Risk Management Presentation July 16 2012

7/28/2019 Risk Management Presentation July 16 2012

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International Association of Risk and ComplianceProfessionals (IARCP)

1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750www.risk-compliance-association.com

Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the week's

agenda, and what is next

George LekatisPresident of the IARCP

Dear Member,

Capital levels have strengthened whilst profits have reduced, leading tosignificantly lower returns on equity

Business models are adapting as banks retreat from some areas ofbusiness such as investment banking or global financeparticularly where economically affordable funding is no longer availableand regulatory changes require more risk protection.

What? Who said that?

The European Banking Authority (EBA) describes the maindevelopments and trends that affected the EU banking sector.Read more at Number 1.

International Association of Risk and Compliance Professionals (I ARCP)www.risk-compliance-association.com
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In December 2011, the EBA issued a Recommendation to nationalauthorities that participating EU banksraise their Core Tier 1 ratio (CT1)to 9%, after accounting for an additional buffer against sovereign riskholdings.

The EBA identified a shortfall for 27 banks of76 bn, to be addressed byend-June 2012 via an increase of the capital elements of the highestquality and via a limited set of actions aimed at reducing risk weightedassets (RWAs), without impacting lending into the real economy.

Go to Number 8 to learn what has happened.

Welcome to the Top 10 list.

Report on Risks and Vulnerabilitiesof the European banking sector11 July 2012

The annual report on Risks andVulnerabilities of the European banking sector by the European BankingAuthority (EBA) describes the main developments and trends that

affected the EU banking sector in 2011.

Questions and Answers

Notification of UCITS and exchangeof information between competentauthorities

The revised Undertakings for Collective Investment in TransferableSecurities (UCITS) Directive puts in place a comprehensive frameworkfor the regulation of harmonised investment funds within Europe.

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


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Advanced Wide FOV Architectures for ImageReconstruction and Exploitation (AWARE)

This is an image of a gigapixel cameracurrently being developed by DARPAsAdvanced Wide FOV Architectures for Image Reconstruction andExploitation (AWARE) program.

As part of the program, DARPA successfully tested cameras with 1.4 and0.96 gigapixel resolution at the Naval Research Lab in Washington, DC.

EIOPA Final Report on Public ConsultationsNo. 11/ 009 and 11/011 On the Proposal for theReporting and Disclosure Requirements

This Final Report contains the outcome oftwo Public Consultations, No. 11/ 009 andNo. 11/ 011, which were launched by EIOPA

on November 8 2011 and on December 21 2011 on the proposal forreporting and disclosure requirementson insurance and reinsuranceundertakings and insurance groups.

FINMA opens consultation on CollectiveInvestment Schemes Bankruptcy Ordinance

The Swiss Financial Market Supervisory Authority

FINMA has opened the consultation onthe Collective Investment Schemes Bankruptcy Ordinance.The consultation will end on 22 August 2012.



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Speech by Financial Secretary to the Treasury, MarkHoban MP; Banking union in the eurozone, Brussels

Implementation of a New Process forRequesting Guidance from the FederalReserve Regarding Bank and NonbankAcquisitions and Other Proposals

Applicability to Community Banking Organizations: This guidance

applies to all institutions supervised by the Federal Reserve, includingcommunity banking organizations, defined as institutions supervised bythe Federal Reserve with total consolidated assets of$10 billion or less

Update on the implementation ofCapital Plans following theEBAs 2011Recommendation on the creation oftemporary capital buffers to restore

market confidence

In December 2011, the EBA issued a Recommendation to nationalauthorities that participating EU banksraise their Core Tier 1 ratio (CT1)to 9%, after accounting for an additional buffer against sovereign riskholdings.

The EBA identified a shortfall for 27 banks of76 bn, to be addressed byend-June 2012via an increase of the capital elements of the highestquality and via a limited set of actions aimed at reducing risk weighted

assets (RWAs), without impacting lending into the real economy.



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FSA (Japan) publishes English translationofGuidance on Equivalency Assessment

on Audit and Public Oversight Systems ofForeign Jurisdictions

The FSA and the Certified Public Accountants and Auditing OversightBoard (CPAAOB) stated in AFramework for Inspection / Supervisionof Foreign Audit Firms, etc. (September 14, 2009) that they will, inprinciple, rely on information requirements and inspections regardingforeign audit firms by the competent authorities of the firms' home

jurisdictions.

FINRA Issues New InvestorAlert: Exchange-TradedNotesAvoid UnpleasantSurprises

The Financial Industry Regulatory Authority (FINRA) issued a newInvestor Alert calledExchange-Traded NotesAvoid UnpleasantSurprisesto inform investors of the features and risks of exchange-traded

notes (ETNs).

http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P131262


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NUMBER 1

Report on Risks and Vulnerabilities of the European bankingsector11 July 2012

The annual report on Risks and Vulnerabilities of the European banking

sector by the European Banking Authority (EBA) describes the maindevelopments and trends that affected the EU banking sector in 2011.

