12 February 2002 12 February 2002

Basel and the Impact on Basel and the Impact on Securities Houses/Investment Securities Houses/Investment FirmsFirms

Securities Institute Risk ForumSecurities Institute Risk Forum

Basel and the Impact on Basel and the Impact on Securities Houses/Investment Securities Houses/Investment FirmsFirms

Securities Institute Risk ForumSecurities Institute Risk Forum

Steve TeatherMerrill Lynch Europe PLC

Steve TeatherMerrill Lynch Europe PLC

The New Basel AccordThe New Basel Accord

The Three Pillars

Pillar 1 Minimum Capital Requirements Pillar 2 Supervisory Review Pillar 3 Market Discipline

Timetable

Quantitative Impact Study (‘QIS) - March 2002 (Investment firms?) CP3 - Summer 2002 Implementation - 2006 (?)

The New Accord was not drafted with Investment firms in mind

Capital Adequacy Directive is the important one

The Three Pillars

Pillar 1 Minimum Capital Requirements Pillar 2 Supervisory Review Pillar 3 Market Discipline

Timetable

Quantitative Impact Study (‘QIS) - March 2002 (Investment firms?) CP3 - Summer 2002 Implementation - 2006 (?)

The New Accord was not drafted with Investment firms in mind

Capital Adequacy Directive is the important one

Why all the fuss?Why all the fuss?

Trying to develop a risk sensitive regime

In effect trying to bring regulatory capital closer to economic capital

No revision of market risk

Aims to maintain overall level of capital (in the Banking industry)

Significant proposals

Credit risk - external v internal ratings based approach

Operational risk - a new charge

Disclosure (Pillar 3) - extensive disclosure of potentially sensitive information

The impact on Investment firms 1The impact on Investment firms 1

Trading book v banking book

Proposals designed and calibrated based on the banking book

General assumption of carry-across confirmed by Basel

More clarity needed

Operational risk

Calibration of minimum charge based on a typical international bank

Investment firms have different business profiles to the typical bank

Result = significantly higher operational risk charge compared to banks

Compensating reduction in credit risk charge?

The impact on Investment firms 2The impact on Investment firms 2

Credit risk mitigation

Initially proposed the “w-factor” though this has been moved

Use of collateral haircuts

Significant impact on repos and securities lending

Concerns with documentation - collateral and credit derivatives

Large exposures

Increases in exposures could have significant large exposure implications

The impact on Investment firms 3The impact on Investment firms 3

Securitisation

Proposals treat securitised products as more risky than similar non-securitised products

Treatment of synthetic securitisation likely to be penal

Treatment of unrated tranches

Minimum capital

Will economic capital be greater than regulatory minimum for investment firms?

Pillar 2 will lead to an upwards review of capital only

Further food for thoughtFurther food for thought

Integrated Prudential Sourcebook

Counterparty risk

Material holdings

Liquidity

Outsourcing

Systems and controls

Financial Conglomerates Directive

Material holdings

Group structure

Investment Services Directive

Commodities

Prospectuses Directive, IAS 39 etc etc