Industry sign banking new york living will computer
hello this is Anne Jones webcast manager at premia and I'm pleased to welcome to this premia webinar today Alan D grody will present risk aggregation and risk reporting new requirements set the pace for accelerated training Alan grody is a leading practitioner academic and advisory advisor working at the forefront and intersection of risk management and risk Dave risk your data management he is the founder of financial inner group Holdings Ltd a strategic consulting & Financial Industry joint venture development company Alan has been involved in the financial industry for his entire business career of nearly five decades he has had hands-on experience in multiple sectors of the financial industry and has been consulting domestically and internationally on issues related to financial institutions global strategies capital and country contract marketing restructuring industry-wide financial business reengineering information systems evolving communications infrastructure and risk management methods and systems Alan is currently a founding board member of the Journal of risk management in financial institutions please feel free to submit your questions to the presenter via the question pane on the right hand side of your screen at any time during the presentation audience questions will be moderated by premiums exam director Andy Condor rocky and answered by Alan at the end of the session as time allows so now Alan I will turn the presentation over to you good morning thank you all for being here I think we've got some very interesting news to make to inform you of a very exciting first step on the route to risk adjusting the financial system risk measurement has been part of the regulatory agenda and financial services since the first Basel capital Court was introduced in 1988 we all assumed that the discipline developed to report on regulatory capital through the Basel lens would embed a risk culture and engender a thoughtful understanding of risk appetite and financial firms however these ambitions have remain largely unfulfilled due in part to an inability to maintain the quality of data needed and in front to the inability to aggregate that data for meaningful risk analysis and reporting hard work which will I will discuss later introduces a British between the direct alignment of financial performance metrics and risk exposure metrics this enables the risk appetite setting process to be Metro sized and become an integral part of the financial planning and budgeting cycle such risk exposure metrics can also be used to compute risk adjusted returns on capital and further to risk adjust the beta's in the capital asset pricing model clocks bridging economic theory with risk management concepts next I'd like to go to our presentation we have just endured a financial crisis of epic epic proportions one that almost toppled the entire global economy we are still not finished with it Europe and Asia remains let us say trouble assuming we get out of it for now we still have to deal with another problem a crisis of confidence regulators and investors don't trust the risk information they get from the financial community just a few days ago it was reported by Reuters that regulatory action may be needed to end variation in the way banks add up risks they think further the article said that the fatal committee is now studying risk weighting in the banking book and quoted the Faisel committee as saying quote it was reasonable for investors to complain that current risk disclosures are opaque and further that remedies could include a combination of better disclosures strictest supervision and forcing banks to show risk calculations based not only on their own but a standard model this is our problem to fix our industry's problem if we leave it to the regulators and legislators the result will be a political solution which always gravitates to the lowest common denominator and in the end winds up not solving the problem look at what we have to show for it a dysfunctional risk regime a patchwork of capital and contract market infrastructure that is springing leaks daily perhaps with another disastrous flash crash looming our financial institutions are being asked to write their death wishes in their living wills a serious set of unintended consequences from attempting to move OTC derivative markets into the futures industry infrastructure is with us this very moment and finally a first attempt at a global identification system but financial market participants and the products they own trade and process that too is potentially compromised through common denominator politics and contention amongst industry constituents this system a sort of bar code for banking as it is sometimes caught up is allowing us to think about the quality of data issues we live with every day the ability to aggregate this data and how to fix our risk data problem the next how do we fix our risk data problem there are two initiatives that are on the regulator's tables today that I wish to tell you about in today's webinar they are both intended to work together the first one is the global legal entity identifier the elio initiative first step toward risk adjusting the financial system it starts with a global identification system for financial market participants to allow for aggregating counterparty risk exposures and systemic risk analysis it is like a social security number or a tax ID no it is the first component of the g20 s mandated global identification standard in this webinar we will focus on the status of that implementation the second initiative is the