Two
examples
A. Basel ii framework
B. The 8th Company Law
Directive (the European Sarbanes-Oxley)
A. Basel ii is a
mandatory framework which is full of differences (different
approaches, different deadlines, different options, different national
discretions etc. )
When we have all these different approaches and options
by design (Basel ii is proud of that), we
also have
"flexible" countries that create opportunities...
...
and "non-flexible" countries
(compliance is just an obligation).
Hedge Funds select the more favorable jurisdictions, playing one
government off against another.
Is it
fair? Absolutely!
The "flexible" countries know that. They
have a plan, to retain or attract foreign direct investments. They
know that
hedge fund managers like shopping, especially
"regulator shopping". They try to find the friendliest regime
to do business.
The "non-flexible" countries complain.
They say that a general easing of regulations is a
"race to the bottom". And, they
continue to lose money, jobs, investments.
Basel ii is supposed to be the framework
that attempts to align economic and regulatory capital more closely to
reduce the scope for regulatory arbitrage.
At least, this is what they say.
But, you can not have so many differences
(approaches, deadlines, options and national discretions)
and the same time to say that you try to
reduce the scope of regulatory arbitrage!!! This is an
oxymoron.
Example:
By providing at least three alternative capital
calculation methods, Basel II creates
differences that do not exist in Basel I. The treatment of
non-investment-grade credits under the standardized approach is so different from the treatment
under the foundation or advanced internal ratings based (IRB)
approach.
B. The
8th Company Law Directive (the European Sarbanes-Oxley)
After the passage of the US Sarbanes-Oxley Act
in 2002, US and non-US companies listed
in a US stock exchange have the difficult task to comply with the
Sarbanes-Oxley Act.
After the passage of the European Union's 8th
Company Law Directive on Statutory Audit (Directive
2006/43/EC), European and non-European
companies listed in any country of the EU have to comply with the
8th company law directive.
The 8th directive is considered the European post Sarbanes-Oxley
regulatory retaliation. And, like in the US SOX, there are
extremely important extraterritorial
consequences.
The Offshore Financial Centers (OFCs) for example must immediately
enact legislation to prove that they have an "equivalent level of
regulation", to protect their auditors that audit offshore companies
with EU listings from being subject to a tough European oversight
regime. Otherwise, auditors and audit firms from "third countries"
have to be registered in the EU and to be subject to oversight,
quality assurance and sanctions.
Under Article 45(1) of Directive 2006/43/EC the competent
authorities of the Member States are required to register
third-country auditors and audit entities that conduct a statutory
audit on certain companies incorporated outwith the Community whose
transferable securities are admitted to trading on a market
regulated within the Community.
Article 45(3) of Directive 2006/43/EC requires Member States to
subject such registered third-country auditors and audit entities to
their systems of oversight, quality assurance systems and systems of
investigations and penalties.
The European Commission is required under Article 46(2) of Directive
2006/43/EC to assess the equivalence of third country oversight,
quality assurance and investigation and penalties systems in
cooperation with Member States and make a determine on it. If those
systems are recognised as equivalent, Member States may exempt third
country auditors and audit entities from requirements of Article 45
of the Directive on the basis of reciprocity.
But...
The European Commission has carried out a preliminary assessment of
audit regulation in relevant third countries. The assessments have
not allowed final equivalence decisions to be taken
GROUP 1: Australia, Canada, Japan,
Singapore, South Africa, South Korea, Switzerland and the United
States have a system of public oversight in place, although for the
time being the information about the systems is not sufficient for
final equivalence decisions to be taken.
GROUP 2: Brazil, China, Croatia,
Guernsey, Jersey, the Isle of Man, Hong Kong, India, Indonesia,
Israel, Morocco, New Zealand, Pakistan, Russia, Taiwan, Thailand,
Turkey and Ukraine, does not have such systems of public oversight
but appears to offer a perspective of moving towards them within a
reasonable timeframe.
GROUP 3: Argentina, Bahamas, Bermudas,
Chile, Colombia, Kazakhastan, Mauritius, Mexico, Philippines, United
Arab Emirates and Zambia, has in place an audit regulatory framework
offering also a perspective of moving towards a system of public
oversight in a longer timeframe.
For the second and third groups of third countries, further
equivalence assessments WILL take place once each of such third
countries has made a public commitment to comply with equivalence
criteria.
Auditors and audit entities from the third countries should be able
to continue their activities in relation to audit reports concerning
annual or consolidated accounts for financial years starting during
the period from 29 June 2008 to 1 January 2011.
Regulatory Arbitrage Opportunities - The environment
ARTICLE 45.4. DIRECTIVE 2006/43/EC OF THE EUROPEAN PARLIAMENT AND OF
THE COUNCIL of 17 May 2006
"Audit reports concerning annual accounts or consolidated accounts
issued by third-country auditors or audit entities that are not
registered in the Member State shall have no legal effect in that
Member State".
Have a look at companies incorporated in Guernsey, Jersey, the Isle
of Man - countries that have NOT equivalent system.
There are several firms incorporated in countries from Group 2 and 3
and listed in Europe. The European regulators have a surprise for
them: Their auditors are not recognized in Europe, and their opinion
has no legal effect in Europe.
