## 1. All ROSCs Completed: 1999–2010

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### Executive summary: key findings and implications
- Initiative background:
  - The Standards and Codes Initiative (“Initiative”) launched after the Asian crisis in the late 1990s to strengthen the global financial architecture.
  - Twelve policy areas selected as key for sound financial systems; framework for Reports on the Observance of Standards and Codes (ROSCs) implemented by the Bank and the Fund for about a decade.
  - The Fund is the standard setter for three of the 12 policy areas (data, fiscal transparency, and monetary and financial policy transparency). The Bank is the standard setter for insolvency and creditor rights (in consultation with UNCITRAL and Fund staff).
- Coverage and trend:
  - A majority of member countries have had one or more ROSCs, but coverage is not fully complete because ROSCs are voluntary.
  - Annual number of ROSCs peaked in 2003 and declined considerably thereafter.
  - Declines driven by reductions in fiscal transparency and data ROSCs (reflecting downsizing of the Fund and departmental priority changes) and a reduction in FSAP-related ROSCs (fewer ROSCs per FSAP).
- Post-crisis and FSB implications:
  - Revisions to standards and FSB initiatives (including FSB members’ commitment to undergo FSAPs every 5 years and the FSB’s framework to enhance adherence to international financial standards) are likely to boost demand for financial sector ROSCs.
- Resource trade-offs:
  - Expanded demands increase burden on prioritization; strategic decisions needed to augment Initiative resources or determine resource cuts to maintain adequate coverage of non-G20 countries.

### Proposed reform directions (2011 Review)
- Adapt coverage of the Initiative to better safeguard financial stability.
- Cooperate with other bodies that use ROSCs for their initiatives but refrain from participating in NCJ-type processes.
- Improve presentation and access to ROSC findings.
- Implement modest changes to improve efficiency of resource use.

### Standards, scope, governance, and publication regimes
- Standards covered (policy areas listed verbatim):
  - Policy Transparency: SDDS and GDDS; Code of Good Practices on Fiscal Transparency; Code of Good Practices on Transparency in Monetary and Financial Policies (MFPT).
  - Financial Sector Regulation and Supervision: BCP (BCBS), IOSCO Objectives and Principles, IAIS ISP, CPSS Core Principles and RSSS, FATF’s Forty Plus Nine Recommendations (AML/CFT).
  - Market Integrity: OECD Principles of Corporate Governance; IASB IFRS; IFAC ISA; Bank’s Principles for Effective Insolvency and Creditor Rights Systems and UNCITRAL Legislative Guide on Insolvency Law (ICR).
- ROSC characteristics:
  - Aim to foster implementation of standards through assessments administered by the Bank and the Fund.
  - Voluntary; administered by different departments at Fund and Bank with no overall system for country/standard selection.
  - No overall budgetary envelope; financing drawn from departmental budgets.
  - For standards assessed under FSAPs, prioritization follows the FSAP process.
- Publication regimes:
  - ROSCs can be stand-alone or annexed to FSSA reports; DARs can be stand-alone or part of FSAP documents.
  - For the Fund, publication of ROSCs is “voluntary but presumed”; publication of DARs is at the discretion of the member with consent of Fund management.
  - For the Bank, Access to Information Policy (effective July 2010) leaves existing ROSC/DAR publication practices unchanged because these documents normally fall under exceptions.

### Evolution, coverage trends, and regional distribution
- Most common assessments: banking supervision, payment and settlement systems, and fiscal transparency.
- Least frequently assessed: corporate governance and insolvency and creditor rights.
- Regional participation: Europe and the Americas had highest participation rates; Asia had the lowest.
- Decline drivers (1999–2010):
  - (i) decrease in overall budget allocated to ROSCs;
  - (ii) reduction in number of countries undergoing initial assessments;
  - (iii) shift from formal ROSCs towards technical notes;
  - (iv) sharp decline in FSAP-related ROSCs (average number of standards assessments per FSAP dropped from about four in 2000-2004 to about one in 2008 and 2009).
- Despite decline, trend may reverse due to comprehensive revisions of standards and renewed momentum to enhance adherence.

### Resources and expenditures (key statistics and caveats)
- Aggregate and trend figures:
  - Overall real expenditure fell by about 40 percent from its peak in 2003 to 2010.
  - Fund real expenditure drop: 42 percent.
  - Bank real expenditure drop: 31 percent.
- Peak and 2010 totals (Appendix II estimates):
  - Real expenditures on ROSCs peaked in 2003 at $15 million (in 2009 dollars) and declined to $9 million in 2010.
  - Real expenditures on Policy Transparency ROSCs: $6.1 million in 2002 to $1.5 million in 2010 (real decline of 75 percent).
  - Expenditures on Financial ROSCs: $3.8 million to $1.3 million (real decline of 65 percent).
  - Expenditures on Market Integrity ROSCs: peaked at $3.6 million in 2004 before falling to $2.7 million in 2010 (real decline of 24 percent).
  - Expenditures on AML/CFT ROSCs peaked at $5.0 million in 2009; as of 2010 AML/CFT ROSCs comprised almost 40 percent of all ROSC expenditures.
- Expenditure caveats:
  - Figures are estimates, not precise; FSAP-related ROSCs not recorded separately; ROSCs straddle budget years; IMF and World Bank fiscal years differ; estimates derive from average ROSC cost multiplied by counts.

### Publication rates and timeliness
- Annual publication rate declined.
- Likely causes:
  - Drop in share of ROSCs in countries with high publication rates (e.g., Europe).
  - Reduction in ROSCs on standards with high publication rates (e.g., Data and Fiscal Transparency).
- A ROSC module is considered published when publication date is within six months of completion date.
- Most ROSCs are issued within the six-month target set in the 2005 Review, though not all.

### Use, perceptions, and market engagement
- Market use:
  - Use by market participants remains low and “seems to have dropped further since the 2005 Review.”
  - Market participants desire more frequent updates (ideally annually), more quantitative ratings, and comparable indicators for cross-country comparison.
  - Where ROSCs are used, they are generally seen through the prism of FSAPs.
- Survey evidence (country authorities):
  - 96 percent of respondents found participation in the Initiative outweighed its costs.
  - 53 percent considered net benefit large or very large.
  - Degree of benefit: To a very great extent: 22% ; To a large extent: 40% ; To some extent: 24% ; To a little extent: 10% ; Not at all: 4%.
- Perceived most useful ROSCs: payment and settlement systems, fiscal transparency, and data ROSCs.
- Market participants’ reasons for limited use:
  - Lack of easily accessible quantitative information.
  - Lack of frequent public updates; ROSCs often out of date and hard to compare.
  - Lack of clarity in key messages.

### Effectiveness, capacity building, and follow-up
- Initiative usefulness:
  - Useful in framing capacity building needs, identifying gaps, setting reform agendas, strengthening institutions, and promoting transparency.
  - Country ownership and consistent follow-up are keys to successful implementation.
- Integration with IFI operations:
  - Integration with Bank and Fund financial assistance stronger than with surveillance in many cases; ROSC results sometimes played a key role in surveillance and structural benchmarks (e.g., Greece and Iceland).
  - Integration with Bank lending and CAS limited but exists in instances (e.g., Uruguay).
  - More ROSCs include prioritized recommendations, notably for data, fiscal transparency, corporate governance, accounting and auditing, and AML/CFT.
- External expert study (22 country cases) essential elements for successful ROSCs:
  - (i) adequate preparatory work (including quality self-assessments);
  - (ii) prioritized recommendations to prepare implementable action plans;
  - (iii) strong country ownership integrated into reform programs;
  - (iv) effective follow-up implementation and allocation of TA resources.

