The Counterparty Risk Management Policy Group III today released its report entitled: "Containing Systemic Risk: The Road to Reform."
The Report, prepared by a group of senior officials from a number of major financial institutions, is a forward-looking, 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 a 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; and, 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," which will require close attention in the period ahead.
The Report further lays out five "Core Precepts," which the Policy Group regards as relatively simple, readily understandable and forward-looking standards upon which the management of large integrated financial intermediaries must rest. The precepts are:
Precept I: The Basics of Corporate Governance
Precept II: The Basics of Risk Monitoring
Precept III: The Basics of Estimating Risk Appetite
Precept IV: Focusing on Contagion
Precept V: Enhanced Oversight
The Policy Group made every effort to frame its recommendations in specific terms that have operational content and foster accountability such that senior management, boards, and supervisors can evaluate progress against these goals.
Commenting on the report, E. Gerald Corrigan, managing director, Goldman Sachs & Co., and co-chairman of the CRMPG III said: "The achievement of the Policy Group and its Working Groups in completing such a vast and complex undertaking in three and one-half months is nothing short of remarkable."
Corrigan added, "it is both necessary and urgent that the private sector, in collaboration with the official sector, begin immediately to implement these reforms, some of which will take well over a year to be fully accomplished."