Intermediary Internal Controls Associated with Price Verification of Structured Finance Products and Regulatory Approaches to Liquidity Risk Management Consultation Report TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS CR04/10 JULY 2010 This paper is for public consultation purposes only. It has not been approved for any other purpose by the IOSCO Technical Committee or any of its members. 1 Foreword The International Organization of Securities Commissions Technical Committee‘s (TC) Standing Committee on the Regulation of Market Intermediaries (TCSC3) for public consultation this Consultation Report on Intermediary Internal Controls Associated with Price Verification of Structured Finance Products and Regulatory Approaches to Liquidity Risk Management. The Consultation Report sets out the results of surveys of firms and regulators on the internal controls and policies in effect at firms, and pertinent regulations, in or around June 2006 i.e., prior to the financial crisis, and any changes made as a result of the crisis with regard to structured finance products. The surveys also sought respondents‘ views concerning the viability of the traditional independent investment banking model in light of the financial crisis that developed after 2006. How to Submit Comments Comments may be submitted by one of the three following methods on or before 29 October 2010. To help us process and review your comments more efficiently, please use only one method. Important: All comments will be made available publicly, unless anonymity is specifically requested. Comments will be converted to PDF format and posted on the IOSCO website. Personal identifying information will not be edited from submissions. I. Email  Send comments to Internal-Controls@iosco.org.  The subject line of your message must indicate Intermediary Internal Controls.  If you attach a document, indicate the software used (e.g., WordPerfect, Microsoft WORD, ASCII text, etc) to create the attachment.  Do not submit attachments as HTML, PDF, GIFG, TIFF, PIF, ZIP or EXE files.  Please do not password protect PDF files. 2. Facsimile Transmission Send by facsimile transmission using the following fax number: + 34 (91) 555 93 68. 3. Paper Send 3 copies of your paper comment letter to: Mohamed Ben Salem IOSCO General Secretariat International Organization of Securities Commissions (IOSCO) Calle Oquendo 12 28006 Madrid Spain 2 Your comment letter should indicate prominently that it is a ̳Public Comment on Intermediary Internal Control’ 3 CONTENTS Chapter Page 1 Background and Purpose of Project 3 2 Internal Controls – Practices and Regulatory Requirements 5 3 Liquidity Requirements 27 4 Chapter 1 Background and Purpose of Project In May 2008, the Technical Committee (TC) of the International Organization of Securities Commissions (IOSCO) published its Report on the Subprime Crisis (Subprime Report)1. The TC noted in the Subprime Report that, among other things, many institutional investors and investment banking firms had inadequate risk modelling and internal controls in place to understand and address the risks they were assuming when buying many types of structured finance products. The TC further noted the work of the Senior Supervisors Group (SSG) in analyzing this issue2. As a result of its findings, the TC recommended that its Standing Committee on the Regulation of Market Intermediaries (TCSC3) ―undertake a study of the internal control systems of financial firms, including asset managers, in different IOSCO jurisdictions and develop principles to address any concerns identified.‖ The Subprime Report also addressed the critical importance of balance sheet liquidity for financial institutions. It observed that firms that proved more resilient during the market turmoil also appear to have more effectively managed their contingent liquidity needs. In some cases, this led firms to forego investments and business lines related to the subprime market because of the contingent liquidity risk they potentially posed. By contrast, firms that experienced greater difficulties tended to not align their treasury functions with their risk management processes, or may have based their contingency funding plans on incomplete or inaccurate information or faulty valuation practices. Indeed, the TC concluded that many institutional investors and investment banking firms had inadequate balance sheet liquidity, even when adequately capitalized. As a result, the Report recommended that TCSC3 also survey members on their experiences with regard to how firms they oversee managed liquidity risk, and wit