### AML/CFT follow-up and topical trust fund (TTF) summary
- FIRST Initiative: multi-donor grant facility managed by the World Bank; extended to 2012 with funding of $100 million.
- AML/CFT TTF:
  - Established late 2008; began operations in May 2009.
  - Twelve donors oversee a five-year TA program amounting to about US$29.3 million.
  - TTF finances TA to prepare national authorities for AML/CFT ROSCs and significant follow-up TA.
  - Prioritization criteria: emerging markets with growth outpacing regulatory reforms and/or significant ML/TF risk; extent of TA by other providers; views of relevant area department.
  - An independent evaluation of the TTF in 2012 will assess effectiveness and sustainability.
- Experience and examples:
  - ROSCs created trust facilitating follow-up TA in most cases, though some authorities were not prepared to implement reforms.
  - Productive follow-up examples: Qatar (assessed 2007; used Fund follow-up TA to be first country removed from FATF’s public list of countries with strategic deficiencies), Thailand (assessed 2007; committed to long-term follow-up TA), Fund AML/CFT assessments of Armenia, Mauritius, Mexico, and Uruguay leading to follow-up TA.
  - World Bank follow-up TA funded through multiple channels; Fund and Bank have experience providing follow-up TA in countries they led AML/CFT assessments (examples: Haiti, Malawi, Mauritania, Namibia).

### Prioritization: across countries and standards
- Across countries:
  - Prioritization effectively moved toward systemically-important members; Initiative lacks overall framework for prioritization across standards and no mechanism ensures ROSC choice aligns with Bank and Fund priorities.
  - Decisions largely demand-driven and conducted differently by standard. Exception: FSAP-linked financial ROSCs where prioritization coordinated via Bank-Fund Financial Sector Liaison Committee.
  - AML/CFT ROSCs required in every full FSAP and FSAP update.
  - Since ROSCs are voluntary, lack of member interest can impact prioritization.
  - Developments (G20, FSB, IMF mandatory stability assessments) expected to divert resources to systemically-important members.
- Across standards:
  - No mechanism ensures prioritization across standards aligns with evolving priorities; ROSC resources determined by functional departments in competition with surveillance and TA.
  - FSB framework de facto prioritizes financial sector regulation and supervision standards (BCP, IOSCO, IAIS) in all countries.
  - Allocation across standards may not reflect Fund’s or Bank’s strategic priorities.

### Efficiency measures: targeted ROSCs and self-assessments
- Targeted ROSCs:
  - Methodology developed for three financial standards (banking, securities, insurance).
  - Application conditions: (i) complete prior ROSC exists; (ii) time elapsed between initial assessment and reassessment does not exceed seven years; (iii) no major overhaul of regulatory system.
  - Focus on principles with identified weaknesses or areas of large change.
  - Benefits: better resource use, transparency, and consistency; may yield savings and enable more frequent partial reassessments.
  - Current use: targeted approach used to some extent for fiscal transparency and for data ROSCs (when subset of statistics evaluated); extension to AML/CFT to be discussed separately.
- Self-assessments:
  - Increased use could complement ROSCs and promote ownership and capacity building.
  - Drawbacks: risk of politicization, inexperienced assessors, lower compliance bar producing optimistic assessments.
  - Advantages: ownership, learning by doing, cost-effectiveness for more frequent updates.
  - Recommendations: staff ready to help countries conduct self-assessments; expand existing manuals into guidebooks for self-assessments; develop training workshops for assessors with standard setters.

### Linking ROSCs with FSB peer reviews
- Closer link between financial sector ROSCs and FSB country peer reviews could help fill gaps from infrequent ROSC updates.
- Recommendation: formal coordination system on timing and country coverage of ROSCs and peer reviews; mechanism for acknowledging peer review outcomes by Bank and Fund.
- FSB peer-review status (as of early 2011): three thematic peer reviews completed; country peer reviews for Mexico, Italy, and Spain (based on 2006 FSAPs); follow-ups and additional reviews planned for 2011.

### Communication, public access, and market usability proposals
- Proposals to improve market use:
  - Encourage further publication of ROSCs; G20 members could lead by publishing their DARs.
  - Create a unified IMF/World Bank ROSC website with all available information and a calendar of planned ROSCs.
  - Introduce a publicly-available, voluntary system to facilitate country-driven updates recording progress vis-à-vis ROSC assessments, with staff verification to the extent possible and clear labeling that updates come from authorities and are not endorsed by staff.
- Verification would entail additional resources.

### Ratings: benefits, drawbacks, and staff recommendation
- Benefits of compliance ratings:
  - Concrete feedback on laws/institutions relative to others; incentive to address vulnerabilities; can promote evenhanded treatment.
- Drawbacks:
  - More contentious and politicized processes; focus on ratings over reforms and ownership; false sense of precision and misleading cross-country comparisons.
- History and practice:
  - Early ROSCs included compliance ratings; subsequent reviews (2001, 2003, 2005) favored clarity without “pass or fail” ratings.
  - In 2006 the Fund introduced principle-by-principle matrices of observance for ROSCs where it was standard setter (four point scale with comments); used for Fiscal, Monetary Transparency, and Data ROSCs. AML/CFT uses a four-point compliance scale since 2002.
- Staff recommendation (paragraph 53):
  - Maintain current system in which some ROSCs have compliance ratings but others do not.
  - Reaffirm importance of focused and prioritized recommendations.
  - For countries that choose to publish DARs, ROSCs would no longer be required to avoid duplication.
  - Tradeoffs: absence of ratings could reduce reform incentives, create tension with FSB evaluation, and yield less comparable information for markets.

### FSB Framework to Enhance Adherence and NCJ issues
- FSB launched Framework for Adherence to International Standards (March 2010) identifying a subset of 14 principles from core financial sector standards relevant for international cooperation and information sharing.
- FSB asked about 60 jurisdictions to share confidential DARs to establish compliance; those not undergoing ROSCs or failing two or more principles were asked to engage in dialogue and request ROSCs.
- FSB planned to determine by spring 2011 jurisdictions not cooperating fully; process could result in publication of a list of non-cooperative jurisdictions, possibly followed by sanctions.
- Fund and Bank approach:
  - Will cooperate to the extent cooperation does not undermine the voluntary ROSC approach.
  - Roles they may play: carry out ROSCs requested by members; provide TA when requested; provide input into assessments at member request; share information with consent; provide input into decision making while not participating in coercive decisions or publication of NCJ lists.
  - Fund and Bank have refrained from—and will continue to avoid—direct involvement in decision making and publication on non-cooperative jurisdictions.

### FATF ICRG parallels and lessons
- FATF ICRG publicly identified jurisdictions with significant AML/CFT deficiencies based partly on Fund and Bank assessment reports.
- Bank and Fund staff stressed FATF process must respect ROSC principles; FATF has endeavored to engage jurisdictions before public statements and differentiate between those committed to action plans and those that are not.

### Resource implications, tradeoffs, and estimated costs
- Net assessment: recommendations and growing demands will result in higher costs.
- Drivers: increased assessments for G20 countries; greater complexity of standards; addition of standards requiring assessments (e.g., deposit insurance and crisis resolution).
- Tradeoffs under constrained resources:
  - Balancing additional G20 requirements against assessments for emerging markets and low-income countries.
  - Assessing new standards could reduce frequency of other assessments.
  - Resource pressures increase the burden on prioritization; strategic decisions needed to augment resources or determine cuts to maintain coverage of non-G20 countries.
- Cost estimates and historical aggregates:
  - Real expenditures on the Standards and Codes Initiative (including non-ROSC work) estimated at $40 million in FY2002 (5.6 percent of gross expenditures) and peaked at $47 million in FY2004 (about 5.8 percent). Expenditures declined to approximately $26 million in FY2010 (2.7 percent of gross expenditures).
  - Non-ROSC related FSAP expenditures estimated at $5-10 million per year.
  - IMF total costs approximately double direct ROSC costs (staff and travel).