The current conjuncture

EU banks have undergone significant changes since 2007, with anaccelerated pace in 2011 and 2012.

Funding structures have shifted considerably, towards the predominance

of official and retail sources of funding.Capital levels have strengthened whilst profits have reduced, leadingtosignificantly lower returns on equity.

Business models are adapting asbanks retreat from some areas ofbusiness such as investment banking or global financeparticularly where economically affordable funding is no longer availableand regulatory changes require more risk protection.

Further adjustments are likely.

The re-segmentation of banking markets within national boundaries,



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particularly interbank funding, will significantly impact business modelsgoing forward.

During 2011 and 2012 significant efforts have been made to strengthen theEU banking sector in terms of both capital and funding/ liquidity.

The EBAs 2011 EU wide stress test reviewed credit soundness, sovereignholdings and funding costs.

However, as the situation deteriorated additional measures were required,leading among other steps to the EBAs December 2011 RecapitalisationRecommendation.

The Recapitalisation entailed a system wide strengthening of

participating bankscapital bases to 9% core tier 1 and thus their ability toabsorb losses.

It was not a stress test, but was a necessary step in the progress to restorebanks balance sheet.

National authorities will continue to pursue the process of balance sheetrepairby assessing individual banksasset valuations, especially forspecific credit segments with a focus on geographies and sectors such asproperty loans.

Market participants and rating agencies continue to see banks andsovereigns as inextricably interlinked, leading to acute pressure onfunding costs.

The ECBs LTRO has meant that funding pressures have easedsomewhat following the ECBs action but further measures will berequired to return to sustainable funding.

Policy announcements as of June 2012 to potentially inject capital directlyinto banks and undertake EU wide supervision appeared to improvemarket sentiment in this regard.



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Nonetheless, as of mid-2012 the situation remains extremely fragile withincreasing uncertainty on asset quality, funding capacity and concernsover the possibility of extreme events.

Banks and supervisors are considering, and putting in place, relevantemergency actions as a rapid deterioration of events could lead to furthersignificant change in the banking landscape.

Beyond 2012 medium term supervisory risks

A return to sustainable funding, beyond the temporary solution broughtby the LTRO, will require

(i)Restoring market confidence in EU banks,

(ii)A recalibration of banks strategies, business models, asset-liabilitymixes and risk-tolerance levels, and

(iii)Forward-looking and close monitoring by supervisors in 2012 andbeyond.

Lengthening maturity profiles, diversifying funding sources and meetingthe new liquidity requirements must all be balanced with the challengesof increasing usage of collateral, rising asset encumbrance and changing

market views on banksunsecured liabilities.

The focus on secured and retail funding all create potential challenges onthe prudential and consumer protection front.

These issues will absorb the efforts of both bank management teams andsupervisors in the years to come.

For the larger EU banking groups with material cross-border activities

these efforts will have to continue to expand well beyond nationalborders.

As banks adjust to the changing environment, further restructuring oftheir activities and business models is expected.



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Moreover, the need to address more vigorously asset quality deterioration particularly

(i)Where economies are in recession and

(ii)For higher-risk credit sectors like real estate will come to the fore. A

number of tools are being used by banks and supervisors to addressdeteriorating asset quality.

For example, higher provisioning levels are being demanded and somesupervisors and banks are strengthening their loan-modification andarrears management monitoring capacity to help identify inflectionpoints where forbearance on potentially problematic loans moves from

being a risk mitigant to being a risk in its own right.Lower returns on equity, tougher funding conditions, and thesegmentation of the single market, are all key drivers for change in banksbusiness models.

Heightened supervisory attention will be paid to these developments tounderstand changes both within the banking system and to monitoraspects of traditional banks which move to other areas of the financialsystem.

Table 1 summarises the EBAs views regarding the main risks andvulnerabilities in the EU banking sector in the short and medium terms.



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Important parts of the document

Structure of EU banks funding

EU banks aremore dependent on wholesale funds than banks in otherregionsdue to the specific dynamics of each market.

As examples, the Asian markets are characterised by a high savings ratioas well as by a more reduced share of economic growth generated by banklending.



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In the US about three-quarters of outstanding residential mortgages arenot in originating banksbalance sheets, being securitised and held byGSEs and to a lesser extent via private securitisation.

In contrast, a very large majority of mortgages in the EU especiallyoutside the UK and the Netherlands are held in the originating banksbalance sheets, being largely funded with covered bonds raised inwholesale markets.

