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• Price Discovery -- Participants undertake due diligence before making buying and selling decisions
• New and innovative products -- Particularly strong demand for information that must be processed appropriately
• Breakdown in market for complex structured products• Insufficient due diligence by buyers and sellers• Investors realized the lack of transparency and the difficulty of
Interagency Statement on Sound Practices Concerning Elevated Risk Complex
Structured Finance Transactions• Issued January 11, 2007 by OCC, OTS, FDIC, FRB, and
SEC• Applies to banks, thrifts, branches and agencies, broker-
dealers, and investment advisers• Expectation to have effective risk management and
internal control systems designed to identify elevated risk complex structured finance transactions ("CSFT")• Evaluate, manage, and address risks• Conduct activities in compliance with applicable law
• CSFT Statement does not pre-empt other supervisory guidance on risk management and controls
• Standard public mortgage-backed securities transactions• Public securitizations of retail credit cards• Asset-backed commercial paper conduit transactions• Hedging-type transactions involving "plain vanilla"
derivatives and CLOs• Other transactions with well established track records
and that are familiar to financial market participants
• When involved in structuring, marketing, advising, or otherwise serving a substantial role, expectation kicks in to have• Greater level of information concerning the customer's business
purpose
• Knowledge of any special accounting, tax, or financial disclosure issues
• Procedures to be applied• Due diligence commensurate with level of risks identified
• Review and approval by appropriate levels of control and management personnel with relevant expertise and stature
• Mitigate any significant legal or reputational risks
• Documentation sufficiently to ensure enforceability, proper disclosures have been given, internal procedures have been followed, and audit trails exist
• General business ethics• Monitoring compliance with internal policies and
procedures• Specialized training for oversight and review personnel• Audit validation of adherence to control procedures• Appropriate management reporting
• Policies and procedures should establish a clear framework for review and approval of individual CSFTs
• Incorporate the review of new CSFTs into new product policies by defining what is a "new" structure and establish a control process for approval
• Factors that are indicative of "new"• Does the structure or pricing vary from existing products?• Is the product targeted at a new class of customers?• Is it designed to address a new need of customers?• Does it raise significant new legal, compliance, or regulatory
issues?• Will the manner of offering deviate from standard market
• Expected to be applicable only to "large" institutions
• Management review and approval of policies should be coordinated with worldwide policies developed under the rules of the home country supervisor
• Policies should be consistent with the foreign bank's overall corporate and management structure, risk management framework, and internal control environment