### Issues for Directors / Questions raised
- Do Directors agree with the proposed changes to the list of key standards under the Initiative?
- Do Directors agree that assessment programs should be developed for standards on deposit insurance and crisis resolution?
- Is there a need for better prioritization across standards?
- Do Directors agree to extend targeted ROSCs beyond banking, securities, and insurance as proposed?
- Is there a need to strengthen the use of ROSCs in Fund surveillance?
- Is there scope to improve follow up of ROSC recommendations through TA? Should there be a closer link between ROSC program and topical trust funds, as for AML/CFT?
- Should self-assessments be encouraged?
- Is there scope for a voluntary system allowing countries to update information on a set of key principles?
- Do Directors agree to maintain the current system in which some ROSCs have compliance ratings but others do not and to stress focused ROSC recommendations?
- Do Directors agree with the general principles of Bank and Fund participation in other global initiatives set forth in section IV.G?
- Staff recommendation: next comprehensive review to take place in five years; do Directors agree?

*Source: Standards and Codes Initiative (ROSCs) review material, 1999–2010 (IMF/World Bank ROSC Database and staff calculations; selected sections).*

### 1. All ROSCs Completed: 1999–2010 .....................................................................................1

### 1. All ROSCs Completed: 1999–2010

### Executive summary: key findings and implications
- The Standards and Codes Initiative (“Initiative”) was launched after the Asian crisis in the late 1990s as a building block to strengthen the global financial architecture.
- Twelve policy areas were selected as key for sound financial systems and a framework for Reports on the Observance of Standards and Codes (ROSCs) was established and implemented by the Bank and the Fund for about a decade.
- Since the Initiative’s inception, a majority of member countries have had one or more ROSCs, although coverage is not fully complete, in part due to the voluntary nature of ROSCs.
- After peaking in 2003, the annual number of ROSCs completed has declined considerably.
  - The number of fiscal transparency and data ROSCs has dropped, reflecting the downsizing of the Fund, and changes in departmental priorities.
  - The reduction in financial sector ROSCs—generally done as part of the Financial Sector Assessment Program (FSAP)—has been less, although fewer ROSCs have been done per FSAP.
- Revisions to standards to incorporate lessons from the crisis, initiatives of the Financial Stability Board (FSB), and changes to financial surveillance are likely to have important implications for the Initiative’s future.
  - FSB members’ commitment to undergo FSAPs every 5 years and the FSB’s framework to enhance adherence to international financial standards are likely to boost demand for financial sector ROSCs.
- Resource pressures arising from expanded demands increase the burden on prioritization; strategic decisions will be needed to augment resources for the Initiative or determine where resource cuts could come from to maintain adequate coverage of non-G20 countries.

### Proposed reform directions (2011 Review)
- Adapt the coverage of the Initiative to better safeguard financial stability.
- Cooperate with other bodies that use ROSCs for their own initiatives but continue to refrain from participating in NCJ-type processes.
- Improve presentation and access to ROSC findings.
- Implement modest changes to improve the efficiency of resource use.

### Background: scope, governance, and publication regimes
- The Initiative focuses on three areas: policy and data transparency; financial sector regulation and supervision; and market integrity.
- Standards in 12 policy areas were selected as key for sound financial systems; the Fund is the standard setter for three of the 12 policy areas (data, fiscal transparency, and monetary and financial policy transparency). The Bank is the standard setter for the standard on insolvency and creditor rights (in consultation with UNCITRAL and Fund staff).
- Eleven of the 12 policy areas have been endorsed by the Bank and Fund Boards.
- ROSCs:
  - Aim to foster implementation of standards through assessments administered by the Bank and the Fund.
  - Are voluntary and administered by different departments at the Fund and the Bank; there is no overall system deciding selection of countries or standards to be assessed.
  - Have no overall budgetary envelope; financing is drawn from different departmental budgets.
  - For standards assessed under FSAPs, prioritization follows the FSAP process.
- Publication regimes vary:
  - ROSCs can be published as stand-alone documents or annexed to FSSA reports when assessments are done as part of FSAPs.
  - DARs can be published as stand-alone documents or as part of FSAP documents.
  - For the Fund, publication of ROSCs is “voluntary but presumed” while publication of DARs is at the discretion of the member with consent of Fund management.
  - For the Bank, under the Access to Information Policy effective July 2010, existing practices regarding publication of ROSCs and DARs remain unchanged because these documents normally fall under exceptions to the policy (e.g., information provided on a confidential basis).

### Standards covered under the Initiative (Box 1 summary)
- Policy Transparency
  - Data: the Fund’s Special Data Dissemination Standard and General Data Dissemination System (SDDS and GDDS).
  - Fiscal Transparency: the Fund’s Code of Good Practices on Fiscal Transparency.
  - Monetary and Financial Policy Transparency: the Fund’s Code of Good Practices on Transparency in Monetary and Financial Policies (MFPT).
- Financial Sector Regulation and Supervision
  - Banking Supervision: Basel Committee on Banking Supervision’s (BCBS) Core Principles for Effective Banking Supervision (BCP).
  - Securities: IOSCO’s Objectives and Principles of Securities Regulation.
  - Insurance: IAIS’ Insurance Supervisory Principles (ISP).
  - Payments Systems: CPSS’ Core Principles for Systemically Important Payment Systems, complemented by Recommendations for Securities Settlement Systems (RSSS) where relevant.
  - AML/CFT: FATF’s Forty Plus Nine Recommendations.
- Market Integrity
  - Corporate Governance (CG): OECD’s Principles of Corporate Governance.
  - Accounting: IASB’s International Financial Reporting Standards (IFRS).
  - Auditing: IFAC’s International Standards on Auditing (ISA).
  - Insolvency and Creditor Rights (ICR): standard based on the Bank’s Principles for Effective Insolvency and Creditor Rights Systems and the UNCITRAL Legislative Guide on Insolvency Law.

### Lessons, pressures, and evolving demands since the crisis
- The crisis has:
  - Placed observance of standards at the forefront of the policy agenda.
  - Raised questions about adequacy and gaps in existing standards and triggered revisions in nearly all standards covered by the Initiative.
  - Prompted initiatives to fill data gaps critical to national and multilateral surveillance.
- FSB-related developments:
  - FSB members committed to undergo an assessment under the FSAP every 5 years, and to publish detailed assessments of ROSCs on Banking Supervision, Insurance Supervision, and Securities Regulation.
  - FSB members launched peer reviews to be undertaken between FSAP updates.
  - FSB launched a process to promote global adherence to standards, focusing on information exchange and cooperative arrangements in banking, insurance, and securities supervision, envisaging creation of a “toolbox” of measures to promote adherence.
  - Some aspects of the FSB’s approach, including the option of publishing the names of non-cooperative jurisdictions (NCJ), may create tensions with the Initiative’s voluntary nature.

### Evaluation approach and review focus
- The 2011 Review focuses on the Initiative’s effectiveness in meeting objectives and proposes adaptations in light of the global crisis and implementation experience, addressing:
  - Appropriateness of key standards covered.
  - Prioritization of standard assessments.
  - Efficiency in resource utilization.
  - Integration of ROSCs into Bank and Fund work.
  - Communication with private sector participants.
  - Use of ratings.
  - Fund’s and Bank’s position on NCJ-type processes.
- Staff used multiple techniques for evaluation:
  - Surveys and discussions with authorities, market participants, and standard setters.
  - Questionnaires to mission chiefs and assessors on usefulness, quality, links to surveillance and capacity building, and follow-up through technical assistance.
  - Consultations with outside experts and previous staff members, desk review of Article IV reports, selected case studies, and a consultant review of selected country experiences.