Also, to a greater extent than in the EU, the US business credit market ishighly bank-disintermediated as practically all large corporates and asignificant number of larger SMEs issue directly in the market.

Equally, large markets in the EU saw significant savings

disintermediation in earlier years (savings shifting from bank deposits tomutual funds and life insurance plans), on a far broader scale than anycorresponding credit disintermediation.

As a consequence, EU banks have had to rely increasingly on wholesalefunds (market issuance but also corporate deposits) to underpin theirlending growth.

That being said, we note that a degree of savings reintermediation backto bank deposits is now taking place in parts of the EU.

The ratio of customer deposit to total liabilities dropped from about 50%to 46% between 2009 and 2011 (chart 1).



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The structure of funding explains why EU banks have been particularlyaffected by the crisis.

In fact, the last five years have seen a significant change in the dynamicsof bank funding.

Before the crisis, EU banks were pursuing mostly asset-driven strategies.Specifically, as funding was readily available at affordable price points,especially in the wholesale markets, banks were aiming primarily toincrease their assets, leading to excessive leverage which generatedunsustainably high earnings for several years.

The crisis and its implications on the availability of liquidity forced anabrupt strategic turnaround for banks, which have been since adoptingliability-driven strategies, aiming to obtain the funding at price points

which could justify generating assets at economically viable costs.



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Credit risk and asset quality

The sovereign crisis and, more generally, the macroeconomic conditionshave obviously affected banksrisk and solvency profiles.

The EBAs KRIs provide mixed indications about banksexposure tocredit risk.

The ratio of impaired loans to total loans increased from 4.5% to 5.6%between 2009 and 20111.

The variability across the sample is explained, among other things, bysize: the difference between the top 15 and other banks has been stableover the last 2 years at around 2 percentage points, with the former group

of banks demonstrating more resilience to credit risk than the others(Chart 5).

Looking at the stocks, accumulated impaired financial assets to total

gross assets remained stable at about 1.6%, with however a significantincrease of the dispersion (Chart 6).



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As far as the level of provisions is concerned, the coverage ratio (i.e. ratioof specific provisions on loans to total loans) increased until March 2011and then slightly declined to 42% in December 2011.

The reduction was more pronounced for banks different from the top 15and the gap between these two categories increased at 5 percentagepoints (Chart 7).



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Overall, the time series of credit risk indicators over the last 9 quarterssignal that asset quality is being affected by the increasingly deterioratingmacroeconomic environment.

However, this is happening at a different pace across countries and typeof banks, as mirrored by increased variability.

This could be due to the fact that the crisis has been affecting countries atdifferent timesand the impact of the second macroeconomic contractionmay be delayed for some countries and not yet visible in 2011-end datastill.

Furthermore, there are indications that several banks have adoptedvarious forms of forbearance which allowed both borrowers to more easilyhonour their obligation and banks to postpone the recognition of possiblelosses.

In fact, the more forward-looking picture from the RAQ shows that therespondents mostly expect that the impairment levels will not decrease inthe near term.



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Exposures towards small and medium enterprises are the most frequentlymentioned driver for the expected increase in problem loans.



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NUMBER 2

Questions and Answers

Notification of UCITS and exchange of information betweencompetent authorities

I. Background

1.The revised Undertakings for Collective Investment in TransferableSecurities (UCITS) Directive puts in place a comprehensive frameworkfor the regulation of harmonised investment funds within Europe.

The extensive requirements with which UCITS must comply aredesigned to ensure that these products can be sold on a cross-borderbasis.

The most recent version of the Directive also introduces a managementcompany passport.

2.The UCITS framework is made up of the following EU legislation:

a.Directive 2009/65/ EC, which was adopted in 2009.

It is a frameworkLevel 1 Directive which has been supplemented bytechnical implementing measures (see the Level 2 legislation in b. below).

b.Directive 2007/ 16/ EC; Directive 2010/ 43/ EU; Regulation No583/ 2010; Directive 2010/42/EU; and Regulation No 584/ 2010.



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3.ESMAs predecessor (CESR) produced a series of questions andanswers (Q&A) based on questions received through CESRs MiFIDQ&A mechanism.

The Q&As reflected common positions agreed by CESR Members.

They were one of the tools used by CESR to elaborate on the provisions ofcertain EU legislation, thereby fostering supervisory convergence, andwere considered useful by external stakeholders.

ESMA has therefore decided to introduce a similar mechanism in theUCITS area.

4.Similarly, ESMA is required to play an active role in building a common

supervisory culture by promoting common supervisory approaches andpractices. In this regard, ESMA will continue to develop Q&As as andwhen appropriate.