exposure measurement and aggregation initiative for internal risk data around implementing basil's recently released principles for effective risk static aggregation and risk reporting here the prescription for change is around exposure measurement that must be dynamic comparable and tied to affirms books and records that is it must be reconcilable to the firm's general ledger it is an attempt to get control over the stochastic techniques far the like that are deemed overly complex not an additive that has inconsistent modeling techniques and assumptions and that is now being challenged by regulators as the basis with determining capital but in this webinar we will also focus on examination of its risk exposure quantification alternatives next I'd like to talk about some financial crisis in the modern era am i telling the history of the modern era of financial crisis I like to begin with the salad oil scandal of the 1960's that put one of the biggest commodity and securities firms under ira Hopson company and almost cratered American Express yes American Express who was then providing financing to what turned out to be a criminal enterprise we move through the paper crisis of Wall Street that caused the securities business closed down one day each week to handle the paper deluge of that era the currency crisis to her State Bank failure in Germany that made us all sensitive to overnight global systemic risk the currency crisis the energy crisis the wall street crash of 1987 the long-term capital fiasco pension and tax reform and the flash crash along the way we built infrastructure institutions from multilateral innovation of financial transactions and for clearance payment and settlement of those transactions and warehouses for immobilizing securities all to create a risk-adjusted financial system we changed our manual process to a highly automated financial system that is by most accounts seriously problematic and fraught with data quality issues and a dysfunctional identification system that requires huge mapping tables across weapons all the proprietary codes that purport to represent the same product or client most egregiously we put in place progressive Babel based by the risk regimes that failed us all next the Basel Accords it is understood that fundamentally firms risk management regime is comprised of setting of its risk appetite determining its capital requirements and pricing risk inherent in its financial products it is also expected that the risk management regime must be derived from a common risk measurement framework however it is widely understood that the absence of a standardized dynamic aggregate able and replicatable risk measurement framework results in the inability of banks to set and monitor their risk appetite e appetite using any objective measures and for investors and regulators most importantly to determine whether a firm is taking on too much risk absolutely or in comparison to others overall of the buck in all the basel regimes the bible capital requirements has resonant remains fixed and 8% of risk weighted assets although that 8% has increased in let's say purity as the calculations of risk weighted assets became more refined and the definitions of capital and qualifying reservists became precisely it has constantly constantly been tampered with in an incremental way now questions of its veracity is being put forward by another other then its creator the Basel Committee we will talk to the significant shift in attitude of the Basel level a bit later in this presentation next I want to talk about the dodd-frank agency is ennahdha which is broad as you can see here in this slide the dodd-frank legislation represents US regulators attempts at fundamental change keeping to the themes of data and data aggregation I would focus the dodd-frank legislation discussion today on the US Treasury and its Office of Financial Research focus on data seeing the MEI the legal entity identifier as the universal standard in order to observe our systemic risk the SEC sees it more broadly as a common set of both product and financial market the dudesman identifier usual for market surveillance and most recently is computer audit trail project the CFTC needs to legal entity identifier oversee the over-the-counter derivatives markets that have come under their purview and the Federal Reserve FINRA and other agencies are hoping to gain consensus of an identification system that would be cooperatively administered in some public/private configuration be used by industry and regulators and that will ultimately replace all proprietary identification schemes but obstacles were made as I'm sure you can appreciate given we have known about this problems for nearly three decades and many stands as bodies in our industry have tried and failed to come up with an agreed to stands it supposing business information of their business hierarchies and their ownership relationships of companies but one issue having stands is by that compete with each other now working together to come up with a new standards yet another next the g20 is our financial stability boards agenda it appears that US regulators and some sovereign regulators are realizing that global standards needs global oversight finally the issue has been taken up by the Financial Stability Board a creation of the g20 that has been given the mandate to oversee on a global basis the contagion of systemic risk trying the le AI and a system of global identification of financial market participants and the financial products they trade to observing systemic risk has not been easy as only recently at the right global