### Evolution and coverage trends
- Over the past decade, most countries have been covered by ROSC assessments.
- After peaking in 2003, the annual number of ROSCs has been more than halved, partly reflecting budgetary considerations and a shift in priorities as many countries had initial assessments of standards and codes.
- This declining trend may be reversed due to:
  - Comprehensive revisions underway across most standards under the Initiative.
  - Renewed momentum to enhance adherence to those standards.

*Source: Standards and Codes Initiative (ROSCs) review material, 1999–2010.*

### 9. While a large number of countries have now undergone one or more ROSCs, the

### 9. While a large number of countries have now undergone one or more ROSCs, the

### Coverage and regional distribution
- Coverage remains uneven by ROSC type and region.
- Most common standard assessments: banking supervision, payment and settlement systems, and fiscal transparency.
- Least frequently assessed standards: corporate governance and insolvency and creditor rights.
- Securities and insurance sectors in emerging and developing economies are sometimes reviewed with reference to the standards rather than being formally assessed.
- Regional participation:
  - Europe and the Americas had the highest participation rates.
  - Asia had the lowest participation rate.

### Trends in number of ROSCs (1999–2010) and drivers of decline
- Annual number of ROSCs peaked in 2003, then dropped significantly and returned close to early pilot years levels.
- Four factors explaining the reduction:
  - (i) a decrease in the overall budget allocated to ROSCs;
  - (ii) a reduction in the number of countries undergoing initial assessments;
  - (iii) a shift from formal ROSCs towards technical notes;
  - (iv) a sharp decline in FSAP-related ROSCs (average number of standards assessments per FSAP dropped from about four in 2000-2004 to about one in 2008 and 2009).
- Table 1 aggregate (1999–2010) totals as presented in source (row totals and per-standard yearly counts shown in source table).

### Resources and expenditures
- Overall real expenditure fell by about 40 percent from its peak in 2003 to 2010.
- Fund experienced a drop of 42 percent in real expenditure.
- Bank experienced a drop of 31 percent in real expenditure.
- Estimated real expenditures on ROSCs presented in US$ Millions, 2009 dollars (totals obtained by multiplying number of ROSCs by estimated average real cost).

### Publication rates and timeliness
- Annual publication rate for ROSCs declined.
- Likely causes:
  - (i) drop in the relative share of ROSCs done in countries with generally high publication rates (e.g., European countries);
  - (ii) reduction in the number of ROSCs on standards with high publication rates (e.g., Data and Fiscal Transparency ROSCs).
- A ROSC module is considered published when the date of publication is within six months of the date of completion of the ROSC.
- Most, although not all, ROSCs are issued within the six-month target set in the 2005 Review.

### Looking forward — expected drivers of ROSC demand
- FSB commitments:
  - FSB members committed to undergo an FSAP and publish the DARs of three financial sector ROSCs (banking supervision, securities regulation, and insurance supervision) every five years.
  - FSB launched a framework for enhancing adherence to international standards; expected to increase demand for these ROSCs.
  - Initial estimates indicate a substantial increase in the number of FSAP requests and the corresponding number of ROSCs per FSAP for FY2011 compared to previous years, including for G20 countries.
- Mandatory financial stability assessments:
  - In September 2010, the Fund’s Board decided to make the stability module of FSAPs mandatory for 25 jurisdictions with systemically important financial sectors every 5 years.
  - Financial stability assessments focus mainly on macro-financial stability issues but can be accompanied by voluntary ROSC assessments; effect on number of ROSCs is uncertain.
- Targeted ROSCs:
  - Principle of targeted ROSCs introduced for BCP, IAIS and IOSCO assessments to allow focused assessments based on evaluation of relevant risks and vulnerabilities.
  - Targeted ROSCs could reduce cost and make partial reassessments less costly; net impact could be an increase in number of ROSCs.
- Fiscal Transparency Assessments:
  - As budgetary support is withdrawn after the recent crisis and governments undertake fiscal adjustment, fiscal transparency assessments could become key in restoring fiscal sustainability, likely increasing fiscal ROSCs.

### Lessons from implementing the Initiative — effectiveness and limitations
- The Initiative has been useful in framing capacity building needs, identifying gaps, setting reform agendas, strengthening institutions, and promoting transparency.
- Country ownership and consistent follow-up are key for successful implementation.
- Market participants find the Initiative less useful due to lack of frequent updates and easily accessible quantitative information.
- Integration with Bank and Fund financial assistance is stronger than with surveillance in many cases, though ROSC results sometimes played a key role in surveillance.

### Evidence on benefits and perceptions
- Survey results:
  - 96 percent of respondents to the country authorities’ survey found that participation in the Initiative outweighed its costs.
  - 53 percent considered that the net benefit from participation was large or very large.
  - To a very great extent: 22%
  - To a large extent: 40%
  - To some extent: 24%
  - To a little extent: 10%
  - Not at all: 4%
- ROSCs considered most useful across countries: payment and settlement systems, fiscal transparency, and data ROSCs.
- Advanced countries placed higher relative usefulness on AML/CFT ROSCs than other groups.
- Emerging markets and developing economies found payment systems ROSCs most useful, followed by fiscal transparency ROSCs.
- Quality of assessments considered good for all standards; payment and settlement systems and fiscal transparency deemed highest quality.

### Key findings from external expert study and staff review
- External expert study of 22 country cases identified essential elements for successful ROSCs:
  - (i) adequate preparatory work (including quality self-assessments);
  - (ii) prioritized recommendations to prepare implementable action plans;
  - (iii) strong country ownership integrated into reform programs;
  - (iv) effective follow-up implementation and allocation of TA resources.
- Trade-offs noted between using ROSCs for surveillance (ratings focus) versus capacity-building and reform agenda shaping.
- Staff review over the last five years indicates:
  - Country coverage has increased.
  - For FSAP-related ROSCs, prioritization linked with broader FSAP prioritization done twice a year.
  - Integration into Fund surveillance is mixed; ROSC recommendations are only selectively integrated into staff reports, though some crisis country cases show good follow-up.
  - Integration with Bank lending and CAS is limited but there are instances of integration into lending (e.g., Uruguay).
  - More progress in integrating ROSCs with technical assistance, including a Fund topical trust fund dedicated to TA to follow up on AML/CFT ROSCs which started in 2009.
  - ROSC recommendations have been used as structural benchmarks in recent Fund arrangements (e.g., Greece and Iceland).
  - A larger number of ROSCs now include a prioritized list of recommendations, particularly for data, fiscal transparency, corporate governance, accounting and auditing, and AML/CFT.

*Source: IMF and World Bank ROSC Database and staff calculations; 2011 Review of the Standards and Codes Initiative (selected sections).*

### 21. However, the use of ROSCs by market participants remains low, and seems to

### _021611 - 21. However, the use of ROSCs by market participants remains low, and seems to

### Use and perception of ROSCs
- Use by market participants remains low and "seems to have dropped further since the 2005 Review."
- Market participants expressed desire for:
  - more frequent updates (ideally annually);
  - more quantitative ratings;
  - comparable indicators for ease of comparison across countries.
- Where ROSCs were considered, they were generally seen through the prism of FSAPs, which was considered a well-recognized program.

### Legal and budgetary treatment; related initiatives
- From a legal perspective, ROSCs are part of the Fund’s technical assistance activities. From a budget perspective, ROSCs are treated as Fund surveillance.
- The FIRST (Financial Sector Reform and Strengthening) Initiative is a multi-donor grant facility managed by the World Bank on behalf of donors and has been recently extended to 2012 with funding of $100 million.
- According to the Bank paper “Building a Monitoring and Evaluation Framework for the Financial Sector” (November 2008), overall ROSC coverage in Bank CAS is poor; financial ROSCs have particularly poor coverage while Bank ROSCs have slightly better coverage.