I I . Purpose

5.The purpose of this document is to promote common supervisoryapproaches and practices in the application of the UCITS Directive andits implementing measures.

It does this by providing responses to questions posed by the generalpublic and competent authorities in relation to the practical application ofthe UCITS framework.

6.The content of this document is aimed at competent authorities underUCITS to ensure that in their supervisory activities their actions areconverging along the lines of the responses adopted by ESMA.

However, the answers are also intended to help UCITS management

companies by providing clarity as to the content of the UCITS rules,rather than creating an extra layer of requirements.



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III. Status

7.The Q&A mechanism is a practical convergence tool used to promotecommon supervisory approaches and practices under Article 29(2) of the

ESMA Regulation.

8.Therefore, due to the nature of Q&As, formal consultation on the draftanswers is considered unnecessary.

However, even if they are not formally consulted on, ESMA may checkthem with representatives of ESMAs Securities and Markets StakeholderGroup, the relevant Standing CommitteesConsultative Working Groupor, where specific expertise is needed, with other external parties.

9.ESMA will review these questions and answers to identify if, in acertain area, there is a need to convert some of the material into ESMAguidelines and recommendations.

In such cases, the procedures foreseen under Article 16 of the ESMARegulation will be followed.

IV. Questions and answers

10.This document is intended to be continually edited and updated asand when new questions are received.

The date each question was last amended is included after each questionfor ease of reference.

11.Questions on the practical application of any of the UCITSrequirements in relation to UCITS notification and exchange ofinformation between competent authorities may be sent to the followingemail address at ESMA: [email protected]

mailto:[email protected]://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/http://www.risk-compliance-association.com/mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Question 1: Notification of new investment compartmentsDate last updated: July 2012

Question 1a: Should UCITS that wish to market new investment

compartments in a Member State where they are already notified formarketing for other existing investment compartments undertake a newnotification procedure via their competent authority?

Answer 1a:Yes. According to Article 91(4) of Directive 2009/65/EC, thenotification procedure as referred in to Article 93 of that Directive alsoapplies to investment compartments of UCITS.

Question 1b: Should UCITS that wish to market several investmentcompartments of the same UCITS undertake different notification

procedures via their competent authority?

Answer 1b: No. UCITS can undertake a single notification procedure viatheir competent authority when they wish to market several investmentcompartments of the same UCITS in a Member State.

Indeed, according to the Annex I of the Commission Regulation584/ 2010, UCITS may indicate names of different investmentcompartments in the notification letter they transmit to their competentauthority pursuant to Article 93(1) of Directive 2009/ 65/ EC.

Question 1c: If the UCITS attestation transmitted to the competentauthority of the home Member State lists all the existing investmentcompartments of a UCITS, should the UCITS undertake a notificationprocedure for all the investment compartments it intends to market in aMember State?

Answer 1c:Yes. Even if the UCITS attestation lists all the existinginvestment compartments of a UCITS, the marketing of these investment

compartments in a Member State is possible only if the competentauthority of the host Member State has been duly notified by thecompetent authority of the home Member State.



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Question 2: Amendments and updates of documents referred toin Article 93(2) of Directive 2009/65/ ECDate last updated: July 2012

Question 2a:Should notifications to the competent authorities of the hostMember States of amendments to the documents referred to in Article93(2) of Directive 2009/65/EC (i.e. fund rules or instruments ofincorporation, prospectus, latest annual report and half-yearly report bythe UCITS) be accompanied by an attestation letter?

Answer 2a:No. The attestation letter should only be transmitted to thecompetent authority of the host Member State by the competent authorityof the home Member State at the time of the original notification ofmarketing.

Question 2b: Should notification by the UCITS to the competentauthorities of the host Member States of a change in the name of theUCITS or in one of its investment compartments be accompanied by anattestation letter?

Answer 2b: No. When UCITS notify the competent authorities of homeMember States of a change in the name of the UCITS or in one of itsinvestment compartments, no UCITS attestation should be transmitted.

Question 2c: Should a UCITS follow a new notification procedure via itscompetent authority when it notifies updates of documents referred to inArticle 93(2) to competent authorities of host Member States?

Answer 2c: No. When UCITS notify updates of documents to thecompetent authority of the host Member State they should not undertakea new notification procedure via their competent authority.

Question 2d: Should all the documents referred in to Article 93(2) ofDirective 2009/ 65/ EC be transmitted when UCITS send updates of

documents to the competent authorities of the host Member Statespursuant to Article 32(2) of Directive 2010/42/ EU?



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Answer 2d:No. Only the documents which have been modified should betransmitted to the competent authority of the host Member State.