institution the regulatory oversight council what we call the ROC ROC has been empowered to take on the challenge of getting global identification standards defined and accepted by summon regulators in their recent summary the g20 set a data high risk management agenda the g20 and its Financial Stability Board and now the rock have become the de facto center of the universe for dealing with financial reform to set a way forward in recognizing the contagion of systemic risk building up in the global financial system and finally to attempt to mitigate a financial crisis from occurring again a tall tall order the basis of this program focuses on the global financial institutions the capital they are hold the risk they take on in trading derivatives and the incentives they receive for selling complexity and that's a bit of optimization the agenda includes setting financial institutions to fail to import early disassembly based on living wills increasing capital regulating all manner of derivatives gain exchange based trading and central clearing to the remaining principal derivative products now trade it bilateral working to resolve high frequency trading and rethinking on dysfunctional identification system of financial market position participant and the products they trade this is all on their agenda next we're going to talk about the Financial Stability Board the Financial Stability Board was established in April 2009 under the g20 to coordinate at the international level the work of national financial authorities and international standard setting bodies they were said to develop and promote the implementation of effective regulatory supervisory or supervisory and other financial sector policies and to bring together national authorities responsible for financial stability is chaired by Mark Carney governor of the Bank of Canada and soon-to-be governor of the Bank of England its Secretariat is located in Basel and is hosted by none other than the Bank for International Settlements next I'd like to talk to you about the global le I initiative and where we are on its implementation let me give you a current status on this most important first step toward risk adjusting the financial system and where it originated from next I'd like to speak to you about Lehman's revelation where it all began the current regime a regulatory form reformed and specifically the dodd-frank act was inspired by the revelation of what was found in the basement of the wreckage of Lehman Brothers bankruptcy no consistency identifying Lehman ISM californee with others the whole understanding of what relationships Lehman had with others no mechanism to associate all of LeMans products and businesses into a told view of the exposure to other others had philemon should it fail in effect no one not regulators or creditors or paralyzed could see in Selenas exposure to risk the big fix this absence of a unique unambiguous and universal legal entity identifier has let the individual firms need for a layer of mapping software and middleware to compensate for this fundamental missing piece of the infrastructure of the industry the consequences are enormous huge additional costs and a process one could only describe as mapping help looking into the basement of Lehman to regulate the forensic accountants the bankruptcy lawyers the creditors and the counterparties found the plumbing leaking at best and in need of replacement for sure and as the problem as we all know it wasn't just women it was a fundamental flaw in the infrastructure of the global financial industry no Universal identification of business entities that we loan money to extend credit to use as reference entities in our credit default swaps and trade with counterparties next I'd like to talk to you about some of the requirements of the global legal and they identifier here are the key requirements of the proposed global identification system that is the lu le i standed advocated by regulators and industry members alike it has to be self registered which means having the financial market participant identify itself who else knows it's better than the firm that sets up the Articles of Incorporation are applies for a pro fabula license or a bank charter the number itself needs to have no intelligent incent no intelligence in it no country or issuing agency code no ability to pause the numbers to determine meaning instead all intelligence is contained in the Associated reference data change the reference data not the number and the number can persist for all times providing a meaningful water trail any and all changes that occur certification is important sort of a sticky wicket we have a case for auditors as designated certifying pages perhaps exchanges in reality orders and exchanges are already at the frontline in observing the creation of legal entities others believe the certifying function can be carried out by central securities depositories of clearing agents or data data vendors this alien eye system is to be organized as a federated netwo
