## _cr10131 ## Source details **Canonical URL:** [_cr10131](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10131.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10131.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10131.pdf.json) --- ### Detailed assessment of banking supervision and Basel Core Principles — institutional context and methodology - Assessment performed by Allan D. Fink (Federal Reserve Bank of Chicago) and Tuomo Malin (Finnish Financial Supervision Authority). - Methodologies used: - Methodology of the Basel Core Principles. - Draft Methodology Document prepared by the IMF and World Bank titled Enhancing the Global Effort Against Money Laundering. - Inputs and sources included FI self-assessment, laws/regulations (Banking Business Act; Act on Capital Adequacy and Large Exposures for Credit Institutions and Securities Companies; Act on Financial Operations), central bank material, and meetings with main commercial banks. - Assessors reported no major barriers despite scarcity of documents in English. ### Institutional and market structure (banking) - Bank types: - Commercial banks (limited liability banking companies), savings banks, cooperative banks — all entitled to engage in all types of banking activity. - Market concentration and structure: - Two-tiered market with five large banks (Handelsbanken, Skandinaviska Enskilda Banken, Nordbanken, Förenings Sparbanken, and the Swedish subsidiary of a major Danish bank) having combined market share of about 75–85 percent. - Residual market shared among around 100 smaller banks. - Home market increasingly includes the whole region surrounding the Baltic Sea. - Ownership structure of major banks: - Largest owners examples: Swedish government (less than 20 percent in Nordea), Investor (some 10 percent in SEB), employees’ pension fund (some 10 percent in Svenska Handelsbanken), former savings banks foundations (some 20 percent in Swedbank). - Approximately one third of bank shares are held by non-Swedes. - Medium and small-sized banks generally held by one dominating owner (e.g., Skandia). - All savings banks are non-profit organizations held by foundations. ### Supervisory and macroprudential framework - FI (Finansinspektionen): - Government authority responsible to the Ministry of Finance (MoF); supervises banks, credit market companies, insurance companies, insurance brokers, securities companies. - Role: ensure statutory compliance, promote secure and sound practices, and preserve confidence in stability and functionality of financial markets. - Funding: costs defrayed by charges levied on banks and other supervised entities; annual budget decided by government. - FI is an independent government authority without outside interference in operational functions; Board: 10 members with Director General as chairman; Director General and board members appointed by government for determinate periods. - FI publishes annual financial stability report to government; Riksbank publishes financial stability reports twice annually. - Riksbank (Central Bank): - Responsibilities include stable and efficient payment system, monetary and exchange rate policy, management of gold and currency reserves, issue of notes and coins, clearing, acceptance of deposits and loans to banks; lender of last resort. ### Resources, staffing and capacity (FI) - FI requested a budget increase of SKR 30 million for new capital adequacy rules; SKR 8,2 million was granted to the budget for 2002. - Goal to increase staff by 36 persons during 2002-03; major risk areas for personnel increase: credit risk and operational risk (14 persons). - Total budget for 2001: SKR 133 million. - Personnel outlays: SKR 91 million (including SKR 1,8 million for training; SKR 4,7 million for foreign travel; SKR 0,5 million for domestic travel). - IT costs for soft and hardware acquisitions: SKR 2,9 million. - FI cannot, with present level of remuneration, compete with private sector for specialists; renewed capital accord and financial conglomerates raise questions about adequacy of FI human resources. - FI instituted ethical standards for employees (confidentiality, conflicts of interest, loans from supervised entities, additional occupations, dealings in financial instruments). ### Recent banking sector performance and risks (2000 data) - Return on equity for largest Swedish banks: ranged between 22 percent and 24 percent, except Nordea group at 18.6 percent. - Credit losses increased to SKR 1.9 billion in 2000. - Nonperforming loans increased by SKR 4.5 billion to SKR 23.5 billion. - Tier 1 capital ratio for commercial banks was 7.9 percent in June 2000. - Credit growth: - Households: 8.1 percent. - Total lending to Swedish public: increased by 4.7 percent. ### Crisis management, deposit protection, and remedial powers - Crisis resolution arrangements: - After disbanding of Bank Support Authority there are no standing institutional arrangements for handling banking crises. - Committee paper of 1998 proposed public administration placement for banks when necessary for system stability; otherwise bankruptcy or liquidation. - No institutional framework for problem bank resolution; moral hazard concerns noted. - Deposit Guarantee Scheme: - Act on Deposit Guarantee Scheme provides guarantee for deposits up to SKR 250,000 per customer at each institution. - Administrative duties lie with the Deposit Guarantee Board. - Remedial powers and limitations: - FI remedial powers include orders, injunctions, conditional fines, warnings and revocation of charter. - Supervisor cannot restrict/suspend payments to shareholders or share-repurchases; cannot bar individuals from banking, replace managers/directors/controlling owners, impose conservatorship, or impose arrangements for take-over/merger; cannot apply penalties directly to management/Board. - Assessment for remedial measures: MATERIALLY NON-Compliant. - Comments: Supervisor has limited range of remedial actions; proposals to broaden powers (e.g., formal complaints, broaden warnings) exist; no laws mitigate supervisory forbearance. ### Principle 1 (Objectives, Autonomy, Powers, and Resources) — findings and recommendations - Assessment summary: - Principle 1(1) Clear responsibilities and objectives: Compliant. - Principle 1(2) Operational independence and adequate resources: Largely Compliant. - Principle 1(3) Legal framework for authorization and ongoing supervision: Compliant. - Principle 1(4) Powers to address compliance, safety and soundness: Compliant. - Principle 1(5) Legal protection for supervisors: (assessment text partial) Compliant in practice per Penal Code protections; employees may be sentenced to prison for up to two years or up to six years for gross negligence/intent; supervisory authority and employees can be considered to have legal protection for actions in good faith. - Principle 1(6) Arrangements for sharing information and confidentiality: Compliant. - Key comments and recommended actions: - Improve competitiveness as an employer to supervise complex bank activities. - Redefine role as lead supervisor for complex multinational groups (e.g., Nordea). - FI should conclude MOUs with authorities in countries where Swedish banks operate and enhance formal crisis-role definitions. ### Licensing, fit-and-proper, ownership and capital (Principles 2–6) - Permissible activities (Principle 2): Compliant. - Chapter 2 list of permitted banking activities includes 1.–17. explicit activities (borrow funds; grant and broker loans; participate in financing; negotiate payments; provide means of payment; issue guarantees; participate in issues of securities; provide financial advice; hold securities in safekeeping; conduct documentary credit operations; act as custodian institution for securities funds; participate in sales of insurance services; provide debt collection services; provide bank safe deposit services; conduct currency trading; conduct securities business subject to Securities Operations Act; provide credit information subject to Credit Information Act). - Use of the word “bank” restricted; unauthorized banking operations subject to conditional fines. - Deposit exceptions: balances not exceeding SKR 15,000 under specified conditions do not constitute deposits. - Licensing criteria (Principle 3): Largely Compliant. - Criteria set in Chapter 9 Banking Business Act and Banking Business Ordinance; FI guideline FFFS 1998:14 for fit-and-proper. - Minimum initial capital: 5 million euros. - Comments: Fit-and-proper test applies only to Board members, managing director and deputy; not all senior management; no detailed statutory criteria for management suitability. - Ownership and qualified holdings (Principle 4): Compliant. - "Qualified holding" defined as 10 percent or more or significant influence. - Prior consent required for thresholds at 10 percent triggering qualified holding and increases to or beyond 20, 33, or 50 percent. - Investment criteria and limits (Principle 5): Compliant. - A bank may acquire shares equal to 30 percent of its capital base. - "The total amount of holdings in and loans to one company, may not exceed an aggregate of 5 percent of the amount equivalent to 30 percent of the bank’s capital." - Within 30/5 percent rule, a shareholding may not, without FI consent, exceed 5 percent of voting capital for all shares in an individual company. - Capital adequacy framework and reporting (Principle 6): Compliant. - EU directives implemented via Capital Adequacy and Large Exposures Act and FFFS 2000:6; Basle Capital Accord complied with. - Capital adequacy reports due March 31, June 30, September 30 and December 31 and must reach FI "no later than the last banking day in the month after each closing date." - Supervisor not empowered by law to set minimum requirements higher than legal minimum depending on operating conditions; FI does not effectively determine internal ICAAP processes. ### Credit policies, provisioning, and large exposures (Principles 7–9) - Credit policies and internal controls (Principle 7): - FI general guideline FFFS 1995:49 and FFFS 1999:12 require board-established credit policies, internal audit, controller function and internal communication systems. - Related-party lending: Chapter 2 Section 17 requires arm’s length terms; banks expected to maintain list of connected/related parties and credits; FI may request list on demand. - Loan evaluation, asset classification, provisioning (Principle 8): - Written instructions required for review of individual credits; provisioning decisions made jointly by bank and external auditors; provisioning rules anchored in FFFS 2000:18. - Loans classified when payments contractually 60 days in arrears. - Assessment: Largely Compliant. - Comments: FI lacks legal power to require banks to strengthen lending practices or provisioning; FI may only make recommendations. - Large exposures and concentration limits (Principle 9): - Large exposure defined as >= 10 percent of capital base; single-counterparty limit 25 percent of capital base; sum of large exposures < 800 percent of capital base. - Reporting currently semi-annual but from 2002 to be quarterly and include industry-sector concentrations. - Assessment: Largely Compliant. ### Connected lending and country risk (Principles 10–11) - Connected lending (Principle 10): Largely Compliant. - Connected parties comprehensively defined (Chapter 2 Section 17); no formal requirement that credits to connected parties be handled at specific decision level; FI lacks power to set limits or deduct connected lending from capital; FI does not obtain continuous data on connected lending. - Country risk and transfer risk (Principle 11): Largely Compliant. - No specific legal provisions for country risk; FI integrates country/transfer risk as part of total credit risk via inspections and has quarterly reports; Riksbank provides country risk information on request. ### Market risk, internal models and supervisory expertise (Principle 12 and related) - Capital charge for market risk implemented (CAD 1) in Act on Capital Adequacy and Large Exposures (Jan 1996). - FI regulation FFFS 2000:6 and guideline FFFS 2000:10 on management of market and liquidity risks in credit institutions. - IMA: FI can set multiplier above 3 after qualitative evaluation; no Swedish bank currently authorized to use IMA; two banks applied. - Market risk team: three persons with two to three years supervisory experience; two staff work on capital adequacy and are members of Basel Models Task Force. - Assessment: Compliant for market risk regime; FI judged to have adequate knowledge to evaluate models but staffing lacks industry background. ### Internal control, audit, AML, on-site/off-site supervision, and consolidated supervision (Principles 13–20) - Internal control and audit (Principle 14): Largely Compliant. - Companies Act and FFFS 1999:12 require board responsibility, internal controls, independent audit function reporting to board. - FI cannot force board composition changes for skill gaps. - AML framework (Principle 15): Compliant. - Legal framework: Banking Business Act and Act on Measures against Money Laundering; FFFS 1999:8, FFFS 1996:8, FFFS 1999:12, FFFS 1999:7. - Identity checks when transaction exceeds SKR 110,000; documents retained five years after business relationship ends. - Compliance officer required (FFFS 1999:8); FI inspects AML practices; intentional/gross negligent failure to comply is criminal (Act Section 14). - FATF self-assessment (2001): Sweden in full compliance with 26 of the 28 mandatory recommendations; identified shortcomings: missing fit-and-proper tests of new staff involved with AML measures and foreign exchange offices/money transmitters not subject to FI supervision. - On-site and off-site supervision (Principle 16–18): - FI uses combination of off-site and on-site; data fed into database (Värdetatabasen); group-wide risk assessment model to evaluate 13 systemically important groups projected for 2002 implementation. - Reporting regimes: standard report every 3rd month; large exposures every 6th month (moving to quarterly); solvency and capital adequacy every 3rd month; interest rate risk every 3rd month; qualified owners yearly. - FI has handbooks and supervision process; assessment: Compliant but resource constraints noted. - Consolidated supervision (Principle 20): Largely Compliant. - FFFS 2000:7 requires yearly group reporting; Banking Business Act extends supervision to group entities; FI developing new consolidated risk assessment model. - Limitations: FI lacks explicit powers to circumscribe bank activities via subsidiaries; not required by law to assess host-country supervisory arrangements; has yet to conclude agreements with some countries outside EU. ### Remedial measures (Principle 22) - Legal authority: Chapter 7 of Banking Business Act gives FI remedial powers including injunctions, conditional fines, warnings and revocation of charter. - Grounds for revocation include failure to commence operations, continuous non-operation, capital base below five million euro not remediated within three months, failure to fulfill Deposit Guarantees Act obligations, or unsuitable management. - Limitations: FI cannot impose many essential remedial measures (suspend dividends, replace management, conservatorship, force mergers, impose capital requirements above legal minima). - Assessment: MATERIALLY NON-Compliant. - Recommended action: broaden legally binding remedial measures to enable proactive supervisory intervention and prevent forbearance. ### Banking sector summary observations and recommended action plan (selected CPs) - Key recommended actions include: - CP1: Improve FI’s employer competitiveness; redefine lead supervisor role. - CP3: Apply fit-and-proper tests to all members of bank management including senior executives and managers of foreign offices. - CP8: Grant legally based powers to require banks to strengthen lending practices, provisions and reserves. - CP9: Require reporting on geographical concentrations in lending. - CP10: Enhance supervision of connected lending; authority to set individual limits and deduct concessionary connected loans from capital; require register and regular reporting. - CP11: Issue regulations on management of country risk. - CP13: Issue supervisory standards on exchange and operational risk; give FI powers to require capital against non-market/non-credit risks. - CP14: Empower FI to require board composition changes due to skill shortages. - CP20: Empower FI to circumscribe activities through foreign operations; adopt active lead-supervisor role; conclude agreements outside EU. - CP22: Provide wider array of legally binding remedial measures and amend laws to prevent supervisory forbearance. - CP23–CP25: Strengthen host/foreign supervisory coordination and information sharing requirements. --- ### Insurance supervision — institutional setting, market structure, and IAIS assessment - FI supervises insurance companies and friendly societies; merged supervisory service on July 1, 1991. - FI staffing for insurance: total FI staff about 170; approximately 30 (18 percent) work in Department of Insurance and Mutual Funds, divided into Licensing & Legal Matters, Supervision, and Risk Analysis. - Assessment against IAIS Insurance Core Principles (ICP): - Of 17 assessed principles, Sweden observes 6 and broadly observes 11. - Market structure and key statistics (year 2000): - Number of insurance companies at end-2000: 482. - Life insurance premium income in 2000: rose by 25 percent to SKR 102.7 billion. - Unit-linked insurance companies’ premium income: up 43 percent. - Traditional life insurance companies’ premium income: increased by 13 percent. - Life insurance companies’ average solvency ratio in 2000: 11. - Non-life insurance premium income in 2000: SKR 34.9 billion, 5 percent higher than in 1999. - Average solvency ratio in 2000: 17.2. - Labor market insurance companies’ aggregate premium income: SKR 15.8 billion, down 23 percent on 1999. - Aggregate assets under management at year-end 2000: SKR 1,820 billion (4 percent higher than previous year end). - Invested in shares and participations: SKR 894 billion (49 percent). - Invested in bonds: SKR 711 billion (39 percent). - Foreign assets: SKR 623 billion (34 percent). - Ratio of domestic insurance liabilities to domestic bank deposits increased from 0.8 to 1.2 (1995 to 2000). - Supervisory effectiveness and constraints: - Legal framework considered sufficient; improvements planned coming into force next year. - Resource constraints and staff shortages at FI jeopardize effective insurance supervision; difficulty recruiting actuaries; shortfall forces prioritization and vulnerabilities in non-prioritized areas. - FI supervises seven financial conglomerates and carries out overall assessment for 13 entities (6 insurance companies, 4 banking groups, 3 security firms). ### Insurance prudential and operational findings (selected ICPs 1–10, 12–17) - Principle 1 (Organization of supervisor): Broadly observed. - FI independent with Board including parliamentary and industry representatives; turn-over rate of staff at least 15 percent; average employment period 5 to 10 years. - Recommendation: strengthen staff resources (fit-and-proper testing, investments, reinsurance, market conduct). - Principle 2 (Licensing): Broadly observed. - Concession required; business plan, minimum capital (often supervisory practice requires capital base double required solvency margin). - Shortcoming: lack in Act prevents FI from carrying out fit-and-proper tests for senior/key persons beyond certain roles. - Recommendation: extend fit-and-proper statutory basis. - Principle 3 (Changes in control): Broadly observed. - FI permission needed for acquisitions leading to qualified holdings; no statutory fit-and-proper test for senior management/key persons. - Principle 4 (Corporate governance): Observed. - Law and FFFS 2000:3 require Board objectives, strategies, guidelines and internal control. - Principle 5 (Internal controls): Observed. - FI reviews internal control; guideline FFFS 2000:3 requires reporting systems; recommendation to make annual risk management report submission mandatory. - Principle 6 (Assets): Observed. - Investment rules for assets covering technical provisions; guaranteed interest rate at present: 3.0 percent per annum. - Principle 7 (Liabilities): Observed. - Technical provisions defined; life technical provision = present value of liability minus present value of expected premiums. - Principle 8 (Capital adequacy and solvency): Broadly observed. - FI follows EU rules (Solvency I); FI can require higher than minimum margin for licensing cases; intends to introduce qualitative risk assessment in spring 2002. - Principle 9 (Derivatives and off-balance): Broadly observed. - Use of derivatives restricted to reduce financial risk; FI requires policy for derivatives. - Principle 10 (Reinsurance): Broadly observed. - Guideline FFFS 2000:5 on management of underwriting risk and reinsurance; supervision of pure reinsurers limited in practice to licensing and reporting. - Principle 11 (Market conduct): Broadly observed. - FI inspects sales, information to customers and complaints handling; resource constraints limit inspections of brokers. - Principle 12 (Financial reporting): Broadly observed. - FI has power to set reporting scope/frequency; appointed auditors report to FI; actuarial report recommendations: Responsible Actuary in life should take asset-side into account; non-life Responsible Actuary should sign report. - Principle 13 (On-site inspection): Observed. - On-site inspections typically 2–3 days for larger insurers at least once a year. - Principle 14 (Sanctions): Broadly observed. - FI can issue injunctions, conditional fines, revoke license; lacks possibility of issuing formal criticism short of injunctions. - Principles 15–17 (Cross-border, coordination, confidentiality): Broadly observed. - FI has authority to enter MOUs; secrecy legislation governs sharing; disclosure of foreign-origin information treated via Secrecy Ordinance Section 1c additions. ### Insurance recommended action plan (selected) - Amend Insurance Business Act to require fit-and-proper tests for senior management/key persons. - Require insurers to inform FI of all outsourcing contracts (regulation). - Make submission of annual risk management report to FI mandatory. - Strengthen staffing (actuaries, investment, reinsurance, market conduct). - Strengthen confidentiality arrangements where necessary to permit full information exchange with foreign supervisors. --- ### Securities markets, exchanges, mutual funds, clearing and settlement — market structure and risks - Fund management: - 70 fund managers licensed in Sweden. - 80 percent of assets under management in fund industry managed by mutual fund companies owned and operated by the four large banks (figures as of August 2001). - Stock exchange and derivatives: - Stockholmbörsen is a public demutualized exchange using the SAXESS system; ranks 15th largest stock market by market capitalization. - Equity market lists 310 companies with market capitalization of SKR 3.583 billion end-2000. - Average daily turnover was 224 million trades worth SKR 15.225 billion in September 2001. - Stockholmbörsen has Norex alliance with Oslo Børs, Copenhagen Exchange and Iceland Stock Exchange. - Clearing, settlement, and custody (VPC and OM systems): - VPC acts as clearing/settlement organization and securities registry; securities fully dematerialized. - VPC effectively controlled by four major Swedish banks owning 98.6 percent of shares. - Equity and bond trades cleared and settled through VPC on T+3 for equities and T+2 for treasury bills; settlement in central bank money via RIX. - VPC features an unprotected netting scheme for equity and debt trade settlements; partial guarantee system for equity but significant risk in debt market. - OM Derivatives clearing system acts as central counterparty for derivatives. - Straight Through Processing not yet widely adopted. - Regulatory framework, SROs, and investor protection: - Extensive use of trade associations for self-regulation (MFA, SSDA, NBK); none officially recognized as SRO. - FI does not license individuals or set proficiency requirements; Svedsec (subsidiary of SSDA) registers and licenses individual employees. - Investor Guarantee Fund coverage up to SKR 250,000 per customer; currently has no reserves. - Supervisory capacity and resource constraints: - FI reorganized supervision planning; designated 13 priority institutions/groups including VPC and Stockholmbörsen. - FI short of resources and expertise for in-depth on-site inspections of VPC, Stockholmbörsen, investment firms and mutual funds. - Inspection statistics: investment firm inspections 43 in 1999; 31 in 2000; 6 to date in 2001. Mutual fund inspections: 33 in 1999 and 2000. ### Main findings and systemic vulnerabilities (clearing & settlement focus) - Executive summary: - Weaknesses in supervision of clearing and settlement systems at Stockholmbörsen and VPC. - Inadequate risk management for exposures in debt and equity clearing in VPC persisted. - Governance structures of VPC and Stockholmbörsen give rise to conflicts of interest. - Key numerical thresholds and facts (preserve source figures exactly): - Investor Guarantee Fund coverage: up to SKR 250,000 per customer. - Mutual fund company minimum capital: SKR 1 million. - NAV publication frequency requirement: at least once a week. - Illiquid securities may constitute up to 10 percent of a mutual fund portfolio. - Listing criteria for A list stocks include market value of SKR 300 million; three year history of operation and profitability; 10 percent public float; at least 2,000 shareholders owning a half board lot each. - O list shareholders threshold: at least 300 shareholders holding a quarter board lot each. - VPC/VPC netting systems specific findings: - VPC netting schemes are unprotected against participant default; Guarantee Clearing has partial payment-bank guarantees; Money Market Clearing lacks guarantor limits and is exposed. - VPC default handling: clearing is unwound and transactions of defaulting party cancelled. - Trade confirmation: equities 30 percent on T+0 and 70 percent on T+1 (between clearing members); bond and money market: 100 percent T+0. - Settlement cycles: rolling settlement used; stock exchange and OTC T+3; treasury bills T+2. - RTGS settlement exists but manually operated and hardly used. - VPC governance: owned 24.65 percent by each of four largest banks; raises conflict-of-interest concerns; shareholders appoint 7 Board members subject to FI acceptance. - CPSS/IOSCO Recommendation observance (VPC): - COMPLIANT: 12 recommendations (Rec. 3, 4, 5, 6, 7, 8, 10, 11, 12, 15, 16 and 19). - BROADLY COMPLIANT: 1 — Rec. 1. - PARTLY COMPLIANT: 5 — Rec. 2, 13, 14, 17 and 18. - NON-COMPLIANT: 1 — Rec. 9 (risk controls for net settlement systems and intraday credit). - CPSS findings on RIX: - RIX participation: sixteen banks; seven participants are branches of foreign banks. - Annually nearly 575 thousand payments cleared/settled in RIX with nominal value SKR 122 trillion ($14 704 billion). - E-RIX euro payments in 2000: 62 000 payments with value of 1 718 billion of euro. - RIX assessed Observed on CP I–VI, VII; CP VIII Broadly observed; CP IX Observed; CP X Observed; Central Bank Responsibilities A, B, D Observed; Responsibility C Partly observed. - Riksbank provides wide collateral acceptance, intra-day credit and contingency arrangements but lacks formal legal enforcement powers over payment systems and oversight framework clarity with FI. ### Principal supervisory shortcomings and recommended securities-market actions - Shortcomings: - Weak oversight and limited on-site inspections of Stockholmbörsen and VPC despite systemic importance. - FI lacks enforcement powers to compel third parties, levy fines, impose interim measures or sanction individuals. - Heavy reliance on SROs without sufficient FI oversight. - Conflicts of interest in mutual fund sector and bank-owned concentration (banks act as owners, custodians and related securities firms). - Settlement risk in fixed income at VPC: no guarantee fund, no collateralization, unprotected netting. - Lack of books-and-records, audit trail, mandatory personnel proficiency standards. - Recommended actions (selected): - Grant FI authority over third parties, ability to compel evidence and levy fines. - Increase FI resources for inspections of investment firms, mutual funds, VPC and Stockholmbörsen. - Strengthen oversight and approval of clearing/settlement risk models and stress tests for VPC and Stockholmbörsen. - Require owner fit-and-proper checks for mutual fund companies; independent custodians where appropriate; NAV monitoring and valuation rules for illiquid securities. - FI to develop powers to act as administrator prior to bankruptcy in case of major failure to enable client account transfers. - Riksbank/Parliament: consider strengthening Riksbank legal powers for oversight; develop explicit regulatory framework and MOU between Riksbank and FI. - VPC: produce figures on market risk in netting schemes; implement risk management and liquidity arrangements; reduce indirect participant exposures by assigning clearing member responsibility. ### Authorities’ response and planned initiatives - Authorities broadly agreed with assessments and noted ongoing EU work will implement many standards. - FI business plan contemplates increased attention to VPC and Stockholmbörsen. - VPC adopting a two-step approach to eliminate "unwinding" procedure and to eliminate indirect participation; rules changed as of October 1, 2002 to remove indirect participants and make clearing member fully responsible. - Riksbank and FI agreed to develop and publish an MOU about oversight methodology, division of tasks and cooperation arrangements. *Source: IMF staff report content extracted from the supplied PDF (_cr10131).