Question 3: UCITS host Member States access to documents

Date last updated: July 2012

Question 3a: When a UCITS is notified for the first time for marketing ina Member State, when should the UCITS make available on a website anelectronic copy of each document referred to in Article 93(2)?

Answer 3a: In order to satisfy the obligation of Article 31(1) of Directive2010/42/EU, UCITS should make available on a website an electroniccopy of each document referred to in Article 93(2) as soon as possibleafter they receive confirmation from their national competent authorities

that the notification of marketing has been transmitted to the competentauthority of the host Member State.

Question 3b:When complying with the obligation of access to documentsas required by Article 31(1) of Directive 2010/42 /EU, can UCITS usepassword-protected documents?

Answer 3b: No. The use of password-protected documents by UCITS isnot permitted.

Question 4: Part A of the notification letterDate last updated: July 2012

Question: If the UCITS is a self-managed investment company, whatinformation should be provided under the heading details of contactperson at the management company in Part A of the notification letter?

Answer: If the UCITS is a self-managed investment company, the detailsof the contact person at the self managed investment company and the

relevant contact information should be provided.



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Question 5: Exchange of information between competentauthorities in the context of establishment of a branch of aUCITS management companyDate last updated: July 2012

Question: In the context of establishment of a branch by a UCITSmanagement company in a different Member State, in which languageshould competent authorities of home Member States send the relevantinformation to competent authorities of host Member States?

Answer:The information should be sent in a language customary in thesphere of international finance, unless the competent authorities of theUCITS home and host Member States agree to that information beingprovided in an official language of both Member States.

Question 6: Attestation of payment of notification feesDate last updated: July 2012

Question: Under Part B of the model notification letter set out in Annex Iof Regulation 584/ 2010, the UCITShost Member State may requireevidence of payment of notification fees. How should this evidenceof payment be provided?

Answer:There should be evidence that the notification fee has beentransferred e.g. by a scan of the transfer form. The evidence should beattached to the notification as proof of payment.

Questions and AnswersRisk Measurement and Calculation of Global Exposure andCounterparty Risk for UCITS

Question 1: H edging strategiesDate last updated: July 2012

Question 1a:Can the following strategy be qualified as a hedging strategyas defined in CESRs guidelines?



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A portfolio management practice which only aims to reduce the interestrate risk of a corporate bond portfolio by entering into a short position onbond future contracts (or an interest rate swap) in the same currency andwith a similar interest rate duration.

Note that in this case the portfolio credit risk would remain un-hedged.

Answer 1a:Yes. This strategy could be considered as a hedgingarrangement as defined in CESRs guidelines as it is in line with theexample set out in paragraph 33(a) of the guidelines.

Question 1b:Can the following strategy be qualified as a hedging strategyas defined in CESRs guidelines?

A portfolio management practice which aims to reduce the credit risk of acorporate or government bond portfolio through purchased Credit DefaultSwaps (CDS). Note that in this case the portfolio interest rate risk wouldremain un-hedged.

Answer 1b:Yes, but only if the corporate or government bond and thepurchased CDS relate to the same issuer.

Question 1c: When calculating the global exposure according to theCommitment Approach, can UCITS that invest in other funds make use

of hedging arrangements?

Answer 1c: According to Box 8 of CESRs guidelines, for the purpose ofcalculating global exposure under the Commitment Approach, hedgingarrangements may only be taken into account if they relate to the sameasset class.

Therefore, hedging arrangements for UCITS funds of funds are possibleprovided that the management company of the investing UCITS has full

knowledge of the underlying investments of the target funds.



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Question 2: Disclosure of leverage by UCITSDate last updated: July 2012

Question 2a: For UCITS using VaR to calculate global exposure, can the

required disclosure of leverage be made on a net basis i.e. leveragecalculated after netting/ hedging arrangements are taken into account?

Answer 2a:No. In accordance with Boxes 24 and 25 of CESRsguidelines, leverage should be calculated as the sum of the notionals ofthe derivatives used.

Question 2b: Could UCITS using the VaR approach to calculate globalexposure disclose leverage based on the Commitment Approach?

Answer 2b:Yes. However, the leverage should be disclosed based on boththe sum of the notionalsas provided by CESRs guidelines and theCommitment Approach.

Question 3: Concentration rulesDate last updated: July 2012

Question:Article 54 of Directive 2009/65/ EC permits competentauthorities to authorise UCITS to invest up to 100% of their assets intransferable securities issued by certain issuers e.g. sovereigns.

In such cases the UCITS must hold securities from at least six differentissues and securities from any single issue shall not exceed 30% of its totalassets.

Should this diversification rule apply on the basis of the net assets of theUCITS or on a gross basis?