k of individual country-specific le i registries brought together as a virtual database much as the internet and the world wide web work today it will start up in 2013 that's now with a final launch state decision to be taken by a newly installed Board of Directors that will be overseen by the regulatory oversight council the book nomination process is to begin shortly now let's drill down into the lui requirements I like next to talk about the common identifier system that we are proposed our approach to the legal entity identifier is for the proponent thoughts known as the enemy specific portion of the code to have a sovereign sponsor that is a government of sorts or a regulator in a sovereign country sponsor a local operating unit which will have the discretion as to what to use for this portion of the code the entity specific portion we call our code construction the u3 identification system for a uniform universal and unambiguous it consists initially of a fixed length of 11 business which conforms to the majority of all the legacy proprietary numbering prevention that will make a transformation to the new numbering convention over time the registration domain identifiers are our ID portion consists initially of a six digit code to be administered by sovereign regulated the remaining initial five digits are signed by the legal entity itself in whatever sequence of mana they choose we suggest the beastie question the u3 identification system can be extended beyond the LOI to include all the other requirements currently identified by US regulators next I'd like to talk to you about what we do with all of these legal entity identifiers in the end we need to aggregate the le I in business entity and control groups so that we can aggregate the associated cash flows and value position data across multiple financial institutions remember the purpose is to see the contagion of systemic risks building up across the globe this is yet to be determined how to do this this is what you see here it depicted our approach on how to do this now next I'd like to ask you some questions we'd like to poll you the first question is are you aware of your institution's involvement in or contribution to the development of the global le I system answer yes or no I have launched the poll question you have approximately 10 seconds to answer I have closed the poll question let me share with you the results the results are 25 percent said yes and 75 percent said no quite interesting I'm glad you're all here listening to this because it's obviously on the agenda immediately and obviously your firms have to get up to speed with this the second question do you know what activities are underway to prepare for the implementation of the lui system in your institution answer yes or no I have launched the poll question you have approximately 10 seconds to answer this one I have closed the poll question let me share the results we have 13 percent said yes and 88 percent said no your own organization next let me talk to you about exposure measurement and aggregation will turn to Basil's new approach for data aggregation set to be implemented this time we have a little time to prepare by 2016 that will work hand in glove with the le I and the rest of the global ID system he has to come the amount of time is very short when you think about the amount of systems work that has to go on to move from a new identification system so what I'm going to tell you about in the next slide on risk data aggregation and reporting first to understand the term risk data aggregation it means defining gathering and processing risk data according to the bank's risk reporting requirements to enable the bank to measure its performance potential risk tolerance and appetite so this end the Financial Stability Board in collaboration with standard setters will develop a set of supervisory expectations to move firms particularly the systemically important financial institutions to move their data aggregation capabilities to a level where supervisors firms and other uses of the data such as too-big-to-fail financial resolution authorities are confident that the management information and risk reports accurately capture the risks of the institution the deadline for the largest financial institutions to meet these expectations not to spot in the beginning of 2016 next I'd like to talk to you about the Basel committees restate our objectives for this initiative what are they trying to accomplish well they want to enhance the infrastructure for reporting key information particularly to the board and senior management to use this information to improve the decision-making process throughout the organization to enhance the management of information across legal entities while facilitating a comprehensive assessment of risk exposures at the global consolidated level they want to reduce the probability and severity of losses resulting from data and risk management weaknesses improve the speed of which information is available and improve each organization's ability to manage the risk of new products and services quite a smorgasbord of things they want to accomplish next I would like to talk to you about risk data and it's key requirement what are these requirements of this enlightened risk reporting regime well here's the prescription for what they are expecting control surrounding risk data's should be as robust as those applicable to accounting data RIF Staters should be reconciled to accounting data as well as for bank sources and books of record to ensure that the risk data is accurate a financial institution since try strive towards a single authoritative source for risk data risk report should include but not be limited to credit risk market operational risk liquidity risk liquidity ratio projections stress test the result results inter and intra risk concentrations and funding positions and plans finally and most importantly it should include capital adequacy regulatory capital and capital ratio projections yes why is capital so important well one of the key functions of capital is to protect the positives and other clients from the financial institution its failure take a look at this chart on the right at the lonely bottom of the chart is the