* ### 1. Detailed Assessment of Compliance of the Basel Core Principles ......................................8 ### Detailed Assessment of Compliance of the Basel Core Principles ### Assessment context and methodology - Assessment performed by Allan D. Fink (Federal Reserve Bank of Chicago) and Tuomo Malin (Finnish Financial Supervision Authority). - Methodologies used: - Methodology of the Basel Core Principles. - Draft Methodology Document prepared by the IMF and World Bank titled Enhancing the Global Effort Against Money Laundering. - Inputs and sources: - Self-assessment submitted by the Swedish Financial Supervisory Authority (Finansinspektionen; "FI"); additional self-assessment on draft money laundering guidance produced on request. - Laws, supervisory regulations, guidelines concerning credit institutions (Banking Business Act; Act on Capital Adequacy and Large Exposures for Credit Institutions and Securities Companies; Act on Financial Operations). - Law texts from Swedish Parliament web site and English versions from Bankers’ Association; many supervisor regulations available only in Swedish. - Relevant material from the central bank and meetings with representatives from main commercial banks. - Assessors reported no major barriers despite scarcity of documents in English. ### Institutional and market structure overview - Bank types: - Commercial banks (limited liability banking companies), savings banks, cooperative banks — all entitled to engage in all types of banking activity. - Market concentration and structure: - Two-tiered market with five large banks (Handelsbanken, Skandinaviska Enskilda Banken, Nordbanken, Förenings Sparbanken, and the Swedish subsidiary of a major Danish bank) having combined market share of about 75–85 percent. - Residual market shared among around 100 smaller banks. - Home market increasingly includes the whole region surrounding the Baltic Sea. - Ownership structure of major banks: - Largest owners: Swedish government (less than 20 percent in Nordea), Investor (some 10 percent in SEB), employees’ pension fund (some 10 percent in Svenska Handelsbanken), former savings banks foundations (some 20 percent in Swedbank). - Approximately one third of bank shares are held by non-Swedes. - Medium and small-sized banks generally held by one dominating owner (e.g., Skandia). - All savings banks are non-profit organizations held by foundations. ### Supervisory and macroprudential framework - FI (Finansinspektionen): - Government authority responsible to the Ministry of Finance (MoF). - Supervises banks, credit market companies, insurance companies, insurance brokers, securities companies. - Role: ensure statutory compliance, promote secure and sound practices, and preserve confidence in stability and functionality of financial markets. - Funding: costs defrayed by charges levied on banks and other supervised entities; annual budget decided by government. - Primary tasks include promotion of satisfactory consumer protection; National Board for Consumer Complaints handles disputes between consumers and business firms, with separate banking board for disputes between banks/credit institutions and customers. - FI is an independent government authority without outside interference in operational functions; has internal process and procedure descriptions. - Board of FI: 10 members with Director General as chairman; Director General and board members appointed by government for determinate periods; board composition not defined in laws or decrees. - FI publishes annual financial stability report to government; Riksbank publishes financial stability reports twice annually. - Riksbank (Central Bank): - Responsibilities: ensure stable and efficient payment system; monetary and exchange rate policy; management of gold and currency reserves; issue of notes and coins; provide clearing function, accept deposits and grant loans to banks; lender of last resort. - Legal framework highlights: - Banking Business Act contains provisions regulating bank business and tasks of FI. - Special acts for savings banks and cooperative banks. - Act on Capital Adequacy and Large Exposures sets capital base, capital adequacy calculations, exposure limits, consolidated supervision rules. - Act on Financial Operations covers licenses and activities of credit market companies (mortgage institutions, finance companies). - Secrecy Act sets conditions for disclosure of confidential information by FI (mandatory to parliament and government; may disclose to Public Prosecution Authority, Police, Riksbank, other supervisory authorities). - Government’s annual directive regarding supervisor’s overall objectives and reporting obligations is publicly available; FI’s annual plan and annual report are publicly available and subject to review by the Swedish National Audit Office. ### Resources, staffing and capacity - FI budget and staffing (exact figures and allocations): - FI requested a budget increase of SKR 30 million for new capital adequacy rules; SKR 8,2 million was granted to the budget for 2002. - Goal to increase staff by 36 persons during 2002-03; major risk areas for personnel increase: credit risk and operational risk (14 persons). - Total budget for 2001: SKR 133 million. - Personnel outlays: SKR 91 million (including SKR 1,8 million for training; SKR 4,7 million for foreign travel; SKR 0,5 million for domestic travel). - IT costs for soft and hardware acquisitions: SKR 2,9 million. - Independence and appointment: - Head of FI can be appointed by government for maximum of two terms of six years each. - Removal from office mid-term only for reasons specified in law; reasons must be publicly disclosed when head removed. - Operational constraints: - FI cannot, with present level of remuneration, compete with private sector for specialists. - Renewed capital accord and prevalence of financial conglomerates in Nordic system raise questions about adequacy of FI human resources. - FI has instituted ethical standards for employees (confidentiality, conflicts of interest, loans from supervised entities, additional occupations, dealings in financial instruments). ### Recent banking sector performance and risks - Profitability and credit metrics (2000 data): - Return on equity for largest Swedish banks: ranged between 22 percent and 24 percent, except Nordea group at 18.6 percent. - Credit losses increased to SKR 1.9 billion in 2000. - Nonperforming loans increased by SKR 4.5 billion to SKR 23.5 billion. - Tier 1 capital ratio for commercial banks was 7.9 percent in June 2000 (with a slight upward trend from previous years). - Credit growth: - Households: 8.1 percent (up from 1999). - Total lending to Swedish public: increased by 4.7 percent. ### Crisis management and deposit protection - Crisis resolution arrangements: - After disbanding of Bank Support Authority there are no standing institutional arrangements for handling banking crises. - Committee paper of 1998 proposed placing a bank into public administration where necessary for system stability or reconstruction; otherwise bank to be declared bankrupt or liquidated. - Government would be able to take control of a bank’s business without taking ownership; no option of compulsory takeover. - Proposed Crisis Management Authority would assume control by representing all shares at general meetings; a government guarantee could be issued to ensure commitments met during guarantee life. - At present there is no institutional framework for problem bank resolution; moral hazard concerns noted as government would be effectively regarded as guarantor of a bank in public administration. - Deposit Guarantee Scheme: - Act on Deposit Guarantee Scheme provides guarantee for deposits up to SKR 250,000 per customer at each institution. - Act contains rules on which deposits are covered, when right to compensation arises, and fees to be paid by covered institutions. - Administrative duties lie with the Deposit Guarantee Board. ### Detailed Assessment — Principle 1 (Objectives, Autonomy, Powers, and Resources) - Principle 1 summary statement: - An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to the authorization of banking establishments and their ongoing supervision; powers to address compliance with laws, as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place. - Principle 1(1): Clear responsibilities and objectives - Description highlights: - Main laws: Banking Business Act and Capital Adequacy and Large Exposure Act; separate laws for savings/cooperative banks and finance companies/mortgage institutions. - Government decree sets FI’s main objectives: promoting financial stability and efficiency and improving consumer protection. - FI duties: supervision per laws/decrees, monitor/analyze financial sector, issue regulations/guidelines, international cooperation, assist government on laws/research. - Board composition and duties noted; FI is sole competent authority for bank supervision. - FI must consult Riksbank, Swedish Competition Authority, Deposit Guarantee Board on matters specified in decree. - Formal memorandum of understanding exists only with Consumer Agency. - Institutional arrangements for crisis resolution not legally defined; FI participates ad hoc with Riksbank and MoF in crisis. - Government issues annual directive (regleringsbrev); FI sets operational goals in annual plan; performance accounted in annual report subject to Swedish National Audit Office review. - Assessment: Compliant - Comments: Laws and regulations on banking activities and supervision are in place. Composition of the Board of FI not regulated in law or ordinances. Position of FI relative to other public agencies in crisis situations not defined in law. - Principle 1(2): Operational independence and adequate resources - Description highlights: - FI independent with its own board; makes budget requests within total state budget; an amount equivalent to approved budget charged to supervised institutions. - Within budget and objectives, FI independent in regulatory and supervisory functions. - FI instituted ethical standards for employees. - For new capital adequacy rules FI requested SKR 30 million; SKR 8,2 million granted for 2002. - Goal to increase staff by 36 persons during 2002-03; planned allocation includes 14 persons to credit risk and operational risk. - One main supervisory objective: produce group-wide risk assessments of 13 major financial groups. - FI can freely dispense appropriations per budget items (salaries, training, equipment, travel). - Budget breakdown for 2001 provided (see Resources, staffing and capacity). - Head appointment and removal process noted. - Assessment: Largely Compliant - Comments: FI requested large increase in specialists. Supervisor cannot, with present remuneration, compete with private sector. To supervise complex activities (market risks) FI must increase competitiveness as employer. Large personnel increase coincides with implementing new model for risk assessment. - Principle 1(3): Legal framework for authorization and ongoing supervision - Description highlights: - Responsibilities defined in Banking Business Act, Chapter 7. - FI issued regulation on licensing process; Director General can defer licensing decisions to government in cases of great general importance. - Banks must furnish FI requested information; FI may carry out investigations at banks as necessary. - Chapter 7 Section 2 authorizes government or FI to issue regulations on information banks must provide; safekeeping/inventory of securities and financial instruments; crime prevention measures. - Capital Adequacy and Large Exposures Act confers powers to give detailed provisions. - Assessment: Compliant - Comments: None - Principle 1(4): Powers to address compliance, safety and soundness - Description highlights: - Banking Business Act: FI may enjoin execution of decisions contravening law or articles of association; may order rescission where possible. - FI has full access to any information deemed necessary; may carry out inspections as necessary. - FI may issue orders or injunctions on pain of a conditional fine (Chapter 7 Section 23); may revoke bank’s charter or issue warnings under specific circumstances. - Assessment: Compliant - Comments: Banking Law Committee preliminary paper of 1998 recommends increasing supervisor’s powers of remedial action. - Principle 1(5): Legal protection for supervisors - Description highlights: - Legislation contains no explicit provisions for legal protection concerning FI and its employees. - Civil cases and claims for damages must be addressed to FI (the employer) and not to the employee. - Law on Damage Compensation (Chapter 3, Section 2): employer normally bears cost of compensation for damage caused by error or mistake by employees; employer may seek damages from employee only in exceptional circumstances after considering nature of action, position of employee, interests of harmed person and other circumstances. - Employees may be addressed directly in criminal cases; employee may be judged responsible for professional misconduct if case not insignificant. - (Assessment text not included in supplied excerpt.) *Source: Detailed assessment chapter on observance of Basel Core Principles (Finland/Sweden assessment content excerpt).* ### Chapter 20 Section 1 of the Penal Code. Employees may be sentenced to prison for up to ### _cr10131 - Chapter 20 Section 1 of the Penal Code. Employees may be sentenced to prison for up to ### Legal protection, penalties, and secrecy - Employees may be sentenced to prison for up to two years, or in case of gross negligence or criminal intent, up to six years. - The employee may also be judged responsible, if not an insignificant case, for disclosing secret information according to the Secrecy Act. - Assessment: Compliant - Comments: The supervisory authority and its employees can be considered to have legal protection for their actions taken in good faith in their office. ### Arrangements for sharing information between supervisors and confidentiality - Principle 1(6): Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place. - FI (Financial Supervisory Authority) obligations and cooperation: - According to the Ordinance for FI, FI shall confer with Riksbanken in matters regarding monetary stability or matters regarding monetary and payment policy and shall provide Riksbanken with necessary information. - Under an agreement between FI and the Deposit Guarantee Board, FI will disclose information (e.g., deposits and capital ratio) on demand so the Deposit Guarantee Board can determine the fee for the deposit guarantee; the Deposit Guarantee Board will be informed about new institutions, branches in Sweden of foreign institutions, and branches abroad established by Swedish institutions. - A bilateral cooperation agreement is not a precondition to exchange information with an authority of another country; FI may, on request, disclose information to an authority if the Swedish Secrecy Act does not hinder a disclosure. - FI has signed MOU’s with the EU-countries where the Swedish banks have operations, and FI has recently entered into an MOU with Latvia. FI has initiated discussions on drafting MOU’s with supervisors in Lithuania, Poland, Estonia and the USA. - In each MOU with a foreign supervisor, cooperation and information sharing is treated as an essential issue. - Secrecy Act provisions: - According to Chapter 8 Section 5 of the Secrecy Act, the government may decide that secrecy applies to information that FI has received according to an agreement with a foreign authority; such agreements have been added to Section 1 c of the Secrecy Ordinance. - Under specific circumstances the Riksbank may ask for and receive secret supervisory information. - FI is obliged to deny any demand for confidential information in its possession where regulated by the Swedish Secrecy Act. - Secrecy shall apply to FI activities consisting of issuance of permits or supervision regarding the banking and credit system, the securities market or the insurance business. - Information concerning the business or management conditions of the person whom FI’s activities concerns is protected by secrecy if it can be assumed that economic losses would be entailed if disclosed. - Information concerning the economic conditions or personal circumstances of the client of a company under supervision by FI is protected by secrecy. - Chapter 14 of the Secrecy Act lists situations when disclosure is mandatory (e.g., to the Swedish Parliament, the Swedish government, another supervisory authority; confidential information concerning suspicion of crime may be disclosed to the Public Prosecution Authority, the Police, or an authority that must take action if imprisonment is prescribed for the crime and this is presumed to give rise to another sanction than fine penalty). - Information that FI receives according to an agreement with a foreign authority cannot be disclosed if disclosure would be in breach of the agreement. - Assessment: Compliant - Comments: The rules of confidentiality regarding the information FI has access to in the discharge of its duties, as well the disclosure of such information, are in place. FI has yet to enter into MOU’s with some authorities in countries where Swedish banks have a presence. ### Permissible activities of banks (Principle 2) - Principle 2: The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined, and the use of the word “bank” in names should be controlled as far as possible. - Legal definitions and licensing: - The term “bank” is defined in Chapter 1 Section 1 the Banking Business Act as banking companies, savings banks, and members’ banks. - Banking business may only be conducted following authorization (license) from FI, or in exceptional cases from the government. An authorization may only be given to banks. - The permissible activities of banks are defined in Chapter 2 the Banking Business Act and correspond to Annex 1 to the European Directive 2000/12/EC relating to credit institutions. - Explicit permitted activities (Chapter 2 list): 1. borrow funds, inter alia, by