Answer:The 100% diversification limit of Article 54 should be applied onthe net assets (i.e. exposure to assets referred to in this article is limited to100% of the net asset value) as all investment restrictions applicable toUCITS, including the diversification limits of Article 54, have to beapplied with reference to their net assets and because any exposurebeyond 100% to a sovereign issuer cannot be considered as equivalent



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protectionwith regard to Article 52. Furthermore, it is explicitly clarifiedthat any exposure taken to assets referred to in Article 54, includingthrough derivatives (e.g. bond future contracts such as Euro.

Bund Future, 10 Year US T-Note future) and any efficient portfoliomanagement techniques (e.g. reinvestment of cash collateral) must beincluded when calculating the limit of 100% according to Article 54.

Question 4: Calculation of global exposure for fund of fundsDate last updated: July 2012

Question: Is the look-through approach compulsory for the calculation ofglobal exposure when UCITS invest in other funds?

Answer:No. For the purpose of calculating global exposure, alook-through approach is not compulsory when UCITS invest in otherfunds.

As an alternative, UCITS may treat the NAV of the target fund as anequity and use it as a substitute in the calculation of global exposure, inparticular when the VaR Approach is used.

This method may only be used if the risk management function can proveand document that this approach does not lead to an inaccurate picture of

the fund of funds. In addition, UCITS fund of funds structures have tocomply with all due diligence and risk management requirements laiddown in the UCITS framework (Directive 2009/ 65/ EC, Directive2010/43/EU and the CESR guidelines on Risk Management principlesfor UCITS7).

Finally, the method chosen by the UCITS should be disclosed in theprospectus.



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NUMBER 3

ADVANCED WIDE FOV ARCHITECTURES FOR IMAGERECONSTRUCTION AND EXPLOITATION (AWARE)

This is an image of a gigapixel cameracurrently being developed byDARPAs Advanced Wide FOV Architectures for Image Reconstructionand Exploitation (AWARE) program.

As part of the program, DARPA successfully tested cameras with 1.4 and0.96 gigapixel resolution at the Naval Research Lab in Washington, DC.

The gigapixel camerascombine 100-150 small cameras with a sphericalobjective lens.

Local aberration correction and focus in the small cameras enableextremely high resolution shots with smaller system volume and lessdistortion than traditional wide field lens systems.



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The DARPA effort hopes to produce resolution up to 10 and 50gigapixelsmuch higher resolution than the human eye can see.

Analogous to a parallel-processor supercomputer, the AWARE cameradesign uses parallel multi-scale micro cameras to form a wide fieldpanoramic image.

The AWARE program is developing new approaches and advancedcapabilities in imaging to support a variety of Department of Defensemissions.

Advanced Wide FOV Architectures for Image Reconstruction andExploitation (AWARE) program responds to these needs bysimultaneously pushing the envelope of imager performance through new

FPA and camera designs and advanced distributed aperture sensors(ADAS) ground support systems.

The AWARE program will enable higher resolution and multi-bandimaging capability for increased target discrimination and search in allweather day/night conditions.

The imaging systems will be sufficiently lightweight and compact to befielded on a variety of ground and air borne platforms.

The AWARE program will solve the current fundamental scalinglimitationsin imaging systems and demonstrate a design methodologyfor building compact systems, capable of forming images at or near thefull diffraction-limited instantaneous field of view (iFOV) achieved over awide FOV.

This approach represents a dramatic advance over the current state of theart.



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DARPA investments in extreme hypersonics continue

DARPAs research and development in stealth technology during the1970s and 1980s led to the worldsmost advanced radar-evading aircraft,providing strategic national security advantage to the United States.

Today, that strategic advantage is threatened as other nationsabilities instealth and counter-stealth improve.

Restoring that battle space advantage requires advanced speed, reach andrange.

Hypersonic technologies have the potential to provide the dominanceonce afforded by stealth to support a range of varied future national

security missions.Extreme hypersonic flight at Mach 20 (i.e., 20 times the speed ofsound)which would enable DoD to get anywhere in the world in underan houris an area of research where significant scientific advancementshave eluded researchers for decades.

Thanks to programs by DARPA, the Army, and the Air Force in recentyears, however, more information has been obtained about thischallenging subject.

DoDs hypersonic technology efforts have made significantadvancements in our technical understanding of several critical areasincluding aerodynamics; aerothermal effects; and guidance, navigationand control, said Acting DARPA Director, Kaigham J. Gabriel. butadditional unknowns exist.

Tackling remaining unknowns for DoD hypersonics efforts is the focus ofthe new DARPA Integrated Hypersonics (IH ) program.

History is rife with examples of different designs forflying vehiclesandapproaches to the traditional commercial flight we all take for grantedtoday, explained Gabriel.