depositor then progressively you can see the layers of a protective capital that absorb losses and financial performance declines we started out a number of slides ago by saying that our industry is experiencing a crisis confidence if investors don't have confidence in a bank's ability to identify quantify and aggregate its risk in a meaningful way then performance on the left side of the slide becomes more prone to unexpected law that presents us with a triple whammy if there is concern that an institution is thrown to unexpected loss declines and performance can accelerate or go into freefall as we saw during the financial crisis investors lose confidence so they remove their capital and invested elsewhere and the part of it is get nervous about the safety of their money and they remove that as well in these circumstances capital can quickly lose this protective properties and function more like the ruler by which firms countdown to failure rather than a mechanism designed to prevent it perhaps that explains what Basel is now switching its focus on to risk data aggregation and risk reporting in addition to the de Faizal three demands to enhance the quality and quantity of bank capital next we want to talk about why data is so important need we even ask first risk exposures are and pause the consequence of the failed or insecure interaction of manual processes an automated process with date usually florid data relevant to the processing of processing of transactions the reporting of financial risk the problem of faulty and ambiguous data creates huge operational risk transactions cannot be practiced in any reasonable automated and complete manner what we refer to as straight through processes this failure is compensated for by requiring human interaction and reconciliation procedures across all the business aisles that comprise a global financial institution the improper interaction of human and automated process on data causes risk streamline the process automatically interactions reduce the incidents of faulty data and we can eliminate operational risk or at least minimizing and it's not only operational risk the consequences of faulty data impacts data aggregation which causes the risk calculations of the desk or department or the overall firm to be questioned certainly with no assurance that the daily numbers are correct and certainly with limited confidence that real-time risk management is even achievable not without first fixing the data problem now I like to next go to the next poll question question three are you surprised to find the Basel rules of data add music aggregation so prescriptive answer yes or no I have launched the poll question you have 10 approximately 10 seconds to answer I have closed the poll question IRA share your results 14 percent said yes 86 percent said no well the Basel Committee is taking this serious the house getting data aggregated properly well that's great and I'm glad you have confidence in the Basel Committee the next question is your company preparing for the implementation of these data aggregation rules answer yes know what don't know I have launched the poll question you have about 10 seconds to answer the pole and I will share your results 38% said yes 16% said no and 46% said they didn't know everyone know about this it's important as you respected the fact that the Basel Committee rules should be prescriptive in the answer to the first question and you're not surprised that they are now the next slide is actually the picture of a dog catching a frisbee and it comes as the cover sheet to a speech made by a most brilliant observer about the current basel regime and the kaldane was the executive director of the Bank of England's financial stability Council the dog and frisbee analogy he used also the titleist paper and speech he gave at the Federal Reserve's recent summin summin equated the current risk regime as equivalent to an attempt to calculate both the flight of the frisbee and the pursued of the dog to catch the frisbee the mathematics of doing this analysis let us say formidable in Andy's views is that formidable as a risk risk mathematics accepted in the debate of risk regime his point the dog learns by intuition to catch the frisbee he makes the point we need to rely more on intuition and season judgments than mathematics as the dog does next I'd like to talk to you about a view of basel ii and the risk models that Andy shared with the Federal Reserve and those others who attended the summit a few months ago quote Andy the quest for with sensitivity in the bottle framework while sensible in principle has generated problems in practice it has spawned startling degrees at startling degrees of complexity and an over-reliance that is the word over reliance on probably unreliable model he further says with thousand parameters calibrated from short samples these models are unlikely to be robust for many decades past centuries to come it is close to impossible to tell whether results from them are fruit a very compelling argument of simplicity don't you think now next I'd like to talk about how financial firms currently manage their risk as we all know we have been looking at the graph on this chart for a long long time as the symbol of our overly complex mathematically driven technique for managing risk this is in stark contrast to the image on the previous page of the dog catching the frisbee simply by repetitive practice and intuition a lesson we took into our approach I and my colleagues to what we call risk accounting I'd like next to talk to you about accounting systems versus risk systems we have all come to understand