Half Day Forum UPDATE ON POLICIES & GUIDELINES Presenter: Karen Rolle, Sr. Asst. Manager Bank Supervision Dept., Policy Unit April 22 nd 2008 Date:
Agenda � New Guideline – Draft Guidelines for the Management of Interest Rate Risk � Amended Guidelines – Corporate Governance – Large Exposures 2
Agenda contd. � Draft Legislation – The Banks and Trust Companies (Temporary Business Continuity Operations) Regulation, 2007 – Proposal to Amend the Banks and Trust Companies Regulation Act, 2000 Relating to the Rights and Duties of Auditors of Licensees – Banks and Trust Companies (Auditors) (Facts and Matters of Material Significance) Regulation 2007 3
Agenda contd. � Guidance Note – Guidance Note on Supervision of Nominee Activities of Subsidiaries and Related Companies of Banks and Trust Companies. 4
Interest Rate Risk Consultation Paper (CP) on the Draft Guidelines for the Management of Interest Rate Risk � The CP was issued on April 16 th 2008. � Consultation ends 16 th June 2008. 5
Interest Rate Risk � The Guideline applies to all licensees that engage in business activities in its banking book which give rise to Interest Rate Risk (IRR). � A licensee’s risk management program should cover its IRR exposure. � The Central Bank will allow a licensee to be covered under its parent’s risk management program for IRR. � Exemption will be permitted on a case by case basis. 6
Interest Rate Risk � The draft Guideline: – offers a principles-based approach to managing interest rate risk; – highlights the responsibilities of the board of directors and senior management in managing IRR; – defines the key elements of risk management policies, procedures and controls; and – defines the key elements of risk identification and measurement tools. 7
Interest Rate Risk The Central Bank recognizes that the interest rate risk management program will differ between licensees based on their: – size; – complexity of assets and liabilities; – risk tolerance; and – risk profile . 8
Interest Rate Risk An effective risk management program for IRR should include: – appropriate board and senior management oversight; – adequate risk management policies and procedures; – appropriate risk identification, monitoring and measurement functions; and – a comprehensive internal controls and independent audit function. 9
Interest Rate Risk � Risk measurement systems for IRR – The draft guideline does not prescribe any particular measurement system as this will be based on a licensee’s business activities. A few examples or risk measurement systems are : re-pricing maturity gap reports, � net income simulation models, and � duration models. � – Licensees may consult the Basel Committee’s paper, Principles for the Management and Supervision of Interest Rate Risk , July 2004, for further guidance (www.bis.org). 10
Interest Rate Risk � Stress Testing – Licensees should measure their vulnerability to loss in stressed market conditions. � Limits – Licensees should establish operating limits consistent with their internal policies. 11
Interest Rate Risk � Capital and Reporting Requirements – The board and senior management should ensure that the licensee holds adequate capital to support its IRR exposure. – The Central Bank may require a licensee to hold more capital or reduce its IRR position. – Licensees are required to report on their IRR exposures on a quarterly basis (form BSD 2B – Interest Rate Sensitivity Schedule). 12
Corporate Governance The Central Bank plans to release a revised version of its Corporate Governance (CG) Guidelines (issued in December 2001). 13
Corporate Governance Significant changes: � The Independent Non-Executive Director Guidelines (issued May 2006) has been subsumed into the revised CG Guidelines. � The frequency of Board Meetings has been changed from quarterly to discretionary. � The December 2003 amendment to the CG Guidelines removing the requirement for the External Auditor’s certification is now reflected in the Guidelines. 14
Large Exposures � The Central Bank released the revised Guidelines for the Management of Large Exposures in April 2008. 15
Large Exposures Significant change: � The amendment addresses the conflict between Section 4 of the Guidelines and the Banks and Trust Companies (Large Exposures) Regulations, 2005, particularly Regulations 7 and 8. � Regulation 7 lists several exposures that are exempted without pre-notification to the Central Bank. 16
Large Exposures � Regulation 8 pre-notification requirement applies to a select group of exposures. � Section 4 of the Guidelines now makes clear which “exempt exposures” should be pre- notified. Prior to, the Guidelines required pre- notification for all exempt exposures. 17
Temporary Business Continuity � The Central Bank issued a Consultation Paper on The Banks and Trust Companies (Temporary Business Continuity Operations) Regulations, 2007 in November 2007. 18
Temporary Business Continuity � Purpose of the Regulation – Foreign banks and trust companies are allowed to establish operations in the Bahamas on a temporary basis due to a natural disaster or other serious event in their home country . – It exempts such entities from the licensing requirement under the BTCRA. 19
Temporary Business Continuity � Key provisions under the draft Regulation: – foreign bank or trust company must enter an agreement with a licensed bank or trust company; – foreign bank or trust company must be registered with the Central Bank as “exempted”; – foreign bank or trust company must apply in writing to the Governor within seven days of entering the agreement; 20
Temporary Business Continuity � Key provisions under the draft Regulation: – it specifies the information/document to be submitted in support of the application; – it specifies conditions of registration, requiring written notification to the Inspector; – the timeframe for the exemption of carrying on exempted activities (shall not exceed 30 days or 60 days) ; 21
Temporary Business Continuity � Key provisions under the draft Regulation: – the Governor may extend the timeframe; and – the timeframe for the exemption for the purposes of testing and maintenance shall terminate when the registration ceases or the Agreement terminates. 22
Temporary Business Continuity � Immigration Requirements – Exempt person should make all arrangements for work and entry permits requirements prior to persons entering The Bahamas. – If unplanned events circumvent a work permit being obtained prior to arrival, the exempt person must apply for a work permit within the time specified by Immigration officials. 23
Temporary Business Continuity � Status – The consultation period ended January, 2008. – The Central Bank is proposing two amendments to the draft regulation, they are: � to amend the definition of “relevant jurisdiction” by removing the reference to countries in the First Schedule of the FTRA; and � to add Reg. 9 (which states that these regulations do not apply to Money Transmission Service Providers or Money Transmission Agents . 24
Temporary Business Continuity � Status Next steps: – The AGs office to finalize the draft regulation by incorporating the new amendments. – The finalized draft will be submitted to the Government for approval. – The CB will be issuing Guidelines to the industry in support of the Regulation. 25
Rights and Duties of Auditors of Licensees � The Central Bank is proposing the following legislation relating to the rights and duties of external auditors of its licensees: – Banks and Trust Companies Regulation (Amendment) Act 2007; and – Banks and Trust Companies (Auditors) (Facts and Matters of Material Significance) Regulation 2007 26
Rights and Duties of Auditors of Licensees � The Amendments to the BTCRA ( sections 8, 12, 13: – impose certain disclosure requirements on current and former external auditors of licensees to the Inspector of Banks and Trust Companies; – impose an obligation on the auditor of a licensee and in some cases a former auditor to provide the Inspector with written notice on specified matters; 27
Rights and Duties of Auditors of Licensees � The Amendments to the BTCRA: – provide protection from liability where disclosure is made pursuant to these new provisions; and – provide a penalty for non-compliance with the requirements for auditors to communicate with the Inspector . 28
Rights and Duties of Auditors of Licensees � The Regulation: – specifies the circumstances to which an auditor might report to the Inspector facts and matters that are of “material significance” concerning a licensee; and – defines “material weakness” as a significant deficiency or combination of deficiencies that result in more than a remote likelihood that a material misstatement of the financial statement will not be prevented. 29
Rights and Duties of Auditors of Licensees � Status – Consultation on the draft legislation commenced in November 2007. – The audit community represented by BICA commented extensively. – The industry consultation period ended in February 2008. 30
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