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Foran entirely new type of flightextreme hypersonicdiversesolutions, approaches and perspectives informed by the knowledgegained from DoDs previous efforts are critical to achieving our goals.

To encourage this diversity, DARPA will host a ProposersDay on August14, 2012, to detail the technical areas for which proposals are soughtthrough an upcoming competitive broad agency announcement.

We do not yet have a complete hypersonic system solution, saidGregory Hulcher, director of Strategic Warfare, Office of the UnderSecretary of Defense for Acquisition, Technology and Logistics.

Programs like I ntegrated Hypersonics will leverage previous investmentsin this field and continue to reduce risk, inform development, and advance

capabilities.

The IH program expands hypersonic technology research to include fiveprimary technical areas: thermal protection system and hot structures;aerodynamics; guidance, navigation, and control (GNC); range /instrumentation; and propulsion.

At Mach 20, vehicles flying inside the atmosphere experience intenseheat, exceeding 3,500 degrees Fahrenheit, which is hotter than a blastfurnace capable of melting steel, as well as extreme pressure on the

aeroshell.The thermal protection materials and hot structures technology area aimsto advance understanding of high-temperature material characteristics towithstand both high thermal and structural loads.

Another goal is to optimize structural designs and manufacturingprocesses to enable faster production of high-mach aeroshells.

The aerodynamics technology area focuses on future vehicle designs for

different missions and addresses the effects of adding vertical andhorizontal stabilizers or other control surfaces for enhanced aero-controlof the vehicle.



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Aerodynamics seeks technology solutions to ensure the vehicle effectivelymanages energy to be able to glide to its destination.

Desired technical advances in the GNC technology area include advancesin software to enable the vehicle to make real-time, in-flight adjustmentsto changing parameters, such as high-altitude wind gusts, to stay on anoptimal flight trajectory.

The range/ instrumentation area seeks advanced technologies toembeddata measurement sensors into the structure that can withstand thethermal and structural loadsto provide real-time thermal and structuralparameters, such as temperature, heat transfer, and how the aeroshellskin recedes due to heat.

Embedding instrumentation that can provide real-time air datameasurements on the vehicle during flight is also desired.

Unlike subsonic aircraft that have external probes measuring air density,temperature and pressure of surrounding air, vehicles traveling Mach 20cant take external probe measurements.

Vehicle concepts that make use of new collection and measurementassets are also being sought.

The propulsion technology area is developing a single, integrated launchvehicle designed to precisely insert a hypersonic glide vehicle into itsdesired trajectory, rather than adapting a booster designed for spacemissions.

The propulsion area also addresses integrated rocket propulsiontechnology onboard vehicles to enable a vehicle to give itself an in-flightrocket boost to extend its glide range.

By broadening the scope of research and engaging a larger community

in our efforts, we have the opportunity to usher in a new area of flightmore rapidly and, in doing so, develop a new national security capabilityfar beyond previous initiatives,explained Air ForceMaj. Christopher

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Schulz, DARPA program manager, who holds a doctorate in aerospaceengineering.

The IH program is designed to address technical challenges and improveunderstanding of long-range hypersonic flight through an initial full-scalebaseline test of an existing hypersonic test vehicle, followed by a series ofsubscale flight tests, innovative ground-based testing, expanded modelingand simulation, and advanced analytic methods, culminating in a testflight of a full-scale hypersonic X-plane (HX) in 2016.

HX is envisioned as a recoverable next-generation configurationaugmented with a rocket-based propulsion capability that will enable andreduce risk for highly maneuverable, long-range hypersonic platforms.

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THIS FALL, SEE YOURSELF AS A DARPA IMAGERYRESEARCHERJuly 10, 2012

Teams wanted for eight weeks of radical innovation in visual andgeospatial data analysis

Theresa lot to be said for the road that is takenits safe, its well lit, andyou probably know where it leads. Rarely does an opportunity presentitself to leave the road entirely and venture off in search of new vistas.

The Defense Advanced Research Projects Agency (DARPA) seekstrailblazers to explore the unknown in the areas of visual and geospatialdata analysis.

Researchers will participate in a short-fuse, crucible-style environment toinvent new approaches to the identification of people, places, things andactivities from still or moving defense and open-source imagery.

A lot can happen when you put seriously intelligent, seriously motivatedpeople in a room with a mission and a deadline, said Michael Geertsen,DARPA program manager and the force behind the Innovation HouseStudy.

We are inviting a new generation of innovators to try out ideas in anenvironment that encourages diverse solutions and far-out thinking.

If this model proves to be as successful as we believe it could be, itrepresents a new means for participating in Government-sponsoredresearch projects.

DARPAs Innovation House Study, conducted with George MasonUniversity in Arlington, Va., will provide a focused residential researchenvironment for as many as eight teams.

