IIF releases final best practice report

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WASHINGTON, DC – The final report from the Institute of International Finance’s (IIF) Committee on Market Best Practices (CMBP) proposes risk management reform and better market transparency in the wake of the subprime mortgage market crisis.

The CMBP was established nine months ago by the IIF’s board of directors. The 200-page final report, published by the IIF, which has more than 380 members across the world, had input from more than 100 senior executives. It proposes principles of conduct together with best practice recommendations on critical issues such as risk management, compensation policies, valuation of assets, liquidity management, underwriting and the rating of structured products as well as boosting transparency and disclosure.

In presenting the report, Josef Ackermann, chairman of the IIF board of directors and chairman of the management board and the group executive committee of Deutsche Bank, speaking on behalf of the IIF’s members, said: “We believe the implementation of this report’s recommendations will serve to strengthen the financial services industry and, as a result, will help to restore confidence. Our challenge is to move forward with implementation, and we are determined to do just that.”

Ackermann also announced the creation of a new global financial monitoring group, the Market Monitoring Group (MMG), for the “better and earlier detection of new, emerging vulnerabilities in the markets and the financial system. This represents a major initiative. It is clear that timely warnings about possible future weaknesses or declining standards will have to be given a higher priority going forward.”

The central issue for improved performance by financial services firms identified in the report is risk management. It calls for a robust risk-aware culture to be fully embedded into the entire organisation. The report emphasised the importance of deploying holistic risk management. Its first principle of conduct stated: “A robust and pervasive risk culture throughout the firm is essential. This risk culture should be embedded in the way the firm operates and should cover all areas and activities, with particular care not to limit risk management to specific business areas or to have it operate only as an audit or control function.”It also points out the accountability of senior management, in particular the CEO, for risk management and that the CRO has the ability to influence key decision-makers in the firm to ensure the firm’s risk level is consistent with its risk appetite. The recommendations also note that stress testing should be an integral part of assessing the bank’s risk profile in relation to its risk appetite across all business activities, risk types and exposures.

The contentious issue of compensation was also addressed by the IIF in its principle of conduct on compensation. This states that compensation incentives should be based on performance and be aligned with shareholder interests and long-term, firm-wide profitability, taking into account overall risk and the cost of capital. Additionally, incentives should not induce risk-taking in excess of the firm’s risk appetite; and firms should take into account the performance realised for shareholders over time in determining severance pay.

To rebuild confidence in the system of bond ratings, the report has also called for an external, independent review of rating agencies.

The report also highlights the need for improvement in due diligence and lending practices by underwriters and distributors. It also includes principles of conduct that relate explicitly to transparency and disclosure in the report.