issuing bonds or other similar debt instruments; 2. grant and broker loans, inter alia, in the form of consumer loans and loans secured by real property or instruments of indebtedness; 3. participate in conjunction with financing, inter alia, by acquiring claims and leasing personal property; 4. negotiate payments; 5. provide means of payment; 6. issue guarantees and assume similar obligations; 7. participate in issues of securities; 8. provide financial advice; 9. hold securities in safekeeping; 10. conduct documentary credit operations; 11. act as a custodian institution for securities funds; 12. participate in sales of insurance services; 13. provide debt collection services; 14. provide bank safe deposit services; 15. conduct currency trading; 16. conduct securities business subject to the conditions prescribed in the Securities Operations Act; and 17. provide credit information subject to the conditions prescribed in the Credit Information Act. - Additional permissible operations: - Banks may conduct operations that have a natural connection with deposits or with operations listed above. - Chapter 2 also states additional permissible activities not directly connected to banking (e.g., acquisition of shares). - Where a special cause exists, a bank may be authorized by FI to provide postal services. - Further details issued in FI’s regulations and guidelines. - Use of the word “bank”: - No entity other than a bank, the Central Bank of Sweden, the Swedish General Mortgage Bank and foreign banking undertakings may use the word “bank” in its name or otherwise in conjunction with a description of its business. - An association or other legal entity with a close affiliation to a bank may, with FI’s authorization, use the word “bank” in its name. - Unauthorized banking operations: - According to Chapter 7 Section 21 the Banking Business Act, where any person conducts banking business without being licensed, FI shall order such person to cease such operations on pain of a conditional fine. - Where there is doubt as to whether operations include deposits, FI may order the person to furnish any information required to determine whether deposit operations are being conducted. - As to foreign undertakings, an order may be addressed to both the undertaking and any person conducting operations in Sweden on behalf of the undertaking. - Definition and exceptions for deposits: - Banking business is defined as operations which include the acceptance of deposits on account where the balance is determined in nominal amounts and is available to the depositor on short notice. - Where an undertaking accepts customer funds on account, they do not constitute deposits provided the balance for each customer does not exceed SKR 15,000 and the balance is only available to the customer for payment for goods and services produced or sold by the undertaking; or by another undertaking in the same group or in the same group of undertakings with close economic affiliation or in connection with the closure of the account. - According to Chapter 1 Section 2b the Banking Business Act, it is not considered to be a banking activity if an economic association conducts deposit operations, provided the association: receives deposits only from its own members; only intends to use members’ deposits to satisfy the financing requirements of the members; only accepts natural persons as members; and has no more than 1,000 members. No new association may use this legal provision as a basis for pursuing these activities without a license. - Consumer information and marketing: - An undertaking which offers deposits on account in accordance with Chapter 1, Sections 2 a and 2 b shall specify in advertising, displays, and other marketing that the balance on the account is not covered by the deposit guarantee in accordance with the Deposit Guarantee Act. - Prior to execution of an account agreement, the account operator must inform the depositor in writing that the balance on the account is not covered by the deposit guarantee. - The Marketing Practices Act applies if the undertaking fails to provide this information. - Assessment: Compliant - Comments: The term bank has been given a definition in law. The supervisor may order a person to stop unauthorized banking activities on pain of a conditional fine. To conduct unauthorized banking activities is not criminalized. A banking law committee has drafted a preliminary version for a revised banking act that includes a more adaptable definition for activities needing authorization. ### Licensing criteria (Principle 3) - Principle 3: The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. Licensing process should assess ownership structure, directors and senior management, operating plan and internal controls, and projected financial condition, including capital base; where the proposed owner or parent is a foreign bank, the prior consent of its home country supervisor should be obtained. - Legal basis and process: - The criteria for licensing banks is set in Chapter 9 the Banking Business Act and correspond to Directive 2000/12/EC the Credit Institution Directive. Some additional criteria are set in the Banking Business Ordinance. - FI has issued a guideline with information about the requirements concerning an application for a banking license. - Basic criteria such as soundness, fit-and-proper test of the Board of Directors and of qualified shareholders, are examined in the ongoing supervision of the institution. - Capital adequacy rules are upheld through the Capital Adequacy and Large Exposures Act. - According to Chapter 7 Section 1 the Banking Business Act, a bank must furnish FI with any information regarding its operation and circumstances requested by FI. - Rejection and procedural rights: - FI may reject an application for a banking license if essential criteria set in law and regulations are not met. - If an application is incomplete, the applicant may be asked to complete it according to FI’s instructions at the risk of the application being rejected. The applicant has the right to express its opinion before a rejection. - Ownership, outsourcing, and governance: - Where the company will have a close affiliation with a third party, the articles of association may only be approved by FI and a license be granted where the relations will not impede effective supervision. - FI may reject a bank’s plans to outsource activities if this would impede effective supervision. - Chapter 8 of the Companies Act regulates management duties; FI has issued regulations and guidelines regarding internal control and responsibilities of the bank’s Board of Directors. - An independent audit function shall be set up within the bank. - Ownership disclosure and documentation: - Major shareowners of a new bank are evaluated by FI according to the same principles as in on-going evaluation of ownership control (Chapter 7 Section 10 the Banking Business Act). - The bank must give FI information regarding the complete ownership structure; if a bank belongs to a group, the type of business of other entities in the group and exact share amounts must be reported. - An economic entity as founder of a new bank must provide its profit and loss statement as well as the consolidated statement for the group. - Capital requirements: - A minimum initial capital amount of 5 million euros is stipulated for all banks. - According to the Banking Business Act, a bank’s capital base may never be less than the amount that was required as initial capital. - According to the Banking Business Ordinance, prior to commencing operations a bank must submit to FI a certificate by a chartered accountant that the minimal capital as stated in Chapter 9 Section 4 the Banking Business Act has been fully paid. - Assessment information (partial in source): - FI evaluates the proposed Board of Directors and the managing director both at application and during on-going supervision. *Source: _cr10131 - Chapter 20 Section 1 of the Penal Code. Employees may be sentenced to prison for up to* ### Section 3 the Banking Business Act stipulates that a charter shall be granted where the ### _cr10131 - Section 3 the Banking Business Act stipulates that a charter shall be granted where the ### Licensing and fit-and-proper requirements - Charter granted when persons who will constitute the company’s boards of directors or serve as the managing director or the acting managing director "possess sufficient insight and experience" and are otherwise suitable to participate in the management of a bank. - Fit-and-proper details provided in guideline FFFS 1998:14 issued by FI. - A charter is not granted if a member of the Board of Directors or the managing director or his deputy has "to a significant extent failed to perform his obligations in commercial operations or in other financial affairs or has been convicted of a serious criminal offence." - Not all senior management are subject to the fit-and-proper test: only members of the Board of Directors, the managing director, and deputy managing director are tested; "All members of a bank’s senior management are not subject to such a fit-and-proper test." - The fit-and-proper test is primarily formal and "is mostly related to the question of the members not being convicted of crimes." - No explicit statutory rules on Board composition; Board is required to have "a broad competence." ### Corporate governance, operating plans, forecasts, and internal controls - Banking Business Ordinance requires submission of a bank’s operating plan with licensing application; plan "must include a description of the projected operations of the bank." - FI reviews that corporate governance and internal controls conform with law and FI guidelines. - FI monitors presence of written procedures for important spheres and "adequate internal control mechanisms." - Required risk descriptions include risk monitoring and management of: - credit risk - interest rate risk - exchange and liquidity risks - FI guidelines require internal regulations for the Board of Directors. - FI has issued regulations and guidelines regarding prevention of criminal activities connected with banking activities. - A prognosis for the bank’s economic results for the next three years "must be submitted to FI" for both the bank and the group, and must include "an analysis of the capital requirements for the different risk areas." ### Foreign banks: branches and subsidiaries - Foreign banking company with registered office in an EEA country intending to establish a branch in Sweden: not required to obtain a license from FI; FI receives notification from the home supervisory authority containing prescribed information; procedure corresponds to the Credit Institutions Directive. - Foreign banking companies from outside the EEA intending to establish a branch in Sweden: a license issued by FI is needed. - Prior to issuing a license for a non-EEA branch, FI "follows the policy of asking the home country authority’s opinion" to check that planned business may fulfill requirements of sound banking operations. - Foreign companies intending to establish a subsidiary in Sweden: authorization must always be submitted to FI. - If owners are foreign physical persons or foreign legal entities, FI’s policy is to contact the foreign supervisory authority to determine owner suitability; "No requirement to obtain the foreign authority’s statement of no objection is stated in law." ### Enforcement, remedial powers, and inspections - If FI determines license was knowingly based on false information, FI can ask for corrections; if false information jeopardizes sound development and management is unsuitable, FI may revoke the charter or issue a warning. - FI may determine restrictions on representation at general meetings where a qualified holder has hindered sound development or failed obligations or been convicted of a serious criminal offence. - FI may order divestment of shares or interests where holdings contravene FI decision or hinder effective supervision. - Inspections: "An inspection is normally made within one year after the bank has been given a license" to monitor business and supervisory compliance. - Assessment headline: "Largely Compliant" for licensing standards. - Comments highlight gaps: - Fit-and-proper test does not cover all members of management. - "There are no detailed criteria for assessing the suitability of management." - Economic situation of principal shareholders "is assessed only through public financial statements." - FI, while not required by law, "in practice consults the foreign supervisor" for non-EEA entrants. ### Principle 4 — Ownership (qualified holdings and supervisory consent) - Definition: "qualified holding" = direct or indirect ownership representing 10 percent or more of share capital or voting capital or where holding otherwise enables significant influence. - Guideline: FFFS 1998:14 on monitoring qualified holdings. - Prior consent required for acquisitions that cause holdings to become a qualified holding or increase a qualified holding to or beyond 20, 33, or 50 percent, or result in the bank becoming a subsidiary. - Special cases (division of joint marital property, inheritance, will, corporate distribution): acquirer must apply for consent to retain shares/interests within six months of obtaining them. - Consent granted where acquirer will not "hinder the sound development of the bank’s operations" and is suitable; consent denied where acquirer has "to a significant extent, failed to perform his obligations" or been convicted of a serious criminal offence. - FI may require that acquisitions completed within a prescribed period. - Requirements to notify FI when divesting qualified holdings or when management changes in legal entities holding qualified holdings: Chapter 7 Section 13 a the Banking Business Act. - Banks must submit annual statement to FI listing persons with qualified holdings and amounts. - Assessment: "Compliant" ### Principle 5 — Investment criteria and limits - Chapter 2 Section 5 the Banking Business Act: a bank may acquire another bank’s business if not prejudicial to public interest; authorization by FI required if acquisition relates to all or a significant part of the business. - A bank may, with authorization, acquire shares or interests in Swedish or foreign banks or non-banking undertakings if "beneficial for the banking system or the general public"; same applies to guarantees or subordinated loans. - A bank may be authorized to acquire shares in insurance companies under specified conditions. - Real estate or other property beyond operational needs: may be acquired to secure a claim and "shall be disposed of as soon as deemed appropriate" without giving rise to a loss. - Holdings and limits: - A bank may acquire shares equal to 30 percent of its capital base. - "The total amount of holdings in and loans to one company, may not exceed an aggregate of 5 percent of the amount equivalent to 30 percent of the bank’s capital." - Within the 30/5 percent rule, a shareholding may not, without FI consent, exceed 5 percent of voting capital for all shares in an individual company. - Group application: limitations apply to group’s total shareholdings; shares held by insurance undertakings within the group or by subsidiaries of insurance undertakings "shall be disregarded." - Exceeding limits: holding or obligations "shall be disposed of to the extent of the excess as soon as appropriate." - Capital base and large exposure rules in Capital Adequacy and Large Exposures Act and regulation FFFS 2000:6 can hinder acquisitions that would reduce capital adequacy below stipulated levels. - FI can order group accounting fixes or divestment where close affiliation hinders effective supervision (Chapter 7 Section 14 b the Banking Business Act). - In cases where prior approval is not needed, there is no requirement to notify FI. - Assessment: "Compliant" - Comments: laws set limits; FI consent required for large individual acquisitions; "there are, however, no requirements