Half Day Forum UPDATE ON POLICIES & GUIDELINES Presenter: - - PowerPoint PPT Presentation

Half Day Forum

UPDATE ON POLICIES & GUIDELINES

Presenter: Karen Rolle, Sr. Asst. Manager Bank Supervision Dept., Policy Unit Date: April 22nd 2008

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Agenda

New Guideline

– Draft Guidelines for the Management of Interest Rate Risk

Amended Guidelines

– Corporate Governance – Large Exposures

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Agenda contd.

Draft Legislation

– The Banks and Trust Companies (Temporary Business Continuity Operations) Regulation, 2007 – Proposal to Amend the Banks and Trust Companies Regulation Act, 2000 Relating to the Rights and Duties of Auditors of Licensees – Banks and Trust Companies (Auditors) (Facts and Matters of Material Significance) Regulation 2007

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Agenda contd.

Guidance Note

– Guidance Note on Supervision of Nominee Activities of Subsidiaries and Related Companies of Banks and Trust Companies.

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Interest Rate Risk

Consultation Paper (CP) on the Draft Guidelines for the Management of Interest Rate Risk

The CP was issued on April 16th 2008. Consultation ends 16th June 2008.

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Interest Rate Risk

The Guideline applies to all licensees that engage in

business activities in its banking book which give rise to Interest Rate Risk (IRR).

A licensee’s risk management program should cover its

IRR exposure.

The Central Bank will allow a licensee to be covered

under its parent’s risk management program for IRR.

Exemption will be permitted on a case by case basis.

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Interest Rate Risk

The draft Guideline:

– offers a principles-based approach to managing interest rate risk; – highlights the responsibilities of the board of directors and senior management in managing IRR; – defines the key elements of risk management policies, procedures and controls; and – defines the key elements of risk identification and measurement tools.

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Interest Rate Risk

The Central Bank recognizes that the interest rate risk management program will differ between licensees based on their:

– size; – complexity of assets and liabilities; – risk tolerance; and – risk profile.

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Interest Rate Risk

An effective risk management program for IRR should include:

– appropriate board and senior management oversight; – adequate risk management policies and procedures; – appropriate risk identification, monitoring and measurement functions; and – a comprehensive internal controls and independent audit function.

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Interest Rate Risk

Risk measurement systems for IRR

– The draft guideline does not prescribe any particular measurement system as this will be based on a licensee’s business activities. A few examples or risk measurement systems are :

• re-pricing maturity gap reports,
• net income simulation models, and
• duration models.

– Licensees may consult the Basel Committee’s paper, Principles for the Management and Supervision of Interest Rate Risk, July 2004, for further guidance (www.bis.org).

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Interest Rate Risk

Stress Testing

– Licensees should measure their vulnerability to loss in stressed market conditions.

Limits

– Licensees should establish operating limits consistent with their internal policies.

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Interest Rate Risk

Capital and Reporting Requirements

– The board and senior management should ensure that the licensee holds adequate capital to support its IRR exposure. – The Central Bank may require a licensee to hold more capital or reduce its IRR position. – Licensees are required to report on their IRR exposures on a quarterly basis (form BSD 2B – Interest Rate Sensitivity Schedule).

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Corporate Governance

The Central Bank plans to release a revised version of its Corporate Governance (CG) Guidelines (issued in December 2001).

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Corporate Governance

Significant changes:

The Independent Non-Executive Director Guidelines

(issued May 2006) has been subsumed into the revised CG Guidelines.

The frequency of Board Meetings has been changed from

quarterly to discretionary.

The December 2003 amendment to the CG Guidelines

removing the requirement for the External Auditor’s certification is now reflected in the Guidelines.

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Large Exposures

The Central Bank released the revised

Guidelines for the Management of Large Exposures in April 2008.

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Large Exposures

Significant change:

The amendment addresses the conflict between

Section 4 of the Guidelines and the Banks and Trust Companies (Large Exposures) Regulations, 2005, particularly Regulations 7 and 8.

Regulation 7 lists several exposures that are

exempted without pre-notification to the Central Bank.

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Large Exposures

Regulation 8 pre-notification requirement applies

to a select group of exposures.

Section 4 of the Guidelines now makes clear

which “exempt exposures” should be pre-

• notified. Prior to, the Guidelines required pre-

notification for all exempt exposures.

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Temporary Business Continuity

The Central Bank issued a Consultation Paper on

The Banks and Trust Companies (Temporary Business Continuity Operations) Regulations, 2007 in November 2007.

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Temporary Business Continuity

Purpose of the Regulation

– Foreign banks and trust companies are allowed to establish operations in the Bahamas on a temporary basis due to a natural disaster or other serious event in their home country. – It exempts such entities from the licensing requirement under the BTCRA.

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Temporary Business Continuity

Key provisions under the draft Regulation:

– foreign bank or trust company must enter an agreement with a licensed bank or trust company; – foreign bank or trust company must be registered with the Central Bank as “exempted”; – foreign bank or trust company must apply in writing to the Governor within seven days of entering the agreement;

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Temporary Business Continuity

Key provisions under the draft Regulation:

– it specifies the information/document to be submitted in support of the application; – it specifies conditions of registration, requiring written notification to the Inspector; – the timeframe for the exemption of carrying on exempted activities (shall not exceed 30 days or 60 days) ;

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Temporary Business Continuity

Key provisions under the draft Regulation:

– the Governor may extend the timeframe; and – the timeframe for the exemption for the purposes of testing and maintenance shall terminate when the registration ceases or the Agreement terminates.