### TA follow-up on AML/CFT ROSCs (Box 3 summary)
- Donors expect the Fund to finance AML/CFT ROSCs as part of its mandate, but TA activities are funded by the Multi-Donor Topical Trust Fund (TTF).
- TTF details:
  - Established late 2008; began operations in May 2009.
  - Twelve donors oversee a five-year TA program amounting to about US$29.3 million.
  - The Steering Committee reviews, revises as necessary, and endorses annual work plans recommended by Fund staff.
  - The TTF finances TA to prepare national authorities for AML/CFT ROSCs and significant follow-up TA.
- Prioritization criteria for TTF-financed TA: emerging markets with growth outpacing regulatory reforms and/or significant ML/TF risk; extent of TA by other providers; views of the relevant area department.
- An independent evaluation of the TTF in 2012 will assess effectiveness and sustainability of the TA and make recommendations.
- Experience:
  - ROSCs created trust that facilitated follow-up TA in most cases, though some authorities were not prepared to implement recommended reforms.
  - Examples of productive follow-up: Qatar (assessed 2007; used Fund follow-up TA to be first country removed from FATF’s public list of countries with strategic deficiencies), Thailand (assessed 2007; committed to long-term follow-up TA), and Fund AML/CFT assessments of Armenia, Mauritius, Mexico, and Uruguay leading to follow-up TA.
  - World Bank follow-up TA for AML/CFT ROSCs is integrated into its TA program and funded through dedicated budgets, TA loans/grants, IDF grants, bilateral agreements, and donor funding (examples: Canada, Korea, United Kingdom).
  - Fund and Bank have experience providing follow-up TA in countries where they led AML/CFT assessments (examples: Haiti, Malawi, Mauritania, Namibia).

### Way forward — staff recommendations for the 2011 Review (summary)
- Initiative needs to incorporate lessons from a decade of implementation and the recent crisis; fill gaps in standards architecture, especially cross-border issues; strengthen focus on “compliance in practice” for systemically-important financial systems.
- Primary areas of potential improvement and primary recommendations:
  - Selection of key standards:
    - (i) adapt coverage of the Initiative to better safeguard financial stability;
    - (ii) improve coordination between standard setting and standard assessment;
    - (iii) encourage Bank-led ROSCs in advanced countries.
  - Prioritization of standards assessments:
    - (i) include ROSCs in existing prioritization processes for TA;
    - (ii) establish topical trust funds for ROSC TA follow up.
  - Efficiency:
    - (i) extend targeted ROSCs to all ROSCs other than AML/CFT;
    - (ii) increase use of country self-assessments.
  - Integration into Fund surveillance and Bank operational work:
    - (i) better prioritize ROSC recommendations;
    - (ii) improve link between ROSCs and TA follow up.
  - Communication:
    - (i) establish a centralized database for ROSCs;
    - (ii) introduce a publicly-available system to facilitate country-driven updates.
  - Ratings:
    - Primary recommendation: maintain current system on the use of compliance ratings.
  - FSB efforts:
    - Primary recommendation: cooperate with other initiatives that may use ROSCs but continue to refrain from participating in the coercive elements of NCJ-type processes.

### Selection of key standards — findings and updates
- The list of key standards is not up-to-date; work to adapt and refine key standards is underway.
- Crisis-related priorities highlighted for inclusion or revision:
  - Strengthening arrangements for dealing with weak financial institutions and cross-border cooperation.
  - Fiscal transparency and fiscal rules; review of the Fiscal Transparency Code.
  - Monitoring and limiting systemic risk (procyclicality and systemically-important institutions, markets, instruments).
- FSB activity:
  - FSB is reviewing the "compendium of standards" including reassessment of the 12 policy areas central to the Initiative.
  - The SCSI proposal on revising key standards was to be subject to approval by the FSB plenary on February 28, 2011.
  - Proposed amendments include:
    - Combine accounting and auditing standards under one “policy area”;
    - Include a new policy area on crisis resolution and deposit insurance (incorporating the Core Principles for Effective Deposit Insurance Systems and standards on crisis resolution, with options including BCBS Recommendations on Cross-border Bank Resolution and/or FSB Key Attributes of Effective Resolution Regimes);
    - Keep the total number of key policy areas at the current 12.
- Fund-specific standard revisions:
  - Data ROSC: updating the Data Quality Assessment Framework (DQAF) to incorporate crisis experience and updated methodologies (examples: SNA 2008, BPM 6, GFSM 2001); financial corporation data to expand beyond banking sector.
  - Fiscal Transparency ROSC: to be revamped to address fiscal rules and fiscal responsibility.
  - Code of Good Practices on Transparency in Monetary and Financial Policies (MFPT): to be revised to remove overlap and update monetary policy transparency standards in light of the crisis.
  - These revisions should be completed sometime in 2012.
- World Bank updates:
  - Standard for Insolvency and Creditor/Debtor Regimes updated in close consultation with UNCITRAL; Global ICR Task Force reconvened in January 2011 to finalize the 2011 Standard for Insolvency and Creditor Debtor Regimes for presentation to Executive Directors of the Bank and Fund for formal endorsement for use in the ROSC program.
- Not all new standards are yet ready for ROSC assessment (examples: no assessment methodology yet for the Recommendations of the Basel Committee on Cross-Border Bank Resolution).

### Prioritization — findings
- Issue: Prioritization across countries has effectively moved toward focus on systemically-important members; Initiative lacks overall framework for prioritization across standards and no mechanism ensures ROSC choice aligns with Bank and Fund priorities.
- Across members:
  - Decisions on ROSCs largely demand-driven and conducted differently by standard.
  - No coordination across departments conducting different ROSCs (example: Data and Fiscal Transparency ROSC country selection determined separately by IMF’s Statistics and Fiscal Affairs Departments).
  - Exception: financial ROSCs where IMF conducts FSAP prioritization coordinated between Bank and Fund via the Bank-Fund Financial Sector Liaison Committee, but only for joint FSAPs.
  - The decision to conduct a ROSC is generally driven by perceived need for coverage of a sector in the FSAP.
  - AML/CFT ROSCs are required to be included in every full FSAP and FSAP update.
  - Since ROSCs are voluntary, lack of member interest can impact prioritization.
- Resource implications:
  - Developments in the G20, FSB, and IMF expected to divert resources to systemically-important members.
  - FSB members committed to undertake FSAPs every 5 years and IMF has decided to implement mandatory stability assessments for members with systemically-important financial systems.
  - Maintenance of current prioritization processes would likely result in a relative increase in resources allocated to the Initiative unless resource cuts are implemented elsewhere.
- Across standards:
  - No mechanism ensures prioritization of ROSCs across standards aligns with evolving Bank and Fund priorities.
  - At the Fund, ROSC resources are determined by functional departments in competition with surveillance and TA.
  - At the Bank, ROSC resources come from FSAP (for BCP, IAIS, IOSCO, CPSS) or functional department budgets (Accounting and Auditing, CG, FATF, ICR ROSCs).
  - Little or no prioritization of ROSCs across standards except for ROSCs undertaken under an FSAP.
  - FSB framework de facto prioritizes financial sector regulation and supervision standards (BCP, IOSCO, IAIS) in all countries.
  - Allocation of resources across standards may not reflect Fund’s or Bank’s strategic priorities.