as to reporting to the supervisor of certain types of investments." ### Principle 6 — Capital adequacy framework and reporting - EU capital adequacy directives implemented through the Capital Adequacy and Large Exposures Act and FI regulation FFFS 2000:6; Basle Capital Accord with amendments "has been complied with." - Rules apply also to savings banks, cooperative banks, credit market companies, securities companies, and the Swedish Ship Mortgage Bank. - Own funds directive implemented via Chapter 2 the Capital Adequacy and Large Exposures Act and Chapter 3 of regulation FFFS 2000:6. - Capital adequacy calculated on solo and consolidated basis per Chapter 6 of the Capital Adequacy and Large Exposures Act. - Chapter 2 Section 2: capital requirements for credit risks; sections 3-5: capital requirements for market risks; these "shall also apply to a financial group of undertakings." - Financial group reporting: provide information on companies in group per FI guideline FFFS 2000:7; if group composition changes during the financial year, provide changes on the form by the end of the quarter (closing date). - Chapter 7 Section 12 the Act on Capital Adequacy and Large Exposures: where capital base is less than minimum required, FI "shall order the institution or the mother company in a group to take appropriate measures." - FI may impose conditional fines; FI can issue warning and revoke banking license if capital ratio not raised within three months to legal minimum (Chapter 7 Section 16 of the Banking Business Act); FI "may grant an extension to the time period." - Reporting timetable (Chapter 16 of FI regulation concerning capital adequacy and large exposures): - "Capital adequacy report" form due on March 31, June 30, September 30 and December 31 (closing dates). - Reports must reach FI "no later than the last banking day in the month after each closing date." - Minimum initial capital: a bank’s capital base may not be less than the amount required at licensing; "a bank company must have a restricted equity which, at the time of the decision regarding a charter, amounts to not less than five million euros." - Supervisor limitations and monitoring: - Supervisor not empowered by law to set minimum requirements higher than legal minimum depending on operating conditions. - Supervisor does not effectively determine that banks have an internal process for assessing overall capital adequacy relative to risk profile. - FI monitors adherence to declared capital ratio goals and has informal contacts with bank management on the matter. - Assessment: "Compliant" - Comments: capital adequacy requirements aligned with Basle Accord; supervisor lacks legal powers to require ratios above legal minimum on risk grounds. ### Principle 7 — Credit policies, controls, and related-party lending - FI general guideline FFFS 1995:49 Section 3 requires the board to establish credit policies, practices and procedures. - Guideline FFFS 1999:12 Section 10 requires the board to issue guidelines for internal audit to monitor adherence to credit policies; internal audit should report directly to the board and to the managing director. - Board responsibilities: ensure policies, practices, procedures and review of risks are sufficient. - Controller function: Section 15 in FFFS 1995:49 requires a specific controller function "regularly monitoring the credit risks" focused on compliance of credit policies, identification, measurement, and reporting of credit risks; quality of credit procedures and monitoring should be reported to management continuously. - FI verifies presence and implementation of policies and instructions through periodic on-site examinations, assessing adherence to FFFS 1995:49. - Related-party lending: Chapter 2 Section 17 of the Banking Business Act requires credits to connected parties on an arm’s length basis on normal terms applied in the bank’s business; FI has powers to specify applicable parties. - Banks expected to maintain a list of all physical and legal entities in "connected or related parties"/the group, with specifications for credits granted; list "must be handed over to FI on request." - Internal communication and information systems: Section 14 in FFFS 1995:49 requires the board to establish an internal communication system providing access to all relevant credit information; FFFS 1999:12 also requires an information system providing relevant business information "at any time." *Source: IMF staff extract from the supplied PDF content* ### Section 6 of the guideline that unless otherwise stipulated, information must be reported to ### _cr10131 - Section 6 of the guideline that unless otherwise stipulated, information must be reported to ### FI reporting and supervisory authority - Section 6 of the guideline requires information to be reported to FI in the format it is available through the bank’s internal communication system. - Chapter 7, Section 1, Banking Business Act: a bank must provide FI with requested information about its business activities and related circumstances; FI has authority to make on- and off-site examinations whenever it deems necessary. - FI’s unit of statistics receives quarterly information from banks on problem credits. - FI’s unit for statistics receives information on problem loans and provisioning on a quarterly basis in accordance with Section 2 in Regulation (FFFS 2000:23) concerning quarterly and yearly reporting of financial accounts. ### Governance, decision-making, and internal controls - Legally there are no formal requirements for banks to have various levels of decision-making; in practice banks apply segregated levels depending on risks and business area. - Articles of association establish general guidelines for granting of credits and indicate possible limitations. - Credit policy must be established according to guideline (FFFS 1995:49) and be in line with articles of association. - Procedures and delegation of powers for granting credits must be described in credit instructions; instructions must state which decisions must always be made by the board. - Section 14 in guideline (FFFS 1995:49) and Section 6 in guideline (FFFS 1999:12) require the board to establish management/information systems providing relevant information about handling and granting of credits and related risks and about business activities at any time. - Assessment: Compliant - Comments: FI has given guidelines for setting credit policies and internal instructions; supervisor has issued a manual for on-site supervision. ### Loan evaluation, asset classification, and provisioning (Principle 8) - Section 10 in guideline (FFFS 1995:49) requires written instructions concerning review of individual credits; credit limits should be reported and reviewed on an annual basis and presented and approved at least once a year by the same authority that initially approved the original credit limit. - Asset/risk classification should be made in connection with the review. - Problem credits/higher risk credits: each bank must evaluate and classify according to risk. - Decisions regarding provisioning are made jointly by the bank and its external auditors; a review shall be made at least at the end of each financial year according to Chapter 4 Section 8, a–g, of FI regulation concerning annual reports (FFFS 2000:18). - The Annual Reports Act (1995:1554) approves only provision made on an individual credit basis; a bank may not make provision for a whole sector. - FI monitors provisioning at on-site examinations and can require the bank to present: - a list of the 10 largest exposures, and - a list of its 10 riskiest exposures, - and may request a list for loans in arrears for 60 days or more. - The system for asset/risk classification and provisioning applies to both on- and off-balance sheet exposures according to Chapter 4 in guidelines (FFFS 2000:18) and Chapter 4 of the Annual Reports of Credit Institutions and Securities Companies Act (1995:1559). - FI requires banks to have policies and instructions to safeguard a realistic market value of assets after provisioning but does not verify that bank-implemented policies guarantee that value; verification is primarily by the bank’s external auditor in cooperation with the auditor appointed by FI based on rules in Chapter 4 Section 1 of the Act on Annual Reports of Credit Institution and Securities Companies and Chapter 4 of Regulations and General Guidelines (FFFS 2000:18). - Section 11 in general guideline (FFFS 1995:49) requires a system enabling analysis of the structure of the whole credit portfolio, quality and development over time; each bank is responsible for implementing procedures and sufficient organizational resources. - FI monitors whether banks have appropriate/sufficient resources for oversight of problem credits and collecting past due loans; handling is reviewed in on-site examinations. - FI does not have legal powers to require a bank to strengthen lending practices, credit-granting standards, or level of loan loss provisions; FI may make recommendations but may not legally require changes in provisioning levels. - Sections 8 and 10 of guideline (FFFS 1995:49) require instructions for assessing collateral in connection with granting and review of credits; collateral must be reviewed at least annually (Annual Report Act, Act on Annual Reports of Credit Institutions and Securities Companies, Chapter 4 and FFFS 2000:18). - Chapter 4 Section 8a in regulation (FFFS 2000:18): a loan is to be treated as sub-standard if the creditor is in financial difficulties, the loan is in default, or a bankruptcy or restructuring seems imminent; interest payments in arrears for more than 60 days is given as a strong indication. - Valuation rules: - Substandard loan is valued based on likely repayment expectations: future discounted cashflows, realistic value of collateral, or market value of the receivable. - Collateral valuation required to reflect net realizable value; current value is realizable/market value less estimated transaction costs (Chapter 4 Section 5, FFFS 2000:18). If no market, current value based on various estimations. - Loans must be classified when payments are contractually 60 days in arrears judged from original loan terms (regulation FFFS 2000:18). - Refinancing of loans that would otherwise fall into arrears does not lead to improved classification. - Rules for restructuring loans and declassification to normal status are in Chapter 4, Section 8 f and g, regulation (FFFS 2000:18). - Chapter 4, Section 8 c, regulation FFFS 2000:18 requires valuation, classification and provisioning for credits to be conducted on an individual basis; loans may be valued as a group only if they form a small homogeneous group (Chapter 4 Section 10). General write-downs/provisions are not accepted except for homogenous groups justified through historical data, statistics or other relevant information. - Assessment: Largely Compliant - Comments: Supervisor lacks legally based authority to require banks to strengthen lending practices or provisioning; banks generally follow FI’s recommendations. ### Large exposures and concentration limits (Principle 9) - Chapter 5, Section 2, Act (1994:2004) on Capital Adequacy and Large Exposure defines “group of customers.” - Section 9 in General Guidelines (FFFS 1995:49) requires banks include guidelines regarding “limits for related group of borrowers” in credit instructions. - Act on Capital Adequacy and Large Exposures and Regulations and General Guidelines (FFFS 2000:6) set exposure limits: - Large exposures defined as equal to 10 percent or more of the capital base against one counterparty or a group of customers forming one counterparty. - An exposure against one counterparty may not exceed 25 percent of the capital base. - The sum of the large exposures has to be less than 800 percent of the capital base. - Rules apply to both on- and off-balance exposures. - Large exposures must be reported to the supervisor; FI monitors through reports and on-site examinations. - FI decided that as from 2002-01-01 reporting should include concentrations to industry sectors (FFFS 2001:11). - Reporting is currently made on a semi-annual basis but should take place from the beginning of 2002 on a quarterly basis. - Where exposures exceed limits, the institution must notify FI without delay; FI may establish a period to reduce exposures to permitted limits and may order the institution to take appropriate measures if not reduced. - No deviations from the limits are acceptable according to the law. - Assessment: Largely Compliant - Comments: Supervisory reports on large exposures are currently produced on a semi-annual basis. From 2002 onward reports will be made on a quarterly basis and include information on exposures to sectors. ### Connected lending (Principle 10) - Chapter 2 Section 17 Banking Business Act provides a comprehensive definition of “connected or related parties,” including: 1. a member of the Board of Directors; 2. a delegate in a management position who, alone or together with a third party, is authorized to determine lending matters incumbent on the Board of Directors; 3. an employee who hold a senior position within the bank; 4. shareholders or owners of interests other than the State with a holding equal to at least three percent of the issued share capital; 5. a spouse or cohabitee of a person referred to above; or 6. a legal entity in which such persons as referred to above have a significant financial interest in their capacity as owners or members. - Loans may not be extended on terms and conditions different from those normally imposed on customers. - FI has discretion to judge connectedness for items 2 and 3. - Each bank must create a specific list of all physical and legal entities belonging to the group, the terms and conditions of credits granted, and amounts; the list must be handed to FI on request. - No formal requirement that credits to connected parties be handled or approved by a body at a certain level; such credits shall be handled and approved according to normal bank procedures. - Sections 2 and 4 of guideline (FFFS 1998:22) require banks to establish ethical guidelines for granting credits and systems for monitoring credit granting from moral, ethical and legal perspectives. - Section 8 of guideline (FFFS 1995:49) states the same person should not have both credit-granting functions and customer account responsibilities. - FI has no authority to set limits to loans to connected parties or to deduct such loans from capital when assessing capital adequacy; amount limited only by Act on Capital Adequacy and Large Exposures. - FI has required banks to specify names of connected parties and terms, amounts and totals, but FI does not on a continuous basis obtain information on connected lending from banks. - Assessment: Largely Compliant - Comments: Rule of arm’s length and concept of connected parties established in law; no requirement that credits to connected parties be decided at a certain level; FI has not issued regulations on register of connected lending nor arranged regular reporting of connected lending to the supervisor. ### Country risk and transfer risk (Principle 11) - FI determines through onsite and offsite inspections that banks’ policies and procedures give due regard to identification, monitoring and control of country risk and transfer risk; country and transfer risk are integrated as part of total credit risk. - Section 14 in guideline (FFFS 1995:49) requires the board to establish a management information system providing relevant and well structured information about handling and granting of credits and related risks; the guideline does not specifically mention country risks. - No general provision for country or transfer risk is permitted in law and regulations; provisioning may only be made for credits identified as problem credits according to Chapter 4 Section 8h in regulation (FFFS 2001:19) concerning annual reports. Each credit shall be evaluated individually and provisioning, if any, must be stated in the annual report. - The bank decides appropriate provisioning for each individual credit and the auditor verifies the provisioning. - Riksbank provides upon request FI with information on country risks by bank. - Assessment: Largely Compliant - Comments: FI receives and evaluates country and transfer risk on a quarterly basis from quarterly reports; FI has no specific guidelines concerning country risk; FI has access to banks’ reports to Riksbank regarding country risk exposures to individual countries. ### Market risk and capital charge (Principle 12) - The directive on the Capital charge for market risk (CAD 1) was implemented in January 1996 by the Act on Capital Adequacy and Large exposures. - FI has issued regulation (FFFS 2000:6) concerning capital adequacy and large exposures. - In 2000 FI implemented general guideline (FFFS 2000:10) concerning management of market and liquidity risks in credit institutions and investment firms. - Section 6 of the general guideline (FFFS 2000:10) stipulates banks should have written policies and instructions concerning identification, measuring, reporting, monitoring and control of market risk. - FI’s guideline (FFFS 1999:12) concerning management, internal information and internal control deals with policies; Section 4 stipulates the Board of Directors should ensure management and control of risks are arranged satisfactorily and relevant risk policies be issued. - FI monitors compliance through analysis of reports and on-site supervision; on-site inspectors are guided by relevant manuals. *Source: _cr10131 - Section 6 of the guideline that unless otherwise stipulated, information must be reported to (PDF).