CRMPG-III report on containing systemic risk

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13 Aug 2008

The Counterparty Risk Management Policy Group III (a group of senior officials from a number of major financial institutions) has published a report titled Containing Systemic Risk: The Road to Reform.

The Report sets out an integrated framework of private initiatives that will complement official oversight to help contain systemic risk. The Policy Group focused on four key areas, which it deemed the most important and timely and were the areas in which the Policy Group believed it could make the greatest contribution. Those areas include:
  • Reconsideration of the standards for consolidation under US GAAP of entities currently off-balance sheet coming on-balance sheet.
  • Measures to better understand and manage high-risk financial instruments.
  • Significant enhancements to risk monitoring and management.
  • A series of sweeping measures to enhance the resiliency of financial markets generally and the credit markets in particular, with a special emphasis on OTC derivatives and credit default swaps.
The report also highlights important emerging issues that will require close attention in the period ahead. Accounting recommendations begin on page 18. Click to Download the Report (PDF 606k). We have added it to our Credit Crunch Page.

An excerpt from the accounting recommendations: II-1. The Policy Group endorses, in principle, the direction of the changes to the US GAAP consolidation rules provided that the changes are (1) principles-based, (2) convergent with International Financial Reporting Standards, and (3) accompanied by suitable disclosure and transition rules regarding regulatory capital which will provide flexibility in the implementation of these rules over a reasonable period of time.

II-2. The Policy Group recommends adoption of a single, principles-based global consolidation framework that is based on control and the ability to benefit from that control. The analysis of whether an entity (the investor) has a controlling interest in another entity (the investee) should be based on:

  • the investor's power over the investee, including the ability to make decisions that determine the success of the investee;
  • the degree of investor exposure to the risks and rewards of the investee, including through guarantees, commitments and all other explicit and implicit arrangements between the two entities; and
  • the design and sponsorship of the investee, including the degree to which the activities of the investee expose the investor to commercial, legal, regulatory and reputational risks.

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