the shortcoming of conventional risk management and accounting systems such as risk events that do not trigger accounting events flow of risk models that is model risk and data quality issues we have seen the different versions of the same capital economic and hook with no ability to reconcile one to the other we understand stakeholders lack of understanding of models statistical theory and assumptions used versus their intuitive understanding of profit we've seen the lack of comparative bility of risk quantification within and between environments leading to difficulties in budgeting risks that is as in risk appetite settings and monitoring and with no ability to identify and quantify the contagion of systemic risk think that's it is in just a few years ago finally it has to be viewed as somewhat incongruous that the governing bodies that oversee the process by which banks determine the levels of capital they have that is booked capital versus a capital they need economic capital follow very different philosophies whereas the county bodies believe that their standards need to be highly prescriptive banking supervisors believe or disbelieve the option for example the Financial Services Authority in the UK issued a document entitled I cap submissions suggest this format where the first line item states quote firms are not required to adopt this format what has to submit their internal capital adequacy assessment process to the FS for review they're not quiet to follow this format our recent research has identified these issues within current risk reporting regimes and concluded that there is the need for new brass parallel techniques to our current best practice candy Haldane is asked for such a simplification and perhaps now the new Bank of England governor will also retain his chairmanship of the FSB will demand one as well next I'd like to talk about the misalignment in risk and accounting we have come to understand that accounting debits are no longer a reliable proxy for exposure it has been long mutated by derivatives we also understand our flawed risk models and data quality issues our stakeholders lack of understanding of these models of statistical theory and assumptions made they are in need of mapping their intuitive understanding of profit to the RISC regime as an industry we ask a lot of our inventors by expecting them to understand the difference between book capital and economic capital one being the product of accounting IFRS US GAAP and like that evaluation or film value base and the other the product of risk modeling that's aim it's a quantified future expose a unexpected loss because they are the product of two fundamentally different processes the amount of capital produced by each is not reconcilable we and other academics believe this difference simply shouldn't exist there should be only one version of capital and the way to achieve that is to account for the exposures that transactions trigger rather than their inherent value put more on that later ah next get to the answer risk account from mine of my colleagues recent paper which is available on www.hsn.com we feel that the disclosure in our surprises financial condition and the concomitant determination of its capital a discrete adequacy must be a function of accounting rather than financial month that is it is achievable by handing risk information to the existing management information that is attached to transactions upon their registration and accounting system in this way a comprehensive risk management system is created that is tied to the financials of the enterprise that is lined with management accounting active and can produce a system of integrated risk and management reporting finally that the root cap exciting appetite spinning process can produce measurement data and become an integral part as an interpreters financial planning and budgeting back that is what we believe puzzles risk aggregation regime and mapping it the general ledger is all about next we'd like to make a briefcase for risk accounting we believe hire my colleagues that financial accounting needs fundamental revisions and a specialized new branch that we call risk accounts risk exposure measurements or risky County as we call it needs to be worked into the fabric of the risk regime if we are ever to have an effective external financial accounting and
regulatory environment current accounting practices are focused on valuation which is inherently a static measure of financial condition focused on exposures risk accounting is an inherently a dynamic measure of financial condition because it indicates how the individual balance sheet values are likely to change in response to changes in the underlying financial economic environment we tested the implements ability of the risk accounting techniques we've created through the development of pilots prototype software and the simulation of complex transactions we believe that our risk accounting method improves upon the known differences of our and other stochastic techniques in an enterprise-wide risk context why well because risk accounting is a direct and explicit risk exposure measurement technique that allows for consistency and comparability across firms and between firms business units it is an aggregator for risk measure and allows for timely and dynamic reporting of accumulating risk exposure the system of accounting for risk is capable of dynamically linking exposure measurements with changes in the factors providing for continual process improvement and risk mitigation by allowing the drill-down could these causal factors and establishing measurable risk mitigation