### Lessons from the global crisis (Box 4 — summary of conclusions)
- Regulatory arbitrage: differences in regulatory requirements across similar activities allowed relatively unregulated risky activities.
- Macroprudential risk: level of capital and liquidity buffers needs better alignment with macroeconomic and systemic evolution of risks.
- Crisis resolution mechanisms: safety nets and resolution mechanisms are needed; accounting systems must evaluate impaired assets.
- International coordination: need for stronger, more globally-coordinated supervision and crisis resolution frameworks for internationally active and systemically important financial institutions.
- Better information: better disclosure and accounting needed across a wider range of financial institutions and markets; gaps critical for off-balance sheet and counterparty exposures, complex structured products, and OTC derivatives.
- Lack of coverage of systemic risks in regulatory frameworks: Joint Forum identified unregulated or lightly regulated entities/activities where systemic risks were not captured (banking, insurance, securities; supervision/regulation of financial groups; mortgage origination; hedge funds; credit risk transfer products).
- Fiscal sustainability: European debt crisis highlighted importance of fiscal transparency and communicating fiscal consolidation strategies to reassure markets and restore confidence.

*Source: _021611 - 21. However, the use of ROSCs by market participants remains low, and seems to*

### 32. ROSCs are to a limited extent prioritized in the context of Fund TA and Bank

### 021611 - 32. ROSCs are to a limited extent prioritized in the context of Fund TA and Bank

### Prioritization of ROSCs in Fund and Bank operational work
- Finding: At the Fund, Regional Strategy Notes (RSN) prepared by area departments outline technical assistance priorities for regions and include ROSCs when they fit into the TA strategy for a given country.  
  - Observation: The link between the RSNs and the actual provision of resources for ROSCs is generally weak.
- Finding: The Fund’s Committee on Capacity Building is tasked with setting high-level strategies for ROSCs, but in practice this has not happened.
  - Evidence: Minutes of the Committee meetings for the past three years do not reflect any discussions on ROSCs.
- Finding: At the Bank, ROSCs are prioritized on a demand basis taking into account needs of Bank operational work for countries (e.g., TA, preparatory work for lending).
- Recommendation set to enhance prioritization and strengthen ROSC role in capacity building:
  - At the Fund, more systematic inclusion of ROSCs in area departments’ RSNs to promote consideration within overall surveillance and TA priorities.
  - Include ROSCs in the discussion of area departments’ Regional Assistance Plans (RAPs) with the Office of Technical Management (OTM) and in the Committee on Capacity Building to raise awareness and improve links with follow up TA.
  - At the Bank, better integration of ROSC findings and recommendations into CAS and in discussions of the CMU’s work programs.
  - Consider establishing one or more topical trust funds to provide external financing for follow up TA, modeled on the topical trust fund for technical assistance for AML/CFT (Box 3).
- Footnote detail preserved: FAD consults closely with area departments in the context of annual RAP discussions and based on RSNs in prioritizing fiscal transparency ROSCs; when requests exceed FAD’s budget envelope, priorities are set based on criteria such as fiscal risks and time lag since the latest fiscal ROSC reports. STA also consults closely with area departments to prioritize countries for Data ROSCs.

### Efficiency: scope, targeted ROSCs, and self-assessments
- Issue: Demand for ROSCs is likely to increase because of FSB commitments and the introduction/refinement of standards; there is a concurrent need to focus assessments and provide more frequent updates.
- Finding: Full ROSCs provide a comprehensive overview and are necessary for first-time assessments; however, targeted reassessments may be preferable where specific weaknesses could have larger systemic repercussions.
- Targeted ROSCs methodology:
  - Developed for three financial standards (banking, securities, and insurance).
  - Application conditions: (i) there has already been a complete ROSC; (ii) time elapsed between initial assessment and reassessment does not exceed seven years; and (iii) there has not been a major overhaul of the regulatory system.
  - Focus: principles with identified weaknesses or risk and principles in areas where large changes have taken place.
- Benefits of extending targeted ROSCs:
  - Better use of resources by focusing assessors on key weaknesses.
  - Brings more transparency and consistency to updates via a clear framework.
  - May result in some savings.
- Current status and notes:
  - A targeted approach is already being implemented to a certain extent for fiscal transparency ROSCs, though a formal methodology has yet to be developed.
  - A targeted approach is followed for data ROSCs when only a subset of macroeconomic statistics is evaluated.
  - The possibility of extending the targeted approach to AML/CFT ROSCs will be discussed separately in a forthcoming Board paper.
- Self-assessments:
  - Finding: Increased use of self-assessments across all standards could complement ROSCs and promote ownership and capacity building.
  - Drawbacks: risk of politicization, assessors insufficiently experienced or qualified, and a lower bar for compliance yielding overly optimistic assessments.
  - Advantage: ownership and learning by doing; potentially cost effective for the Fund and Bank to help countries with capacity building and more frequent updates.
  - Staff role: staff should be ready to help countries conduct self-assessments and assist authorities in following standard-setter self-assessment methodologies where applicable.
  - Recommendation: expand existing manuals (e.g., Manual on Fiscal Transparency, the Fund’s Code of Good Practices on Transparency in Monetary and Financial Policies) into guidebooks for self-assessments; develop training workshops for assessors in coordination with standard setters.

### Linking ROSCs with FSB peer reviews
- Finding: Establishing a closer link between financial sector ROSCs and country peer reviews conducted by the FSB could help fill gaps from infrequent ROSC updates.
- Recommendation: establish a formal system for closer coordination on timing and country coverage of ROSCs and peer reviews, and a mechanism for acknowledging outcomes of peer reviews by the Bank and the Fund.
- Box summary (FSB peer review process and status as of early 2011):
  - Thematic peer reviews focus on cross-country implementation of particular policies or standards.
  - Country peer reviews evaluate implementation and effectiveness of policies and standards in a single country through follow-up of FSAP/ROSC recommendations.
  - Process: draft report by team of experts → presented to FSB SCSI → final report approved and published by the Plenary.
  - Status: As of early 2011, FSB completed three thematic peer reviews (compensation practices, risk disclosures, mortgage underwriting practices) and country peer reviews for Mexico, Italy, and Spain (based on FSAPs in 2006). A follow up thematic review on compensation practices, reviews of deposit insurance, and country reviews of Australia, Switzerland, and Canada were planned for 2011. Later in 2011, the FSB planned to review scope and process of thematic and country peer reviews.

### Integration of ROSCs with Bank and Fund work: Fund surveillance and Fund/Bank availability
- Issue: Attempts to improve the link between the Initiative and Fund surveillance have had limited success despite recommendations following the 2005 Review.
- Finding: Surveillance does not consistently pick up on key recommendations of most ROSCs, although ROSC recommendations mentioned in FSSAs are more likely to be followed up on.
  - Note: For Data ROSCs, major recommendations are regularly appended to Article IV reports through the statistical issues appendix.
- Observation: The link between key ROSC recommendations and structural conditionality in Fund financial arrangements seems stronger than the link with surveillance.
- Caution: Mandating a stronger link may undermine streamlined Article IV staff reports and surveillance effectiveness; however, revival of post-mission meetings suggested in the 2005 Review is encouraged.
- Recommendations to sharpen message and public availability of ROSC recommendations:
  - All ROSCs should have clearly prioritized recommendations; internal review efforts could help ensure prioritization is clear as a matter of practice.
  - Establish a system ensuring Bank-led ROSCs and Fund-led ROSCs not done under an FSAP (e.g., accounting and auditing, and fiscal transparency) are available to Fund area department teams and Bank regions (for emerging markets and developing economies), respectively, on a systematic basis.
  - Consider encouraging Bank-led ROSCs in advanced countries to be conducted and financed more systematically by advanced countries, noting the voluntary nature of the Initiative. (Bank-led ROSCs refer to accounting, auditing, corporate governance, and insolvency and creditor rights.)