* ### Section 7 of FI’s general guideline (FFFS 2000:10) on management of market and liquidity ### Section 7 of FI’s general guideline (FFFS 2000:10) on management of market and liquidity ### Market risk limits, valuation and reporting - FI stipulates banks must have limits for market risks: - Limits set for the bank as a whole and for position taking units. - Limits set for operational units as a whole and for different trading desks, products and individual traders. - FI examines banks’ limits and limit-setting policies and procedures through on-site supervision. - Chapter 4 Section 12 of regulation on capital adequacy (FFFS 2000:6) requires positions in the trading book to be marked to market on a daily basis for measurement of capital charge. - Section 9 (FFFS 2000:10) requires independent daily market valuation for the trading book based on complete, precise and updated information about positions. - Banks’ valuation models and data used in valuations are examined through on-site supervision; inspectors use relevant manuals. ### Internal Models Approach (IMA) for market risk capital requirements - FI has the power to set the multiplier above the stipulated 3 subsequent to performing a qualitative valuation of a bank’s risk management systems (Chapter 11 Section 7 in FI’s regulation on capital adequacy and large exposures, FFFS 2000:6). - At present no Swedish bank has authorization to use the Internal Models Approach for market risk capital requirements. - Two banks have applied for authorization and FI is currently in the process of evaluating these models. - Apart from the above, the supervisor has no powers to impose a capital or specific limits on market risk exposure. - FI’s judgment: it has the adequate knowledge and skills to evaluate and follow up these models. - Assessment: Compliant - Comments: None. ### Risk measurement, stress testing and model governance - A bank authorized to use IMA must perform stress tests and on an annual basis evaluate its entire risk management system for market risks (Chapter 11 Section 4 in FFFS 2000:6). Section 8 of FFFS 2000:10 also addresses this. - Banks with large and complex exposures should perform gap-analysis, sensitivity analysis etc. - Banks using Value at Risk models internally should perform stress test and scenario analysis. - FI examines banks’ stress tests and scenario analysis through on-site supervision and reviews assumptions used in stress test scenarios. ### Supervisory staffing and expertise - The market risk team consists of three persons, each with two to three years of experience at the supervisory authority. - Two risk analysts have a master degree in financial economics with mathematical emphasis. - One has a master degree in economics. - Two staff members work with capital adequacy questions and are members of the Models Task Force of the Basel Committee on Banking Supervision. - No staff member has a background in the industry. - Training: market risk team members attend in-house and external courses, e.g., an internal course in financial mathematics focused on market and credit risk modeling techniques. ### Senior management and board responsibilities - Section 5 (FFFS 2000:10) assigns responsibility to the managing director to: - Secure balance between the bank’s present business strategy and the level of risk incurred. - Issue guidelines and regulations. - Have sufficient resources for managing and monitoring risks. - Maintain systems and standards for measurement of risk and return, reporting and internal control. - Section 11 requires reports to Board and managing director to cover at least: risk exposures, limit utilization, returns, results of stress tests and back-testing etc. - FI examines senior management’s understanding of market risks and the quality of management information through on-site supervision. ### Principle 13 — Other Risks (summary) - Companies Act Chapter 8: Board responsibility to ensure company is organized so accounting, management of assets and other financial conditions are controlled safely. - General guidelines (FFFS 1999:12) identify risk areas: credit and counterpart risks, market risks, liquidity risks, IT and other technical risks, administrative risks and legal risks. - Specific guidelines: credit risks (FFFS 1995:49), market–and liquidity risks (FFFS 2000:10). FI issues regulation on reporting of interest risk exposures (FFFS 1998:11). - The Act on Capital Adequacy and Large Exposures sets minimum requirement of capital to risk-weighted assets at 8 percent for all credit institutions. FI does not have a mandate to prescribe a higher rate of capital coverage. - Section 44a (FFFS 2000:18) requires institutions to report exposures related to financial and other risks, e.g., operational and legal risks. - Institutions do not report the extent or volume of foreign liquidity transactions; FI addresses currency risks in bank management via examinations and FFFS 2000:10. - Assessment: Largely Compliant - Comments: FI has issued general guidelines on management of market risk and internal controls. FI has no supervisory standards on exchange and operational risk. FI is in the process of giving reporting guidelines concerning liquidity. FI has no powers to require a bank to hold capital against risks other than market and credit risk. ### Principle 14 — Internal Control and Audit (summary) - Companies Act Chapter 8: Board responsibilities for organization and administration; monitoring accounts, treasury and economic performance; issue written instructions on reporting frequency and type. - FFFS 1999:12: board must ensure reliable procedures and information systems, establish special instructions for managing and controlling risks (credit/counterparty, interest rate, foreign exchange, liquidity, IT and other operational, administrative and legal). - Internal controls must assure correct and complete accounting; provide routines for deviations; safeguard proprietary information and IT security; enforce four eyes principle for duties. - FI’s guideline FFFS 1999:12 mandates an independent audit function subordinated directly to the board or managing director; internal auditors must report to the board. - FI examines internal audit independence, resources, authority, audit plans, work routines and reporting lines during on-site inspections; FI can obtain all information needed for supervision. - FI does not continuously investigate competence of directors or senior management; FI can require changes only in connection with an application for banking license. - It is customary that board members are non-executives representing different backgrounds, including major owners. - Assessment: Largely Compliant - Comments: FI is not empowered to require a change in the constitution of a board due to shortcomings in the skills and knowledge of board members. ### Principle 15 — Anti-Money Laundering (AML) framework and enforcement - Legal framework: Banking Business Act and the Act on Measures against Money Laundering. - Regulations and guidelines issued by FI include: - Regulation concerning measures for the prevention of money laundering (FFFS 1999:8). - Regulation on crime prevention in banking (FFFS 1996:8). - Guidelines on principles for dealing with ethical issues (FFFS 1998:22). - Guidelines concerning management, internal information and internal controls (FFFS 1999:12). - Guidelines concerning reporting of incidents of high importance (FFFS 1999:7). - Customer identification and record keeping requirements: - Identity checked on commencement of business relationship. - Checks made whenever a transaction exceeds SKR 110,000. Banks licensed in another EEA country are exempt from the rule. - If grounds exist that a party is not acting on his own behalf, steps must be taken to establish identity of originating party. - A check must always be made if there are reasons to suspect money laundering. - Documents relating to a transaction are to be kept for five years after the business relationship came to an end. - Compliance officer requirements: - Section 3 (FFFS 1999:8) mandates appointment of a person with explicit responsibility for implementing anti-money laundering measures; compliance officer must be a member of management. - Board or executive management must provide instructions on decision making and reporting procedures for suspicious transactions; checklists and manuals should indicate money laundering. - Feedback must be given to originating entity within the bank on whether notification to the FIU of police has been made. - Recommended: decisions on reporting suspicious transactions to FIU should be centralized. - Reporting and supervision: - Banks should report to FI cases where local regulations prevent consistent global application of anti-money laundering policy (Section 7). - FI does not require foreign branches to report suspected money laundering. - Guidelines on incident reporting (FFFS 1999:7) list incidents (including suspicions of internal/external crime) expected to be reported to FI if of considerable negative importance. - External auditors have reporting duties (BCCI-directive) under Companies Act (Chapter 10 sections 38-40); suspected crimes involving a bank should be addressed to the prosecutor’s office and FI is expected to be notified. - Enforcement and inspections: - FI conducts on-site and off-site inspections to check compliance with AML measures. - Within a year FI conducted five inspections of AML practices in banks; no major shortcomings or grievances detected. - FI has internal guidelines for examinations of AML practices as part of the manual for operational risk. - For enforcement, FI can revert to measures enumerated under CP 22. - Intentional or gross negligent failure to comply with essential requirements of the Act on Measures against Money Laundering is a criminal offence punishable with a fine (the Act Section 14). - International cooperation and limitations: - The Secrecy Act, Chapter 1 Section 3, limits sharing confidential information with foreign financial regulators; sharing also depends on whether criminal proceedings have been initiated. - FI has entered into MOUs with a number of foreign regulators setting procedures for information sharing. - Guidelines FFFS 1988:22 provide recommendations on ethics policies. - Sweden participates in the FATF NCCT exercise; institutions must conduct intensified due diligence with such countries. The FATF ”black list” has been submitted to all institutions covered by the Act. - FATF self-assessment: - Sweden is a member of the Financial Action Task Force and has endorsed and implemented the FATF 40 recommendations. - A self assessment exercise done in 2001 shows Sweden is in full compliance with 26 of the 28 mandatory recommendations. - Identified shortcomings: missing fit and proper tests of new staff involved with AML measures and foreign exchange offices and money transmitting firms are not subject to FI’s supervision. *Source: Section 7 of FI’s general guideline (FFFS 2000:10) on management of market and liquidity (excerpts).* ### Section 10 of the regulation (FFFS 1999:8) requires banks to have an ongoing training ### Section 10 of the regulation (FFFS 1999:8) requires banks to have an ongoing training ### Anti–Money Laundering: Training and Reporting - Section 10 of the regulation (FFFS 1999:8) requires banks to have an ongoing training program on matters concerning money laundering. - All employees handling matters concerning the Anti Money Laundering Act shall be kept continuously informed of current developments of the field. - If FI learns of transactions which may be deemed to point to money laundering it must inform the FIU of the matter. - FI is able to share information with the relevant judicial authorities on the conditions outlined in the Secrecy Act (1980:100). - Assessment: Compliant - Comments: The relevant laws and regulations provide the legal and institutional framework for combating money laundering. To supervise compliance and assess efficiency, the supervisor relies substantially on internal auditors and information provided by the external auditors appointed by FI. ### Principle 16 — On-Site and Off-Site Supervision: Framework and Processes - Supervisory approach: combination of off-site supervision and on-site supervision; approaches range from specialized risk analysis to general supervisory activities. - On-site supervision verifies internal control systems, sufficiency of risk management methods, and compliance with guidance issued by FI. - FI has issued handbooks on: credit risk, market risk, liquidity risk, internal controls, and operational risk. - FI appoints auditors to banks required to report on compliance in key risk areas, especially major deviations from FI’s regulations and guidelines (Chapter 7 Section 5 the Banking Business Act). - Prudential reports and statistical returns are analyzed regularly: quarterly, semi-annually, months and annually. - Reported data from all financial institutions is fed into a specific database (Värdetatabasen). - Internal routines flag deviations in data regarding capital adequacy (including down-going trends) and large exposures for further risk analysis and examination. - Risk analysts have access to Värdetatabasen for in-depth risk analyses and carry out on-site examinations for additional information. - Internal documents: “The New Financial Supervision” (Den nya tillsynen) (March 2000) and “The Supervision Process” (Tillsynsprocessen) (February 2001). - Organizational features: horizontal cooperation across banking, insurance and capital markets; "group managers" (koncernansvariga) assess major systemically important groups/entities. - Department for strategy and analysis: analyzes prudential reports, produces statistical information, drafts yearly financial stability report. - Group-wide risk assessment (riskbedömning) defined as core supervisory product; to embrace stress testing, risk diversification, pricing of risk, ownership structure, corporate governance, and capital adequacy. - Implementation status: content and methods yet to be defined systematically; process projected to be implemented in the year 2002. Each of the 13 groups or entities with systemic importance are to be evaluated on a yearly basis. One large commercial bank will be subject to the first assessment of the prototype of the new model. - Supervisory