project it also allows for objective measures of risk appetite setting and monitoring links operational metrics and risk metrics and risk adjust performance reporting the techniques we describe in our paper was first piloted Chase Manhattan Bank in the late 90s under the sponsorship from the chief operating officer initially as an operational risk management solution at the dawn of the Liberation's and what was to become Basel two's introductions of a capital calculation for operational risk pilots have been conducted by us contestant methodology and validated output and a research talent collaboration was established in 2009 with the York management School of Business and in 2012 with Leeds University to update the methodology in the light of the financial crisis and to extend its capability to financial risks next I'd like to tester after third and the fifth of six poll questions five do you believe risk management has become too complex answer yes or no I have launched the poll question if approximately 10 seconds to answer I have closed the poll question I will share your results 44% said yes 56% said no I believe the folks who might be risk managers I believe they understand it I believe the folks who don't heart risk managers are the other half but we might have a dialogue about that in the final questions that you might want to ask me ah the sixth question the last question do you believe a method that size accounting valuations so the riskiness of transactions can work toward simplifying risk management answer yes or no I have launched the poll question you have approximately 10 seconds to answer I have closed the poll question and I'll share your results 69% yes 31% said no the work that we've been doing over the last number of years and others obviously and that has found its way into the Basel mandates for data aggregation as you would up you understood my presentation of a few slides ago next I'd like to introduce you to premiers a risk data workshop which I and another colleague of mine are privileged to be providing in a three-day workshop from March 26 to 28 in New York City we will explore these and related issues that we just discussed in depth next the course outline is shown here day by day it's an intensive course it'll cover in depth at which I was just able to cover on the surface in this webinar we have it laid out over the three days in in two separate sessions in each morning and afternoon session over the three days you will be delighted to know that I and my partner will be up close and in your face for those three days maybe we'll have fun perhaps we'll be intense at times we'll have foot dialogue and I invite you all to come we have quite a number of people that have already signed up the events and we'll look forward to perhaps some of you are on this call to do the same I like to refer you to the next slide which basically is me in my full glory with my picture in my smaller bio and then the next slide which is my colleague Peter use and his bio somewhat shortened Peter has been a risk manager and a country manager at JPMorgan Chase for quite a number of years and its predecessor firm Chase Manhattan Bank and he runs our business out of the UK I would like to conclude that the starting point for risk adjusting the financial system is the global identification system specifically the le I initiative to begin in 2013 and the Basel Committee risk aggregation mandate to be enforced beginning in 2016 which we need to start now we've attempted in this webinar to describe each of those prescriptions for change and a lot more detail on these and risk account counting will be focused on in the three-day training event later this month now taken together they will allow for data transparency risk aggregation of position and cash flow data it will lower the tolerance for losses get regulated seeing ability to finally implement its regulatory oversight mandate reduce huge duplicated infrastructure seek triggers of systemic risk and finally permit the long voice mantra of straight-through processing for improving the industry's efficiency and lowering its cost next I turn it over to our moderator who will prompt you to ask me questions I thank you for allowing me to present our pickings Allen thank you for for your presentation today I think I think everybody has a lot to learn from this and we have quite a few questions from from our audience and I would like to start to kick it off by go that's the lumen case and ask you if you can talk a little bit more about how long it took us to identify the demons of exposure to the le eyes if I understand the question it was how long did it take us to get to understand that the legal entity identifier was a key to solving risk management problems and if that's the question ah it's um 2033 it took 30 years and multiple attempts to try and do what now is being pushed down from the top the g20 for us to do when I say 30 years I literally dated to the 1987 Mothe crash in the United States which had repercussions throughout the world and the attempt then to organize a study group led by then chairman John reads understand the causes of the problem and the long-term cures it was at that point in time around the whole idea of what went wrong and our improvement that the study produced the idea of getting expanded goals and copy of referential data meaning the identities of financial market participants the products they trade and all of the data elements associated with those business entities and their products it was believed and still is that that is common to all and should be given out as non proprietary to everyone