### Capacity building: follow-up, financing, and tracking progress
- Issue: ROSCs’ impact on capacity building seems relatively strong, but authorities indicate follow up and assistance on key recommendations could be more systematic.
- Finding: Assessments typically establish benchmarks and often elaborate action plans when significant deficiencies are identified; authorities in emerging and low income countries see a need for more systematic follow up and assistance from IFIs.
- Constraint: Funding is often available for the diagnosis (ROSC) but not for follow up TA; funding is available for follow up TA to AML/CFT ROSCs, unlike other ROSCs.
- Specific suggestions to improve ROSC follow up:
  - Create a database with information on key recommendations across standards and departments at the Bank and the Fund, made available to all staff; use it to track progress with input from area/regional and functional departments.
  - Establish an expectation that in countries where capacity building is needed, ROSCs will be followed up by an action plan and offer of technical assistance to support implementation of the action plan.
    - One avenue: explore donor interest in establishing topical trust funds for follow up technical assistance linked explicitly to each type of ROSC, as is the case for AML/CFT.
    - Note: successful implementation of proposals to extend follow up TA would depend on the availability of additional resources.
  - Use available funding options (e.g., FIRST Initiative) for the Bank and Fund to play a catalytic role in galvanizing support behind ROSC-promoted agendas and attracting concerted support from other institutions (e.g., donors) to implement necessary reforms; conduct joint outreach activities with donors to proactively engage decision makers and the general public in countries.

### Communication and market use of ROSCs
- Issue: ROSCs are not widely known by the public and are rarely used by market participants.
- Market participant-identified reasons for limited use:
  - The lack of easily accessible quantitative information.
  - The lack of frequent updates publicly available, making most ROSCs out of date and hard to compare across countries.
  - The lack of clarity in the key messages.
- Tension: Market participants’ needs (frequently updated quantitative ratings) conflict with the needs of capacity building and surveillance (clearly prioritized recommendations); there is no solid consensus for a stronger market profile of ROSCs.
- Proposal: introduce a publicly-available system to facilitate more frequent and country-driven updates; system would be entirely voluntary and allow countries to record progress vis-à-vis ROSC assessments.
  - Verification: To the extent possible, staff would verify accuracy of information provided, but no change in assessments would be made on this basis.
  - Labeling: Such updates would be clearly labeled as coming from the authorities and not endorsed by staff.

*Source: 021611 - 32. ROSCs are to a limited extent prioritized in the context of Fund TA and Bank*

### 49. Other options for improving market participants’ use of ROSCs could be

### _021611 - 49. Other options for improving market participants’ use of ROSCs could be

### Improving market participants’ use of ROSCs: proposals
- Encourage further publication of ROSCs:
  - G20 members could lead by example by publishing their DARs and thereby encourage non-members to publish ROSCs (and DARs, if relevant).
- Create a unified IMF/World Bank ROSC website:
  - The website would contain all available information on ROSCs and published assessments.
  - The website could include a calendar of planned ROSCs in each policy area for the upcoming year.
- Note on verification:
  - Verification by staff of information provided by the authorities in this context would entail additional resources.

### Ratings: benefits, drawbacks, and staff recommendation
- Context and recent developments:
  - Renewed efforts at promoting adherence to standards (G20, FSB, standard setters) raise the question of whether to encourage greater use of ratings for members and for all ROSCs.
  - The FSB plans to evaluate certain jurisdictions’ adherence to relevant standards; FSB members have agreed to undergo peer reviews and publish their DARs for financial standards.
- Benefits of compliance ratings:
  - Give concrete feedback to country authorities on how laws and institutions compare with other countries.
  - Provide an incentive to address vulnerabilities.
  - Can promote more evenhanded treatment across countries.
- Drawbacks of compliance ratings:
  - Can make the assessment process more contentious and politicized, focusing attention on ratings rather than reform efforts and country ownership.
  - May give a false sense of precision and lead to misleading cross-country comparisons.
- History and past approaches:
  - Several early ROSCs included compliance ratings.
  - Subsequent reviews: 2001 review noted assessments generally avoid country ratings; 2003 review proposed clear conclusions and prioritization without advocating ratings; 2005 review favored clarity while avoiding “pass or fail” reports.
  - In 2006 the Fund introduced principle-by-principle matrices of observance for new ROSCs for which it was the standard setter, based on a four point scale with comments to reduce misinterpretation. Implemented for the Fiscal, Monetary Transparency, and Data ROSCs but not for other ROSCs.
  - For AML/CFT assessments, a four-point compliance scale has been used by the FATF and Fund staff since 2002.
- Staff recommendation (paragraph 53):
  - Maintain the current system in which some ROSCs have compliance ratings but others do not.
  - Reaffirm the importance of focused and prioritized recommendations.
  - For countries that choose to publish DARs, ROSCs would no longer be required to avoid duplication.
  - Rationale: retains focus on forward-looking reforms and increases ownership for members that might not receive high compliance ratings.
  - Tradeoffs noted: absence of ratings could generate less incentive for reform, create tension with the FSB evaluation process, and mean less comparable information for market participants.

### The FSB Framework to Enhance Adherence to International Standards (NCJ): use of ROSCs and cooperation principles
- FSB initiative overview:
  - In March 2010 the FSB launched a Framework for the Adherence to International Standards to encourage adherence by all countries and jurisdictions to international financial standards.
  - The FSB identified a subset of 14 principles drawn from the three core financial sector standards (banking, insurance, and capital market supervision) deemed relevant for “international cooperation and information sharing.”
  - The FSB identified the three core finance sector ROSCs for use as a basis for the FSB’s non-cooperative jurisdiction (NCJ) process.
  - The FSB asked about 60 member and non-member jurisdictions to share their confidential DARs prepared in the context of Fund and Bank ROSCs to establish a country’s degree of compliance with these principles.
  - Countries that have not undergone a ROSC or failed to comply with two or more of these principles were asked to engage in a dialogue with the FSB and request a ROSC.
  - The FSB will determine by spring 2011 jurisdictions that are not cooperating fully or show insufficient progress; at the end of the process the FSB may start publishing a list of countries considered non-cooperative, possibly followed by a call for sanctions.
- Challenges and tensions:
  - NCJ-type processes present challenges to the cooperative and voluntary nature of ROSCs; coercive elements threaten to undermine the voluntary approach.
  - The Fund and the Bank must balance participation in initiatives with coercive elements against safeguarding their broader membership and the voluntary, cooperative ROSC approach.
  - The Fund and Bank are FSB members; their participation is informed by past experience, including the FATF exercise.
- Adopted approach and limits on involvement:
  - Although ROSC findings will inform the FSB’s NCJ process, the Fund and Bank have refrained from—and will continue to avoid—direct involvement in decision making on, and any resulting publication of, non-cooperative jurisdictions.
  - Staff has voiced concerns in the FSB about the NCJ process and stressed the need for transparency, objectivity, and consistency with ROSC principles.
- General principles for collaboration with NCJ-type initiatives (paragraph 58):
  - The Fund and Bank, as a general principle, will cooperate in such initiatives to the extent that cooperation does not undermine the voluntary and cooperative ROSC approach.
  - Roles they may play:
    - carry out ROSCs requested by members;
    - provide TA, when requested, to enhance compliance with international standards;
    - if requested by the relevant member, provide input into assessing members’ compliance with the principles subject to the evaluation;
    - if requested, share relevant information with other participants, subject to the consent of the member involved;
    - provide input into the decision making process, while not participating in decisions related to coercive elements of NCJ–type processes.