staffing and planning: - Three categories of supervisors: general analysts (regular prudential report analysis), specialized risk analysts (in-depth analyses and on-site examinations), general supervisors for respective financial sector (main task: on-site examinations). - Annual supervision plan updated every four months; input from Director General directives, analyses, previous supervision documents. - Total number of financial institutions and companies subject to supervision: more than 2000. - Frequency of on-site examination: higher for large financial groups; small companies rely more on off-site analysis; individual occurrences evaluated by risk and essentiality for prioritization. - Quality control and oversight: - External consulting agency hired for quality control of risk assessment process. - Handbooks and supervisory "products" defined; random tests of inspection reports by process leader; deviations reported to owner of supervision process (chief of department for strategy and analysis). - External auditors of the Swedish National Audit Office check supervisor’s ability to fulfill objectives. - Supervisory powers: FI’s supervisors entitled to any documentation from supervised entities, including internal and external auditors’ reports. Auditors appointed by FI have specific reporting requirements to FI. - Assessment: Compliant - Comments: FI has a supervision process with defined procedures and responsibilities; due to the newness of the supervision process, some parts of the group-wide risk assessment model have not yet been fully tested. The model is projected to be implemented during 2002. ### Principle 17 — Bank Management Contact - FI management holds regular meetings with bank management: - Quarterly meetings with senior management from the four biggest banks in Sweden. - Yearly meetings where annual accounts and other issues are discussed with the four banks and some other banks. - Banks traditionally notify FI informally of structural or strategic changes. - Legal requirements: - Banking Business Act and Financing Operations Act require notification and in some cases application for new permits for major acquisitions and changes in ownership. - FI guideline (1999:7) requires reporting of incidents of major importance to the bank (crimes against the bank, deliberate or unintentional mistakes connected to banking activities) where essential economic losses or threats to vital functions arise. - Assessment of owners/management: FFFS 1998:14 prescribes controls on new board members, deputies, managing directors and deputies including education, last ten years’ employment, court sentences, preliminary investigations, qualifying shareholdings, and prior assessments. FI obtains information from police, executor authority, register of companies, and insider registration. - FI cannot force a resignation if a person is found unfit; FI contacts the bank. - Assessment: Compliant ### Principle 18 — Off-Site Supervision: Reporting and Data Management - Required reports and frequencies (with FI regulations/guidelines): - Standard report (every 3rd month), information about the balance sheet and the income statement. (FFFS 2000:23) - Large exposures (every 6th month) (FFFS 2000:6) - Solvency ratio and capital adequacy (every 3rd month) (FFFS 2000:6) - Interest rate risk exposure (every 3rd month) (FFFS 1998:11) - Qualified owners and subsidiaries (yearly) (FFFS 2000:7) - Possession of investment shares (yearly) (FFFS 2000:6) - Derivative statistics (every 6th month) (FFFS 1998:7) - Reports are, with few exceptions, submitted on both a solo and consolidated basis. - Accounting framework: - Annual Accounts Act for Credit Institutions and Securities Companies ("ÅRKL,” 1995:1559) implements parts of the Bank Accounting Directive (BAD), 86/635/EEG. - ÅRKL refers to the Annual Accounts Act (1995:1554, "ÅRL"), result of Swedish implementation of fourth and 7th EC Company directives. - Chapter 1, Section 5 of ÅRKL gives FI right to issue binding accounting regulations. - FI-issued regulations and guidelines include implementation of BAD, clarifications of ÅRKL (Regulation FFFS 2000:18), and detailed accounting regulation for financial instruments (Regulation FFFS 2000:18). - Reporting enforcement: - Reports delivered at settled dates, usually a month after reporting period. - Late reporting or misreporting can lead to sanctions: withdrawal of a permit, issuance of a warning, or a fine according to the Banking Business Act. - Examples: April 2000 warning to a credit institution for repeated late reports; February 2000 withdrawal of permit for miss reporting. - Statistical handling: - Statistical and prudential reports handled by Statistical Department. - Analytical framework uses reported information for ongoing monitoring; information shared organization-wide for supervisory activities. - Database created in early 1990s: comparable time series for almost ten years with frequency up to three months. - Data collection dates and periods: - Dates (stock data): end March, June, September and/or December - Periods (flow data): January to March, January to June, January to September and/or January to December. - Assessment: Compliant - Comments: No standardized prudential report regarding a credit institution’s liquidity situation; one is scheduled to come in place during 2002. ### Principle 19 — Validation of Supervisory Information - On-site supervision seeks to form coherent picture of institution’s risk position; supervisors verify internal controls, risk management, and legal compliance. - Handbooks issued for different risk areas; on-site supervision follows a yearly plan updated three times a year. - On-site examination completion requirements: written supervision report detailing shortcomings and required rectifications. - Typical inspection resourcing: large bank inspections generally require three inspectors for three days each; total time per inspection is two to three months. - Inspection frequencies: - Major risk areas in larger banks: every three years. - Most important foreign branches of major banks: every four years. - Interaction with auditors: - Supervisory process involves meetings with auditors in preparation for on-site examinations. - FI has no system of systematically obtaining reports of a bank’s internal and external auditors; internal audit reports only requested in connection with FI’s projected examinations. - FI appoints auditors obliged to report on compliance in key risk areas and major deviations from FI’s regulations and guidelines. - Policy: FI does not appoint an auditor from the same accounting firm as the auditor elected by the general meeting. - Appointed auditor may not provide consulting services to the bank or closely linked entity without FI’s consent; law requires at least one auditor be a chartered accountant. - FI can appoint auditors to do specific reviews on its behalf. - Legal powers: - Supervisor has legal right of full access to all bank records and to convene board meetings or extra general meetings (Chapter 7 Section 6 the Banking Business Act). - Periodic examination of auditors’ returns is part of supervisory work. - FI meets at least once a year with management of main banks and financial groups. - Assessment: Compliant - Comments: FI has increasingly stressed proper arrangements for banks’ internal audit functions. Supervisor’s connection with external auditors representing shareholders is through the auditor FI appoints. ### Principle 20 — Consolidated Supervision - FI has MOUs with supervisory authorities in most countries where Swedish bank groups have subsidiaries; FI can often obtain information from foreign authority and participate in foreign on-site investigations. - Reporting obligations: - FFFS 2000:7 requires yearly report listing subsidiaries, ownership interests, branches and representative offices. - Legal basis for consolidated supervision: - Banking Business Act Chapter 1 Section 11 extends provisions and supervision to other companies within the group, including non-financial companies, where applicable. - Group entities must provide FI information required for supervision. - Group contributions by a bank may only be given following FI consent. - FI’s supervisory model development: - New risk assessment model based on three parts: key financial ratios from institutes; market ratios for public institutes; FI’s own risk analysis and evaluation based on examinations. - Goal: full risk assessment for thirteen institutes/groups identified as systemically critical. - Supervision of bank groups on a consolidated basis is highest priority. - Accounting and legal definitions: - FI responsible for regulations concerning accounting standards for credit institutes and financial conglomerates/financial groups; accounting regulations apply to solo and consolidated groups. - Capital Adequacy and Large Exposures Act Chapter 6 defines a financial group to include credit institutions, securities firms, financial holding companies and certain subsidiaries including data services and real estate managers. - Prudential rules applied on solo level and on consolidated basis concerning the financial group. - Reporting collected on solo and consolidated basis: parent companies, Swedish subsidiaries, foreign branches, consolidated reports covering balance sheet, profit and loss, large exposures, capital adequacy ratios (FFFS regulation 2000:6). - Limitations in powers and practice: - FI does not have powers to circumscribe the range of activities a bank may engage in via subsidiaries (e.g., to order a foreign branch to be shut down). - FI does not accord sufficient attention to efficient host country supervision when processing applications for foreign establishments by local banks (cf. CP 23). - FI is not required by law to assess supervisory arrangements in host country to safeguard consolidated supervision. - FI has yet to conclude agreements with some countries outside the EU where Swedish banks operate. - In complex multinational groups FI is in the process of defining its role as lead supervisor. - Assessment: Largely Compliant - Comments: Laws apply to prudential regulation on a consolidated basis and give supervisor powers to issue prudential rules on a consolidated basis. However, FI lacks explicit powers to circumscribe a bank’s activities via subsidiaries and should enhance assessment of foreign operations given expanding overseas activities of Swedish banks. ### Principle 21 — Accounting Standards - Governance and records: - FFFS 1999:12 requires the board to ensure reliable procedures and information systems for internal control and risk analysis. - FFFS 2000:18 determines requirements for financial record keeping and public and FI reporting. - Consequences of non-compliance: - Failure to publish an annual report or to audit properly may lead to revocation of license. - Crime established by Annual accounts Act and Swedish Companies Act for not publishing audited annual report. - If bank does not deliver annual audited report within eleven months since end of financial year the bank will be compulsorily liquidated. - Auditor responsibilities: - Auditors’ tasks defined in Swedish Companies Act Chapter 10 sections 3-6: examine annual report, accounting records, and administration. - Audit report attached to annual accounts must be signed by all auditors including the one appointed by FI. - Auditor appointed by FI files report per general guideline FFFS 1998:5 within three weeks of completing the audit; must note major shortcomings in internal control, accounting and administration and discrepancies from FI’s regulations and guidelines. - Auditor appointed by FI must on a continuous basis report findings significant to FI and report written complaints addressed to the board. - Accounting regulation hierarchy: - Banks follow ÅRKL (1995:1559) and ÅRL (1995:1554). - FI has issued regulation concerning annual reports of banks (FFFS 2000:18). - Banks must utilize valuation rules that are consistent, realistic and prudent, taking account of current values where relevant, and profits net of appropriate provisions. - Banks follow Bookkeeping Act and recommendations from Bokföringsnämnden and Swedish Financial Accounting Standards Council (Redovisningsrådet), which implements IASC standards; about 20 recommendations have been issued. - Interim statements: - Banks must produce interim statements at least once a year per Annual Accounts Act of credit institutions and securities companies; listed banks prepare quarterly interim statements. - FI’s regulations and guidelines (FFFS 2000:18) provide further details for interim statements. - Reporting duties and FI powers: - FI required by law (Chapter 7 Section 5 Banking Business Act) to appoint additional auditors; appointed auditor may not be from same firm as shareholders’ auditor. - FI has no power to revoke auditors appointed by the general meeting; FI can revoke the appointment of the auditor referred to in Chapter 7 Section 5. - Auditors’ reports are not subjected to FI approval prior to publishing. - Assessment: Compliant - Comments: Supervisor has no powers to revoke auditors elected by shareholders’ meeting. FI appoints (and may discharge) a special auditor whose functions are partly dictated by FI’s guidelines and who must furnish special reports to FI. ### Principle 22 — Remedial Measures - Legal authority: Chapter 7 ("Intervention against banks") of the Banking Business Act gives FI authority to take remedial action against banks. - FI remedial powers include: - Enjoin execution of bank decisions contravening the Act or regulations. - Order rescission of executed decisions when possible. - Charter revocation provisions: A Swedish bank’s charter shall be revoked in specified circumstances; in some cases (marked 4 and 5 in the Act) a warning may be issued instead of revocation if deemed sufficient. *IMF Staff Report — Section extracted from the source PDF.