as the common denominator for supporting all the other business applications to come in the financial industry so it took five different attempts by various organizations to fail for the Financial Stability Board taken on after the financial crisis and to understand what they found in the Lehman basement of needing to fix the plumbing is an endemic problem and that it's the first step on the road to risk adjusting the financial system I'm glad I'm glad you ended with that because our next question is how many le is does the complex bank usually have and in your opinion is the current le I trust you're a good one okay uh I could give you some numbers that are accurate Goldman Sachs has 10,000 legal entities under its umbrella Bank of America has $4,000 Bank has 6,000 Morgan Stanley has 6,000 on and on and on and on Allah Allah ah the question about how the legal entity identifier project is proceeding I I have to be an advisor on the project one of many and so I have some intimate knowledge of it and it's proceeding as best you can expect and that's a positive I don't mean to be coy given that we have now 60 regulatory organizations spread out over maybe 40 different countries buying in to the concept of pushing through in their own jurisdictions to mandate the requirement the cajoling of financial institutions and financial market participants to get a legal entity identifier by registering their information in the local operating units that will run their local registries it is quite an accomplishment to get so many people so many disparate regulatory regimes so many countries to sign on to this that we have to give a thumbs up for this effort now the devil is always in the detail and I don't want to leave you hanging here but I can't go into all the detail of what the issues are but I can give you a clue that in our opinion the devil is in the construction of the code itself to allow for the ability to aggregate all of these multiple le eyes into one unit to some of the leaving problem and to be able to have a gate these these legal entities that are going to be registered across multiple global operating units in any reasonable timeframe in order for it to work for analysis of internal needs as well as systemic risk needs the other thing is the relationships that each entity has with the other and that is something that is being focused on as we speak and it has to do initially with dealing with the way in which these business entities are consolidated for accounting and materiality attestation purposes that is our current focus and of course we have to move out of that organizational form or legal entities into credit aggregation for credit limits for example and for aggregations for counterparty risks for example so there's a lot of work to be done and we will be standing up a board of directors shortly within weeks perhaps and those of you who care to nominate people you'll be pinged in a public way to do so and we're looking to get the most prominent most capable people to lead this effort into the future Thanks and you mentioned the different regulatory regimes can these projects ever come to function without any regulatory compulsion is this one of the major hurdles that we're facing well I've made my voice loud and clear that it can never happen without regulatory compulsion and the reason I say that is because we've tried and fail I personally tried and organized the financial community globally to do this and in the end it it was disbanded in favor of the competitive forces and the nature of competition and the financial industry even the standards body so competitive with each other and so unless we have regulatory compulsion this will never work I think we have an empty beds and how does a structure was that with so many le eyes solve the problem related to to risk aggregation with how well the first thing is we do have so many le eyes I mean that's the reality of its assets and thousand business entities I mean we can we can't bypass that why they do it F TVs trust a whole bunch of things securitized products you know a whole bunch of things so that's given so what we have to do is be smart about how to aggregate these and the global legal entity identification system is attempting to be smart about how to abrogate these we have presented it our proposal on how to do this others have different ideas on how to do this and hopefully in in in the court of public opinion and thoughtful opinion based upon people like yourself are on this webinar we will debate the issue in the rigorous way we need to and come to a non-political non-force decision to the common lowest common denominator and solve the problem at the highest level of intellect systems design and an understanding that what we do now is the first step on what has to be fit for purpose for all our aspirations for the future well thank you very much Ellen and thank you for today's presentation those those are all the questions that from the audience so far so with thanks Andy Thank You Allen for sharing your expertise and thank you to all that have joined us today just a couple of things I need to mention that GoToWebinar link that I sent you that you use to access this webinar will become your recording link in the next 48 hours usually it's in a couple hours but give me up to 48 hours to get that done also make sure that you check out the details for the three course three day course that's being led by Allen and Peter by going to premios website at www.archives.gov/calendar the training tab and you can check out becoming a sustaining membership under our website thank you for joining this webinar