### FATF ICRG experience (Box 7): lessons and parallels
- The FATF ICRG process raised similar issues to the FSB initiative; the FATF publicly identified jurisdictions with significant AML/CFT deficiencies based in part on Fund and Bank assessment reports.
- Bank and Fund staff stressed the importance that the FATF process be conducted in a manner that respects ROSC principles; past Board guidance conditioned the Fund’s involvement on suspension of coercive NCCT exercises.
- The FATF has acknowledged concerns and endeavored to conduct the ICRG process in a manner that respects ROSC principles, engaging in dialogue with jurisdictions before public statements and differentiating between jurisdictions that have committed to action plans versus those that have not.

### Resource implications and costs
- Overall assessment:
  - On balance, recommendations under the review and growing demands on the Initiative will result in higher costs.
  - Drivers of higher costs: expected rise in assessments for G20 countries, increased complexity in assessing existing standards, addition of standards requiring assessments (e.g., deposit insurance and crisis resolution).
  - Developing assessment programs for deposit insurance and crisis resolution would require additional resources.
- Tradeoffs under constrained resources:
  - Balancing additional G20 requirements versus need for assessments of emerging markets and low-income countries.
  - Assessment of new standards could imply less frequent assessments of other standards.
  - Resource pressures increase the burden on prioritization, requiring strategic decisions to augment resources for the Initiative or decide where resource cuts could come from to maintain adequate coverage of non-G20 countries.
- Estimated cost figures (Appendix II):
  - Real expenditures on ROSCs peaked in 2003 at $15 million (in 2009 dollars) before declining by about 40 percent to $9 million in 2010.
  - Real expenditures on Policy Transparency ROSCs declined from $6.1 million in 2002 to $1.5 million in 2010 (a real decline of 75 percent).
  - Expenditures on Financial ROSCs declined from $3.8 million to $1.3 million (real decline of 65 percent).
  - Expenditures on Market Integrity ROSCs peaked at $3.6 million in 2004 before falling to $2.7 million in 2010 (real decline of 24 percent).
  - Expenditures on AML/CFT ROSCs increased gradually over time, peaking at $5.0 million in 2009; as of 2010 AML/CFT ROSCs comprised almost 40 percent of all ROSC expenditures.

### Issues for discussion (selected questions raised for Directors)
- Do Directors agree with the proposed changes to the list of key standards under the Initiative?
- Do Directors agree that assessment programs should be developed for standards on deposit insurance and crisis resolution?
- Is there a need for better prioritization across standards?
- Do Directors agree to extend targeted ROSCs beyond banking, securities, and insurance as proposed?
- Is there a need to strengthen the use of ROSCs in Fund surveillance?
- Is there scope to improve the follow up of ROSC recommendations through TA? Should there be a closer link between the ROSC program and topical trust funds, as is the case for the ROSC program on AML/CFT?
- Should self-assessments be encouraged?
- Is there scope for a voluntary system allowing countries to update information on a set of key principles of a set of standards?
- Do Directors agree to maintain the current system in which some ROSCs have compliance ratings but others do not and to stress focused ROSC recommendations?
- Do Directors agree with the general principles of the Bank’s and Fund’s participation in other global initiatives set forth in section IV.G?
- Staff recommendation: next comprehensive review to take place in five years; do Directors agree?

*Source: IMF/World Bank Standards and Codes Initiative review (text as provided).*

### 4. In terms of expenditures on individual ROSCs, the AML/CFT and Data ROSCs have

### _021611 - 4. In terms of expenditures on individual ROSCs, the AML/CFT and Data ROSCs have

### Expenditures on individual ROSCs: key findings
- AML/CFT and Data ROSCs have the highest estimated average costs.
- For AML/CFT ROSCs, high costs reflect:
  - a combination of high staff costs and the breadth of the methodology (49 recommendations + 260 criteria) which leads to large number of staff being required.
- For Data ROSCs, high costs primarily reflect:
  - a greater number of specialists needed to cover several macroeconomic datasets with specific methodologies.
- ROSCs conducted as part of FSAPs generally have lower estimated average costs due to cost savings from sharing staff time and travel costs between ROSCs and other FSAP activities.
- If ROSCs that are currently part of FSAPs become stand alone activities, their average costs may rise.

### World Bank: Number of ROSCs (1999–2010)
- 1999: 3
- 2000: 8
- 2001: 12
- 2002: 16
- 2003: 11
- 2004: 13
- 2005: 11
- 2006: 12
- 2007: 16
- 2008: 11
- 2009: 9
- 2010: 7
- Additional yearly counts shown: 6, 6, 3, 6, 5, 1, 4, 8, 16, 18, 16, 11, 13, 5, 9, 8, 8, 5, 8, 19, 19, 17, 15, 11, 11, 7, 13, 13, 2, 0

### Data quality and caveats on expenditure estimates
- The expenditure figures are estimates rather than precise figures.
- Specific caveats include:
  - ROSCs conducted as part of FSAPs are not recorded separately but included as part of FSAP expenditures; assumptions are made about the allocation of expenditures between ROSCs and FSAPs, introducing error.
  - ROSCs straddle budget years and the date an expenditure is recorded may not reflect the period during which the expenditures were incurred.
  - The IMF and World Bank operate on different fiscal years. The data were converted to calendar years for comparison purposes but figures for particular years may not be precise.
  - Expenditure estimates are derived by estimating the cost of an average ROSC and multiplying by the number of ROSCs conducted in a year. The costs of individual ROSCs can vary greatly from country to country depending on travel costs and the complexity of the institutions being evaluated; advanced countries may require more staff resources than developing countries.
  - The estimates do not distinguish between full ROSCs and ROSC updates.

### Other expenditures and IMF totals (summary)
- Estimates of ROSC expenditures above do not include other expenditures on the Standards and Codes Initiative such as standard setting, review work, and general overhead.
- For the IMF, the OBP collects data that capture these additional expenditures.
- Non-ROSC related FSAP expenditures are estimated at $5-10 million per year.
- The data show that for the IMF total costs are approximately double direct ROSC costs (i.e. expenditures on staff and travel).
- Historical aggregate figures:
  - In FY2002, total expenditures on the Standards and Codes Initiative are estimated at $40 million or 5.6 percent of gross expenditures.
  - Expenditures on the Initiative peaked in FY2004 at $47 million or about 5.8 percent of gross expenditures.
  - Expenditures declined steadily to approximately $26 million in FY2010 or 2.7 percent of gross expenditures.

### FSB‑proposed selection criteria for key standards (Appendix III)
- The SCSI recommended the following criteria to the FSB Plenary for determining standards to be included in the list of key standards:
  - The list of key standards should be kept short, i.e. it should comprise only the most relevant and critical standards for sound financial systems (including in light of the lessons from the financial crisis) in order to impart a sense of prioritization to them;
  - The standard should cover areas that are important in nearly all jurisdictions, i.e. that they are universal in their applicability;
  - The standard should be general enough to offer some flexibility in implementation to take into account different country circumstances (flexible).
  - The standard should have been issued by an internationally-recognized body in the relevant area in extensive consultation with relevant stakeholders. To satisfy this criterion, the standard should preferably undergo a public consultation process. This criterion would also be satisfied when the standard-setting body has wide representation, or when the standard has been endorsed by IFIs;
  - The standard should be implemented in a form that can be assessed by national authorities or by third parties such as IFIs (assessable). This criterion does not require the existence of an assessment methodology as a prerequisite for inclusion in the list of key standards, although it is expected that a clear and objective methodology would need to be developed by, or in consultation with, the relevant standard-setting body to enable a standard to be properly assessed in the context of IMF-World Bank ROSCs.

*Source: _021611 - 4. In terms of expenditures on individual ROSCs, the AML/CFT and Data ROSCs have*

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