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Temporary Business Continuity

Immigration Requirements – Exempt person should make all arrangements for work and entry permits requirements prior to persons entering The Bahamas. – If unplanned events circumvent a work permit being

• btained prior to arrival, the exempt person must

apply for a work permit within the time specified by Immigration officials.

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Temporary Business Continuity

Status – The consultation period ended January, 2008. – The Central Bank is proposing two amendments to the draft regulation, they are:

to amend the definition of “relevant jurisdiction”

by removing the reference to countries in the First Schedule of the FTRA; and

to add Reg. 9 (which states that these regulations

do not apply to Money Transmission Service Providers or Money Transmission Agents .

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Status

Next steps: – The AGs office to finalize the draft regulation by incorporating the new amendments. – The finalized draft will be submitted to the Government for approval. – The CB will be issuing Guidelines to the industry in support of the Regulation.

Temporary Business Continuity

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Rights and Duties of Auditors of Licensees

The Central Bank is proposing the following

legislation relating to the rights and duties of external auditors of its licensees:

– Banks and Trust Companies Regulation (Amendment) Act 2007; and – Banks and Trust Companies (Auditors) (Facts and Matters of Material Significance) Regulation 2007

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Rights and Duties of Auditors of Licensees

The Amendments to the BTCRA (sections 8, 12, 13: – impose certain disclosure requirements on current and former external auditors of licensees to the Inspector

• f Banks and Trust Companies;

– impose an obligation on the auditor of a licensee and in some cases a former auditor to provide the Inspector with written notice on specified matters;

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Rights and Duties of Auditors of Licensees

The Amendments to the BTCRA: – provide protection from liability where disclosure is made pursuant to these new provisions; and – provide a penalty for non-compliance with the requirements for auditors to communicate with the Inspector.

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Rights and Duties of Auditors of Licensees

The Regulation:

– specifies the circumstances to which an auditor might report to the Inspector facts and matters that are of “material significance” concerning a licensee; and – defines “material weakness” as a significant deficiency or combination of deficiencies that result in more than a remote likelihood that a material misstatement of the financial statement will not be prevented.

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Rights and Duties of Auditors of Licensees

Status

– Consultation on the draft legislation commenced in November 2007. – The audit community represented by BICA commented extensively. – The industry consultation period ended in February 2008.

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Rights and Duties of Auditors of Licensees

Status

Next Steps: – The draft legislation has been sent to the AG’s office. – The finalized draft will be submitted to the Government for approval..

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The Guidance Note was released in July 2007

and it replaced the original Guidance Note issued November 2000.

The Guidance Note is intended to:

– clarify, update and formalize existing Central Bank’s practice related to licensee’s nominee activities; and – support the Central Bank’s effort to provide effective consolidated supervision of banks and trust companies in The Bahamas

Supervision of Nominee Activities of Subsidiaries and Related Companies

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Supervision of Nominee Activities of Subsidiaries and Related Companies

Nominee Activity - Holding Assets or Securities

The Policy states that a subsidiary company or a related company of a licensee of the Central Bank which has been incorporated to hold securities and other assets in its name on behalf of clients of its parent bank or trust company, or other group bank or trust companies, must obtain a nominee trust licence from the Central Bank.

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Supervision of Nominee Activities of Subsidiaries and Related Companies

Nominee Activity - Corporate Services

The Policy states that a subsidiary company of a licensee of the Central Bank, which has been incorporated to provide corporate directors and officers on behalf of clients of its parent bank or trust company must obtain a nominee trust licence from the Central Bank.

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Supervision of Nominee Activities of Subsidiaries and Related Companies

For Nominee Corporate Services the following

• ption may also be used:

– The parent bank or trust company may apply to the Securities Commission for a license under the Financial and Corporate Services Providers Act to conduct this activity. – The parent bank or trust company may conduct this activity under its existing bank and trust or trust company licence.

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Supervision of Nominee Activities of Subsidiaries and Related Companies

Policy regarding IBCs

– An IBC which has been incorporated under the International Business Companies Act, 2000 to provide nominee services on behalf of clients of its parent bank or trust company can hold a nominee trust licence. – A foreign IBC which provides nominee services, will have to be continued under the International Business Companies Act, 2000 in order to be eligible for a nominee trust licence.

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Supervision of Nominee Activities of Subsidiaries and Related Companies

Audited Financial Statements

– The Governor has waived the requirement for all nominee trust licensees to file an audited financial statement, provided its financial statements is consolidated into the financial statements of its parent. – In lieu of the audited financial statement, the nominee trust licensee must provide an annual Directors’ and Auditors’ Certificate confirming compliance with its licence mandate.

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Supervision of Nominee Activities of Subsidiaries and Related Companies

Onsite Examinations – A nominee trust company which is a subsidiary or a related company of a licensee will be examined along with the parent/related licensee. Deadline – Licensees have until 30th June, 2008 to comply with this policy.

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Policy Agenda 2008/2009

Looking ahead:

– Guidelines for Risk-based Supervision – Guidelines for the Management of Operational Risk – Guidelines for the Management of Market Risk – Guidelines for Temporary Business Continuity – Basel II Survey

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Thank You