets regulators like the SEC, prudential regulators were good enough and smart enough to run our economy — and doggone it, the 111th Congress liked it! And so, Dodd-Frank created the Fed-dominated Financial Stability Oversight Counsel, or FSOC, the Fed-dominated SIFI designation process, the Fed-dominated Title VIII oversight regime for clearance and settlement, the FDIC-dominated Title II resolution process, and so on. While capital market regulators were tasked with writing long, complicated rules to interpret and implement the ill-formed mandates of the Dodd-Frank Act, prudential regulators were given greatly broadened authority over the economy. Dodd-Frank, in short, sought to make prudential regulators Masters of the Universe. Since I became a Commissioner in 2011, I have seen the implications of this mindset play out in some very real ways. For example, while the Fed was busy proposing incredibly intrusive rules under Sect 165 of Dodd-Frank, the so-called Intermediate Holding Company rulemaking, a rulemaking that hugely impacted SEC registrants, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 98 we at the SEC were also busy — working on the conflict minerals disclosure rule. It was emblematic of the view of the SEC held by policymakers at the Fed that our staff was not consulted in a meaningful way before the Section 165 rules were proposed. To be fair, maybe the Fed was merely trying not to burden the SEC with trivial matters such as the fundamental structure of bank affiliated broker-dealers — after all, while the Section 165 rules were gestating, the Commission was making the U.S. financial markets safe by ensuring that Congolese tantalum would never again take down the likes of Lehman or AIG! Within the FSOC, the SEC Chairman is just one vote out of 10, and together with the CFTC Chairman, one of two capital markets regulatory voices. What’s worse, as I and Commissioner Piwowar have emphasized many times in the past, these votes are the purview of the SEC Chairman, not the Commission itself. You might think this structural disproportionality would be reflected in FSOC’s vote tallies, with the capital markets regulators frustrated by their lack of voting power but holding their ground on principle. But, alas, FSOC has moved in harmony as each SEC Chairman since its inception has voted with the prudential regulators — even in the case of the Met Life designation vote, in which the FSOC’s sole insurance expert was the lone no vote. FSOC has proven to be a poor construct for monitoring and addressing potential systemic risk. To be clear, it is important to have that function, but the FSOC has clearly been the wrong way to approach it. An FSOC structured more like a regulatory college — where each organization is a member, as opposed to each regulatory head — and operated like a think tank, via the power of good ideas, backed by solid research, economics, and other science, instead of relying upon diktat, would be a good place to start. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 99 Until that happens, the SEC must be actively and publicly providing input to FSOC. The agency cannot simply go along for the ride. On this point, I have to tip my hat to Chair White for opening a comment file on the tortured OFR Report on asset managers in 2013. But more is needed. As troublesome as FSOC is, an even more dangerous charade is playing out in the international star chamber known as the Financial Stability Board, or FSB, where there are only three capital markets regulators on the thirty-five member steering committee. What’s more, the gaggle of central bankers on the FSB steering committee includes not only representatives from the European Commission, the European Central Bank, and the Basel Committee, but also central bankers from many of the individual countries that are members of these organizations. Why is it that Spain and the Netherlands get invitations to the FSB cocktail parties, but Texas and South Carolina do not? It is a little-known fact that from 1945 to 1991, the Soviet Union had three seats in the United Nations — one for the USSR, and one apiece for the Ukrainian and Byelorussian Soviet Socialist Republics. The FSB has moved this program of selective over-representation westward, but the principle is the same, comrades. This has allowed the Europeans — for whom capital markets are much less important than the United States — and their pro-prudential regulatory cohorts in the United States to relegate their capital markets counterparts to the kids table out in the hall. Apparently, the U.S. representatives can’t, or don’t want to, stand up for capital markets. Prudential regulation is an important tool for bank regulators to use in supervising banks’ risk-taking activities, so as to ensure that risks are limited to an acceptable level and avoid posing an undue strain on the government insurance backstop — despite the moral hazard and expectations of “no losses” that the insurance itself creates. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 100 But in practice, “prudential” regulation can and has evolved into an opaque regulatory system in which the government’s invisible hand replaces the market’s, transcending rule enforcement and becoming the decision maker for ostensibly private enterprises. The attempts by our prudential regulators and their international counterparts to de-risk the U.S. capital markets and make them look like the banking markets are not just philosophically wrong — they are an attack on U.S. competitiveness. As I have stated before, piling more regulatory burdens on our capital markets will only cause more activity to move overseas, where up-and-coming jurisdictions in Asia and elsewhere would be more than happy to gain market share. And it will stifle domestic economic activity, as companies will be forced to line up for bank loans made scarce by new bank regulations rather than pursuing capital formation opportunities in the market. In the bubble of the beltway, regulators can come to believe that they are omniscient, that they know better than Main Street America. They are often lured by special interest groups who insist that Americans must be coddled and that private enterprise is rapacious and greedy. So it takes a special breed to resist that siren song of greater regulatory power and authority. It takes those willing to play referee, rather than God. When the SEC rotely rubber-stamps the work of the prudential regulators and their umbrella organizations FSOC and FSB, we get less vibrant markets, more government backstops, more potential bailouts. Along these lines, I tip my hat to IOSCO Chairman Greg Medcraft, who recently had the courage to break ranks from the party line espoused by his peers in Basel in announcing his view that the asset management industry does not pose a systemic risk. Importantly, Chairman Medcraft acknowledged a fundamental truth about capital markets regulation, one that I have been loudly making since the day I became a Commissioner — that “markets are all about taking risks and should be regulated in different ways to banks.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 101 Let’s hope that his voice is not like the sound of the proverbial tree falling in the woods. *** Despite these external threats to the U.S. capital markets and our regulation thereof, change must first start from within. As I have said many times over the last four years — you are what you prioritize. It is more than abundantly clear that the SEC’s place in the pantheon of federal regulators cannot be taken as a right, or as immutable. We have to prove ourselves to be a smart, tough-but-fair regulator of the capital markets. It is when we are weak, or appear incompetent, that the barbarians storm the gates. And the only way for the SEC to remain a pre-eminent federal regulatory agency is for the Commission to commit to a robust and proactive agenda. With that, I’d like to share some final thoughts regarding the priorities for the main operating Divisions and Offices at the SEC. Over the last seven years, the Division of Corporation Finance (“Corp Fin”) has unfortunately, and despite the best instincts of many key staffers, become a tool for advancing a radical shareholder rights agenda. Executive pay rules, stonewalling on shareholder proposal reform, and now the universal ballot — the Corp Fin agenda has confused protecting investor activism with protecting investors. Sometimes these two are aligned, but sometimes they are not. I am encouraged that the Chamber and other prominent organizations have banded together in the Corporate Governance Coalition for Investor Value to start challenging this dominant viewpoint. Corp Fin’s commitment to review disclosure effectiveness is a positive step forward, but I also fear this will be yet one more vehicle for injecting a radical view of corporate disclosure, trying to involve information that any investor might find interesting, rather than information that a reasonable investor would find important in making an investment or voting decision — that is the heart of the SEC’s disclosure regime. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 102 Corp Fin must also work to ensure that the opportunities inherent in our capital markets remain open and attractive to all businesses. Despite incremental improvements like Reg A+, which the Commission adopted this year, small businesses are still highly constrained when it comes to capital formation, and often have no access to viable secondary markets. Indeed, many growing businesses have consciously avoided the public markets over the past decade because of the regulatory baggage that accompanies the offering regime, instead choosing the far simpler options of selling themselves or staying private. And who can blame them? Companies that go public get such “benefits” as shareholder proposals, social policy masquerading as disclosure requirements — tune in, by the way, for tomorrow’s SEC open meeting to adopt a final pay ratio rule for a textbook example of that — shareholder activists, and, best of all, creeping and continuing federal intrusion into corporate governance. Over the coming years, the manner in which Corp Fin addresses these issues will play a large role in determining whether our capital markets continue to be the engines that power our economy. As for the SEC’s Investment Management Division, I am proud to say that it has made great strides in recent years, shepherding a nuanced money market fund rule to adoption and announcing a suite of rulemaking initiatives aimed at gathering better and more useful data in the fund space. But the Commission needs to continue to assert itself as a competent and effective overseer of the asset management industry, which has been under attack from the prudential regulators since the financial crisis. The FSOC and FSB have recently shifted their focus to the activities and products of asset managers rather than attempting the absurdity of declaring individual large asset managers as “systemically important.” This does not mean, however, that they have abandoned their quest to de-risk the industry with prudential regulatory tools like capital requirements, which serve absolutely no purpose in an agency business. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 103 For the sake of the millions of investors who depend on our asset management industry, the Investment Management Division must stand its ground and defend its purview. The Enforcement Division has done an admirable job in the wake of the financial crisis, resisting calls to storm Wall Street with torches and pitchforks while still addressing the miscreants, both large and small, corporate and individual, that plague our capital markets. However, we need to be constantly reminded of the importance of being measured and thoughtful in exercising our enforcement authority. For example, throughout my tenure I have repeatedly called on the Commission to tread carefully when bringing enforcement actions against compliance personnel, who are often the only line of defense we have in detecting and preventing violations of the federal securities laws. Recent enforcement actions holding compliance officers to a standard of strict liability will only serve to chill talented professionals from playing this vital role. We also need to remain focused on affording respondents the due process rights to which they are entitled. The recent attention on the SEC’s use of administrative proceedings has fostered a healthy debate on this topic. I am confident the Enforcement Division will heed outside voices calling for introspection, such as the Chamber’s recent report in this area. And, as for my old stomping grounds — the Division of Trading and Markets (“TM” — I understand all too well the competing priorities and demands it constantly faces. But, TM must not lead from behind — or worse, fall into a reactionary role — on market structure. The Commission needs to stop dabbling around the edges on deep-in-the-weeds issues such as Rule 15b9-1 and start taking on the hard work of genuine, holistic market structure reform. And TM must be empowered to begin a comprehensive program for oversight of the fixed income markets. As I have said before in response to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 104 calls to address the issues set forth in Flash Boys, we still need to address the ones that were highlighted in Liar’s Poker…over 25 years ago! A number of areas of TM’s oversight are woefully outdated and in need of attention. Commissioners have publicly called for reforms of the transfer agent rules and the settlement cycle. There is a long list of other needed reforms, such as a finalization of the Rule 15a-6 amendments. We should also be questioning why the SEC does not have regulatory authority over the markets for treasuries and over municipal debt issuers, given their overwhelming importance to the capital markets. And it is long past time that the Commission re-think the SIPC regime and work with Congress on needed updates to SIPA. These are critically important issues that have needed to be addressed for years, but unfortunately they have taken a back seat to Dodd-Frank mandates that have nothing to do with the financial crisis or the Commission’s mission. I have been glad to witness over the course of my tenure the transformation of the Division of Economic and Risk Analysis (“DERA”) from a start-up enterprise to a vital Division with its own purpose and priorities. DERA staff are critical to analyzing the costs and burdens associated with the Commission’s rulemakings, which all too often have failed to accurately take into acct the crippling and cumulative costs being placed on issuers and market participants. I hope DERA is able to bring on more staff and continues to be integrated into the sausage making factory called SEC rulemaking. And, the Office of Compliance Inspections and Examinations, or OCIE, has also come a long way since its low point following the financial crisis, and they will hopefully get a boost with third party investment adviser examinations. As with DERA and ENF, OCIE must continue to work with the policymaking divisions, and resist the urge to undertake rulemaking through examinations. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 105 *** Notwithstanding the many concerns I have set forth today, I remain optimistic about the SEC’s future and I believe that the agency is in a much better position than it was four years ago. The agenda is still all too dominated by the nonsense of Dodd-Frank, and the agency’s place in the financial services regulatory constellation is still too low. However, there are hopeful signs of life and indicia that the SEC will go back to its roots: allowing disclosure to inform investors and preserve investor choice; letting the market, rather than regulation, decide winners and losers; and using appropriate discretion in exercising its power. There appears to be a renewed understanding on the Commission of the critical importance of updating existing programs instead of continuing the Dodd-Frank death march of rulemaking. And some capital markets regulators are finally speaking out about the importance of capital markets to investors and the global economy. These are issues I raised in my first speech as a Commissioner — in this building — in 2011. They were important then and critical now. Thank you for your attention, and thank you to the Chamber for inviting me here today. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 106 Disclaimer The Association tries to enhance public access to information about risk and compliance management. Our goal is to keep this information timely and accurate. If errors are brought to our attention, we will try to correct them. 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You may visit: www.risk-compliance-association.com/How_to_become_member.htm If you plan to continue to work as a risk and compliance management expert, officer or director throughout the rest of your career, it makes perfect sense to become a Life Member of the Association, and to continue your journey without interruption and without renewal worries. You will get a lifetime of benefits as well. You can check the benefits at: www.risk-compliance-association.com/Lifetime_Membership.htm 2. Weekly Updates - Subscribe to receive every Monday the 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: http://forms.aweber.com/form/02/1254213302.htm 3. Training and Certification - Become a Certified Risk and Compliance Management Professional (CRCMP) or a Certified Information Systems Risk and Compliance Professional (CISRSP). The Certified Risk and Compliance Management Professional (CRCMP) training and certification program has become one of the most recognized programs in risk management and compliance. There are CRCMPs in 32 countries around the world. Companies and organizations like IBM, Accenture, American Express, USAA etc. consider the CRCMP a preferred certificate. You can find more about the demand for CRCMPs at: www.risk-compliance-association.com/CRCMP_Jobs_Careers.pdf _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 108 You can find more information about the CRCMP program at: www.risk-compliance-association.com/CRCMP_1.pdf (It is better to save it and open it as an Adobe Acrobat document). For the distance learning programs you may visit: www.risk-compliance-association.com/Distance_Learning_and_Certificat ion.htm For instructor-led training, you may contact us. We can tailor all programs to specific needs. We tailor presentations, awareness and training programs for supervisors, boards of directors, service providers and consultants. 4. IARCP Authorized Certified Trainer (IARCP-ACT) Program - Become a Certified Risk and Compliance Management Professional Trainer (CRCMPT) or Certified Information Systems Risk and Compliance Professional Trainer (CISRCPT). This is an additional advantage on your resume, serving as a third-party endorsement to your knowledge and experience. Certificates are important when being considered for a promotion or other career opportunities. You give the necessary assurance that you have the knowledge and skills to accept more responsibility. To learn more you may visit: www.risk-compliance-association.com/IARCP_ACT.html 5. Approved Training and Certification Centers (IARCP-ATCCs) - In response to the increasing demand for CRCMP training, the International Association of Risk and Compliance Professionals is developing a world-wide network of Approved Training and Certification Centers (IARCP-ATCCs). This will give the opportunity to risk and compliance managers, officers and consultants to have access to instructor-led CRCMP and CISRCP training at convenient locations that meet international standards. ATCCs use IARCP approved course materials and have access to IARCP Authorized Certified Trainers (IARCP-ACTs). To learn more: www.risk-compliance-association.com/Approved_Centers.html _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 109 RiskMinds International is the world’s largest and most prestigious risk management conference and is fully established as the most senior gathering of the global risk management community. 600+ CROs, global supervisors, renowned academics and expert industry practitioners will gather together this December to discuss strategic risk management, capital allocation and practical risk modelling. I will be providing information about the CRCMP training course during the event. I am pleased to be able to offer you a special 15% discount off the booking fee for RiskMinds International. Just quote the discount VIP Code: FKN2436IARCPE to claim your discount. The latest agenda can be found on the website here, as well as the speaker line-up to date. For more information or to register for the 22nd annual RiskMinds, please contact the ICBI team on: Tel: +44 (0) 20 7017 7200 Fax: + 44 (0) 20 7017 7806 Email: [email protected] Web: http://www.riskmindsinternational.com/FKN2436IARCPE Please note: you can save up to £1800 in early bird savings on top of the 15% discount. I look forward to meeting those of you attending this conference. Best Regards, George Lekatis President of the IARCP 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 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) P a g e | 110 12-15 October, The Excelsior Hotel, Hong Kong The World’s Largest Risk Management Event Series' Asian Conference * 10% DISCOUNT OFFER * Quote VIP Code: FKN2438BCP Join 200+ senior risk managers from around the world 20+ CROs in attendance Learn from 80+ speakers across 85+ sessions Find out more & claim your 10% discount today on: www.riskmindsasia.com/FKN2438BCP Please contact ICBI for all enquiries: Email: [email protected] Tel: +44 (0)20 7017 7200 Note: The IARCP is media sponsor of RiskMinds Asia 2015 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)