Here the excitements starts... Just an example:
A. How shareholders react when something has happened (they never
understand what) and we can not have consolidated financial
statements?
B. What about the Basel ii obligation - the home country is
responsible for the consolidated financial statements - when the
home country is non-European and the host country is European?
Basel iii and Regulatory
Arbitrage
It is very interesting to monitor the
regulatory differences that will definitely lead to regulatory
arbitrage.
One more time, Basel iii looks like a menu
approach, and counties will be able to do more or less, sooner or
later.
Basel iii will again become something like a dream,
and the national interpretation of Basel iii will become the law,
which is going to be different from country to country.
Some
important issues
1. The
definition of the Tier 1 Capital. A new definition has a huge
impact for healthy (under Basel 2) banks. For years, some banks
rely on types of
hybrid equity that may now not meet
the new Basel iii requirements.
For example, there is a
form of non-voting bank capital in Germany, known as
"silent participations”,
which do not absorb losses as long as a bank
is still in business.
For this reason the Basel Committee excludes
them from banks' Tier 1 capital, which could force German banks to
raise billions, as a quarter to a third of the capital reserves of
German savings banks, cooperative banks, private banks and
landesbanks come in the form of silent participations. We speak
about 50 billion Euros.
If banks are unable to raise equity on
capital markets, it could lead to a shortfall in loans to
companies and municipalities in Germany of 300-400 billion Euros.
2. Investors will be scared.
If Tier 1 capital is less than 9%, banks will
not be allowed to pay out dividends to
shareholders.
In good times,
banks have to allocate another 3%, the "anti-cyclical buffer". It
simply means that in good times banks need Tier 1 capital of 12%
in order to be able to pay dividends.
If we add
4% Tier 2 capital, we reach an interesting
number: 16% (6 percent Tier 1, plus 4
percent Tier 2, plus 3 percent conservation buffer, plus 3 percent
anticyclical buffer). And, remember,
we have a more (very strict) definition of Tier 1 capital. Hybrids
are out.
Hedge funds could
plan to short certain banks.
Investors try to understand how
much capital banks may need to raise in order to be able to pay
dividends.
The Basel iii regulatory changes
that require banks to hold more capital for risky assets
will hit some banks that have large
investment banking divisions
especially hard.
One of our
Regulatory Arbitrage presentations (233 slides) is part of the
Certified Hedge Fund Compliance Expert (CHFCE)
- Distance Learning and Online
Certification Program
Certified Hedge Fund Compliance Expert (CHFCE)
The
Cost:
US$
797
What is
included in the
price:
A.
The
official presentations we use in our
instructor-led classes (5387 slides)
We will
send you:
A1.
Compliance for Hedge Funds Around the World
- 710 slides
A2.
The Sarbanes Oxley Act: What you need to know
- 410 slides
A3.
Understanding the Frameworks:
COSO and COSO ERM
- 110 slides
A4.
Understanding the Frameworks: COBIT
- 272 slides
A5.
The Basel ii Accord and the new
international standards in credit, market and operational risk Part
A
- 354 slides
A6.
The Basel ii Accord and the new international standards in
credit, market and operational risk Part B
- 448 slides
A7.
Financial Stress
Testing
-
437 slides
A8.
Understanding the European Sarbanes Oxley -
the 8th Company Law Directive, the Market Abuse Directive and the
Transparency Directive of the
European Union
- 370 slides
A9.
The Markets in Financial Instruments Directive (MiFID) - the
European Union's harmonized regulatory regime for investment
services across the 30 member states
- 557 slides
A10.
Undertakings for Collective Investment in Transferable Securities
(UCITS III / UCITS IV): What is important
- 327 slides
A11.
Regulatory Arbitrage after the Basel ii framework and the 8th
Company Law Directive of the European Union
- 233 slides
A12.
The Financial
Conglomerates Directive of the European Union
- 183 slides
A13.
The Dodd Frank
Act and the major changes in corporate governance and risk
management
- 976 slides
B.
Up to 3 Online Exams
You have to pass one exam. If you fail, you must
study the official presentations and try again, but
you do not need to spend money. Up to 3 exams are
included in the price.
To
learn more about the exam:
www.hedge-funds-association.com/CHFCE_Certification_Steps_1.pdf
C. Personalized Certificate printed in full color
Processing, printing,
packing and posting to
your office or home
D. Membership to the Association,
Networking and Exposure to the Market
You will receive a monthly newsletter to stay current with new
developments and opportunities
E.
The Dodd Frank Act and the new
Risk Management Standards (976
slides, A13 above)
The US Dodd-Frank Wall Street Reform and Consumer Protection
Act is the most significant piece of legislation concerning the
financial services industry in about 80 years. What does it mean for
risk and compliance management professionals? It means new
challenges, new jobs, new careers, new opportunities.
The bill establishes new risk management and corporate
governance principles, sets up an early warning system to protect
the economy from future threats, and brings more transparency and
accountability. It also amends important sections of the Sarbanes
Oxley Act. For example, it significantly expands whistleblower
protections under the Sarbanes Oxley Act and creates additional
anti-retaliation requirements.
To learn more:
www.hedge-funds-association.com/Distance_Learning_and_Certification.htm
