FACTBOX-Global regulators seek to plug supervision gaps

By Reuters Staff
January 8, 2010

Jan 8 (Reuters) – A forum of global financial regulators put forward 17 recommendations on Friday covering supervision of hedge funds, credit derivatives and mortgages in a bid to plug supervisory gaps highlighted by the financial crisis.

The G20 group of countries, which is spearheading reform of financial regulation at the global level, asked the forum last November to come up with recommendations.

Policymakers saw flaws in how supervisors of securities, insurers and banks worked together, with some firms able to exploit gaps. The recommendations comprise a marked shift in the parameters of regulation and supervision.

Some of the recommendations are already being acted on, such as forcing hedge fund managers to register and report to supervisors, and increasing transparency and central clearing of credit derivatives.

For report from the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions and the International Association of Insurance Supervisors click on

http://www.bis.org/publ/joint24.pdf

The main recommendations are:

– There should be minimum capital rules for all financial sectors so that firms can’t avoid setting aside capital by shifting an activity to a differently supervised sector.

– Firms that offer mortgages should adopt minimum underwriting standards to accurately assess each borrower’s ability to repay the loan in a reasonable period of time. There should be effective verification of income, job and debts. The origins of the financial crisis lay in defaults in the U.S. subprime home loans market.

– Supervisors should introduce/or strengthen minimum risk management regulatory standards for hedge fund operators.

– Supervisors should impose reporting requirements on hedge fund operators to identify possible sources of systemic risk.

– There should be minimum and ongoing capital requirements on hedge fund operators as a condition for registration and to allow orderly liquidation.

– Supervisors should encourage or require greater transparency for credit default swaps and financial guarantee insurance.

– Supervisors should impose capital requirements on CDS transactions, where appropriate.

– Policymakers should clarify the position of financial guarantee insurance in insurance regulation to make clear the sector is subject to regulation and supervision.

– Regulators should revise their core principles to specifically take into account system wide risks and not just risks from an individual firm. Poor appreciation and tackling of destabilising systemic risks is seen as a core lesson from the credit crunch.

– There should be similar rules for similar activities, no matter which financial sector they are located in.

– All activities and risks within cross-border financial groups should be regulated and supervised. The aim is to ensure that hitherto unregulated activities within a group are also supervised.

(Reporting by Huw Jones, editing by Stephen Nisbet)

((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))

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