Interested team leaders are encouraged to submit proposals by July 31,2012, detailing their plan to design, execute and demonstrate a radical,novel research approach to innovation in the area of extracting

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meaningful content from large volumes of varied visual and geospatialmedia.

Selected teams will receive up to $50,000 in funding.

The Innovation House concept revolves around a collaborative, ratherthan competitive, environment.

The study will run for eight weeks over two four week sessions from Sept.17, 2012 to Nov. 9, 2012.

In Phase I, teams are expected to produce an initial design anddemonstrate in software the crucial capabilities that validate theirapproach.

In Phase II , teams are expected to complete and demonstrate a functionalsoftware configuration as a proof of concept. Teams demonstratingsufficient progress in Phase I will receive Phase I I funding.

DARPA will provide access to unclassified data sets and facilitateinteraction with mentors from U.S. Government and academia.

These interactions will provide teams with context for how their proposedtechnology could be applied in the real world.



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NUMBER 4

EIOPA Final Report on Public Consultations No. 11/ 009 and11/ 011 On the Proposal for the Reporting and DisclosureRequirements

1. Scope

1.This Final Report contains the outcome of two Public Consultations,No. 11/ 009 and No. 11/ 011, which were launched by EIOPA onNovember 8 2011 and on December 21 2011 on the proposal for reportingand disclosure requirements on insurance and reinsurance undertakingsand insurance groups.

2.It includes a feedback statement with EIOPAs opinionon the main

comments received during the Public Consultation.

3.In the Annexes, stakeholders can find the detailed resolution templatewith EIOPAs feedback on all comments received (Annex I ), together withupdated reporting and disclosure documents, which have been revised asa result of the comments received (Annex II).

4.In relation to the draft Guidelines on Solvency and Financial ConditionReport and the Regular Supervisory Report, Reporting under predefinedevents and undertakingsProcesses for Reporting & Disclosure, EIOPAhas included the explanatory text in this Final Report, as it did in the

Consultation Papers, in order to assist readers in understanding thethinking behind specific points in the Guidelines.

5.The requirements on reporting and disclosure templates described inthis Final Report will be reflected in a technical standard to be drafted by



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EIOPA and endorsed by the European Commission (EC) according toArticle 10 and 15 of EIOPA Regulation.

6.The draft Guidelines in this Final Report may still be subject toamendments in order to reflect future developments of any underlying

legally binding Union acts.7.TheOmnibus I I Directive (OMDII ) will set the date of entry intoforce of the Solvency II regime.

EIOPA strongly supports, within the constraints of the final decisions ofthe Parliament and the Council on the timeline and the scope of thetechnical standards, the entry into force of Solvency I I from 1 January2014.

2. Purpose

1.EIOPA acknowledges that theeffective transition to the Solvency IIregime and in particular compliance with the reporting and disclosurerequirements from day one requires that early preparations are made forimplementation.

2.Consequently, EIOPA has performed informal consultations withstakeholders over the last few years and this was followed by a period offormal public consultation at the end of 2011 on , Consultation Paper 9(CP No. 11/ 009 ) and Consultation Paper 11 (CP No. 11/ 011).

3.CP No. 11/009 included the draft proposal on Quantitative ReportingTemplates and Draft proposal for Guidelines on Narrative PublicDisclosure & Supervisory Reporting, Predefined Events and Processes forReporting & Disclosure.

This consultation, included:

a)Issues Paper;

b) Excel templates for reporting and disclosure;

c) Summary docs for each template;



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d)LOGs for each template;

e)Proposal for a Guideline on Narrative Public Disclosure & SupervisoryReporting, Predefined Events and Processes for Reporting & Disclosure;

f) Impact Assessment.

2.4. CP No. 11/ 011 introduced information needs required from insurersfor financial stability purposes.

This consultation included:

a)Issues Paper;

b) Excel templates for reporting and disclosure;

c) LOGs for each template.

5.The package in this Final Report reflects EIOPAs position on thecomments received on CP No. 11/ 009 and CP No. 11/ 011.

6.EIOPA considers that it is crucial for the effective and timelyimplementation ofSolvency I I reporting and disclosure requirements(including the reporting needed for EIOPA financial stability purposes)that an updated package is provided, which undertakings can use as thebasis for their preparations.

Furthermore, EIOPA believes that the package represents a stable view ofthe level of granularity of the information that supervisory authorities willneed to receive.

7.Changes arising from the discussions of OMDII and the implementingmeasures are not expected to be major and may potentially includeamendments in the following templates:

a) Scope of the quarterly reporting;

b) Own funds;

c) Solvency Capital Requirements (SCR) specific risk modules;

d) Life Technical Provision

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