* ### 1. the bank has not submitted an application for registration within the prescribed period ### 1. the bank has not submitted an application for registration within the prescribed period ### Grounds for revocation of a commercial bank’s charter - Revocation may be decided where: - the bank has not submitted an application for registration within the prescribed period or the application has been withdrawn or cancelled as a result of a decision which has become final; - the bank has not commenced banking operations within one year after the grant of the charter or the bank, prior thereto, has declared that it will not be utilizing the charter; - the bank has transferred its entire business; - the bank has not conducted banking operations during a continuous period of six months; - the bank, as a result of the breach of a provision referred to in Section 15 or in any other manner, has proved itself to be unsuitable to exercise such operations to which the charter relates; - the commercial bank’s capital base is less than five million euro and the deficiency has not been covered within three months from the discovery of the deficiency by the bank (similar requirements are set forth in the acts regulating savings banks, and member banks); - the bank has failed to fulfill its obligations in accordance with the Deposit Guarantees Act and has not undertaken rectification within one year from such time as FI ordered the bank to comply with its obligations with a warning that the bank’s charter may be revoked; or - any person who is a member of the commercial bank’s Board of Directors, or its managing director, or the acting managing director does not possess sufficient insight and experience in order to participate in the management of a bank and is otherwise not suitable for such a task, including cases where it may be assumed that such person has failed, to a significant extent, to comply with his obligations in commercial operations or in other financial affairs or has been convicted of serious criminal offences (similar requirements are set forth in the acts regulating savings banks and member banks). ### Decision-making, extensions, and winding up - Revocation of charters and the issuance of warnings are decided upon by FI. - The government shall determine cases of exceptional importance. FI’s Director General has the discretion to refer a case for governmental decision making. - Where a special cause exists, FI may grant an extension to cover the deficiency in the bank’s capital base. - In cases where, e.g., the managing director has been found unsuitable for his position, the charter may only be revoked where FI has taken a decision to complain about the person and that he or she, following a specified period determined by FI, remains in the position. - Where the charter is revoked, the governmental authority, which decided to revoke the charter, may determine the manner in which the winding up of the business shall take place. - An injunction against future operations may be ordered together with a decision in respect of revocation. ### Cross-border and branch-related measures - Where FI is informed by a competent governmental authority in another country within the EEA that a Swedish bank has violated the laws of that country, measures of injunction and warning may be taken against the bank. FI shall inform the competent governmental authority in the other country of the measures undertaken. - When a banking undertaking domiciled outside the EEA conducts banking operations from branch offices in Sweden and breaches a provision as referred to in Section 15 the Banking Business Act or proves unsuitable to conduct banking operations, the branch office’s license shall be revoked or a warning issued if deemed sufficient. Issues regarding revocation of branch office licenses and the issuance of warnings shall be determined by FI. The government shall determine cases of principle or of exceptional importance. - Where deposits at the branch office are covered by a guarantee as a result of a decision in accordance with the Deposit Guarantees Act, FI may order the bank to undertake rectification with a warning that the branch office’s license will otherwise be revoked. The license may be revoked in the event that rectification has not been undertaken within one year from the date of the order. FI shall inform the supervisory authority in the country where the banking undertaking has its registered head office of the measures undertaken. - If a bank domiciled in a country within the EEA conducts operations in Sweden through a branch or by direct provision of services and breaches a legal provision or proves unsuitable, FI may order the bank to effect rectification. Where the bank fails to comply with the order, FI shall inform the competent governmental authority in the bank’s home country. Where rectification is not effected notwithstanding FI’s order, FI may enjoin the foreign bank from assuming further obligations in Sweden. Prior to the issuance of the injunction, FI shall inform the home country supervisor; in urgent cases, FI may issue the injunction without prior notification to the home country authority. - If the operating license of a bank domiciled in another country within the EEA that conducts operations in Sweden has been revoked in its home country, FI shall immediately enjoin the bank from entering into further obligations in Sweden. ### Enforcement powers and conditional fines - According to Section 23 the Banking Business Act, FI may issue orders or injunctions in accordance with the provisions in the Act on pain of a conditional fine. - FI has authority to take remedial actions against banks with the support of Chapter 7 of the Capital Adequacy and Large Exposures Act [lag om kapitaltäckning och stora exponeringar för kreditinstitut och värdepappersbolag] if a bank or financial group: - 1. has a capital base which is less than the minimum amount required pursuant to Chapter 2, (8 percent); - 2. fails to fulfill the requirements with respect to systems and routines related to registration and classification of credit risks, supervision and verification of market risks and large exposures and interest risks in its operations in their entirety; and calculation of the institution’s or the financial group’s financial positions; and - 3. fails to reduce its large exposures to the permitted levels. - FI shall order the institution or the undertaking in a financial group of undertakings which must prepare the group-based accounting to take appropriate measures in order to rectify the situation. - According to Chapter 7 Section 15, the Capital Adequacy and Large Exposures Act, when FI issues injunctions pursuant to this Act, it may also make such orders subject to conditional fines. The supervisor can not impose penalties for non-compliance, it can only set conditional fines. ### Limitations on supervisory powers and legal constraints - The supervisor cannot: - restrict or suspend payments to shareholders or share-repurchases; - make decisions barring individuals from banking or replace managers, directors or controlling owners or restrict their powers; - impose arrangements for a take-over by or a merger with a healthier institution; - impose conservatorship on an ailing bank; - impose restrictions on the current activities of the bank or on asset transfers from the bank. - The supervisor cannot apply penalties and sanctions to the management and/or the Board of Directors of the bank. - There are no laws or regulations that mitigate against the supervisor delaying appropriate corrective actions. However, criminal law concerning civil servants can be said to oblige the supervisor to act promptly when there is a clear need of corrective action. Failure to do so can render responsibility under Chapter 20 Section 1 of the Penal Code for breach of duty or under Section 14 of the Act on Employment in the Public Sector for professional misconduct. ### Assessment and commentary - Assessment: MATERIALLY NON-Compliant - Comments: - The supervisor has a limited range of remedial actions available; in addition to issuing warnings and imposing conditional fines, the supervisor can revoke the license. - The supervisor should be able to take a more proactive approach with respect to remedial measures. - The Committee on Banking Law has in 1998 proposed some amendments and additions to the powers of FI in order to broaden the range of remedial actions. The proposals include inter alia a possibility to communicate formal complaints (erinran) and to broaden the scope of issuing warnings. - The supervisor is not empowered to take most of the measures enumerated in the essential criteria, e.g., restricting the scope of activities of a bank and suspending the payment of dividends. - There are no laws or regulations that would militate against supervisory forbearance. *Source: _cr10131 - 1. the bank has not submitted an application for registration within the prescribed period* ### 1. the planned business may be assumed to fulfill the requirements of a sound banking ### _cr10131 - 1. the planned business may be assumed to fulfill the requirements of a sound banking operation; and ### Licensing and deposit guarantee conditions for foreign branches - A license may not be denied on the basis that no further banks are required. - Deposits with a branch office are covered by the guarantee in accordance with the Deposit Guarantees Act, or by a foreign guarantee which covers deposits as referred to in Section 2 of the Deposit Guarantees Act and which have a maximum compensation level of not less than an amount corresponding to 20,000 Euro prior to any deductions, where applicable, for excess in an amount not exceeding 10 percent of an individual depositor’s guaranteed deposit. - A license is not required for banking undertakings domiciled in a country within the EEA. Such undertakings may: - conduct banking business via branch offices in Sweden commencing two months following receipt of notification by FI from the home country authority; and - conduct banking operations by offering and providing services from its home country after FI receives notification from a competent governmental authority. ### Permitted activities and licensing limits for foreign banks - A foreign bank is permitted to engage in the activities enumerated in Chapter 2 Section 2 the Banking Business Act. - A foreign banking undertaking may conduct operations referred to in Section 2 only to the extent such operations are covered by the bank’s license to conduct operations in the country in which the undertaking maintains its registered office. ### Supervision of EEA-domiciled foreign branches - FI exercises supervision in cooperation with the competent governmental authority in the home country to ensure that the liquidity of the branch office established in Sweden is satisfactory. - Branches of foreign banks must submit to FI a profit and loss account four times a year. - Following notification to FI, a competent governmental authority in another country within the EEA may undertake investigations at a branch office established in Sweden of a banking undertaking domiciled in the other country. - FI shall provide any information to the competent governmental authority in the bank’s home country which such authority requires for its supervisory purposes. - FI may issue orders or injunctions on pain of a conditional fine for both local and foreign establishments; the same standards are applied. ### Supervision and measures for non-EEA banks and cross-border enforcement - Where a banking undertaking domiciled outside the EEA conducts banking operations from a branch in Sweden and breaches a legal provision or proves unsuitable, the branch office’s license shall be revoked or a warning issued if deemed sufficient. - If deposits at the branch are covered by the Deposit Guarantees Act and the undertaking fails to fulfill its obligations, FI may order rectification with a warning that the branch office’s license will otherwise be revoked. - The license may be revoked if the banking undertaking has not undertaken the rectification within one year from the date of the order. - FI shall inform the supervisory authority in the country where the banking undertaking has its registered office of measures undertaken. - For EEA-domiciled banks conducting operations in Sweden who breach legal provisions or prove unsuitable, FI may order rectification, inform the competent governmental authority in the home country if rectification is not effected, and may enjoin the bank from assuming further obligations in Sweden after informing the home authority. - If a bank’s operating license has been revoked in its home country, FI shall immediately enjoin the undertaking from entering into further obligations in Sweden. ### Information sharing, confidentiality, and cooperation - FI can share information with a supervisory authority in another country according to Chapter 14 Section 2 the Secrecy Act. - Chapter 7 Section 9 of the Banking Business Act specifically allows FI to share information with a home country authority within the EEA. - FI as host country supervisor obtains information through procedures established in MOU’s, bilateral meetings and informal contacts, and finds that the information obtained fulfills its requirements as to relevance and reliability. - The law does not require FI to determine that the home supervisor has given its approval for the establishment of a subsidiary in Sweden; however, in the context of ownership control FI consults the foreign authority and, if the home country supervisor practices consolidated supervision, this is taken into consideration. ### Assessment of compliance (supervision of foreign banks’ establishments) - Assessment: Compliant - Comments: Local entities of foreign banks are supervised by FI in cooperation with respective foreign authorities. The law does not state that the host supervisor needs to determine that approval (or no objection) from the home supervisor has been received for a foreign establishment. In the context of ownership control FI does consult the foreign authority. ### Basel Core Principles — summary observations and gaps - Table summary indicates areas rated Compliant (C) and Largely Compliant (LC) across CP1–CP25 with notable LC ratings for Independence (1.2), Licensing Criteria (3), Loan Evaluation and Loan-Loss Provisioning (8), Large Exposure Limits (9), Connected Lending (10), Country Risk (11), Internal Control and Audit (14), Consolidated Supervision (20), Remedial Measures (22), Globally Consolidated Supervision (23), and Host Country Supervision (24). - Recommended action plan highlights (selected): - CP1: Improve competitiveness as an employer to supervise complex bank activities; redefine role as lead supervisor for complex multinational groups (e.g., Nordea). - CP3: Apply fit and proper tests to all members of bank management including senior executives and managers of foreign offices; enhance criteria for suitability of management. - CP8: Grant legally based powers to require banks to strengthen lending practices, provisions and reserves; binding powers to adopt policies affecting overall financial strength. - CP9: Require reporting on geographical concentrations in lending. - CP10: Enhance supervision of connected lending; authority to set individual limits and deduct concessionary connected loans from capital; issue regulations on register of connected lending and require regular reporting. - CP11: Issue regulations on management of country risk; current reliance largely on quarterly reports prepared by Riksbank. - CP13: Issue supervisory standards on exchange and operational risk; give FI powers to require capital against non-market/non-credit risks. - CP14: Empower FI to require board composition changes due to shortcomings in skills and knowledge. - CP20: Empower FI to circumscribe activities a bank can engage in through foreign operations; adopt active lead-supervisor role for multinational groups; conclude agreements with countries outside the EU where Swedish banks operate. - CP22: Provide a wider array of legally binding remedial measures and amend laws to prevent supervisory forbearance. - CP23: Empower FI to prevent establishment of branches in jurisdictions with inadequate local supervisory arrangements; strengthen powers to require closing or limitation of overseas offices. - CP24: Conclude cooperation agreements with supervisors from some countries where Swedish banks operate; address inability to deny license on grounds of hindered free flow of supervisory information. - CP25: Require host licensing authority to assess whether home supervisor practices effective consolidated global supervision; law does not require host supervisor to determine approval (or no objection) from home supervisor for a foreign establishment. ### Authorities’ response - Authorities broadly agree with the mission’s assessment of FI’s observance of the Basel Core Principles. - FI has requested substantial budgetary enhancements to address resource shortcomings. - A proposal to reform the regulation of banks and credit institutions to give FI necessary early intervention powers has been put forward for public comment, with the objective of submitting a bill to parliament by Autumn 2002. - Authorities note that, concerning country risk, FI determines through onsite and offsite inspections that banks’ policies and procedures are appropriate and adequate. ### Insurance supervision — institutional setting and assessment overview - On July 1, 1991, the Supervisory Service merged with the supervision of banks and other credit organizations into FI. Legal changes from August 1, 1991, permit financial conglomerates: insurance companies may hold shares in credit institutions and vice versa, and both types may be owned by a holding company, forming a financial group. - Supervision of insurance companies and friendly societies is the responsibility of FI, an independent State agency governed by legislation and government Ordinances; final decisions on matters of principle may rest with the government. Administrative courts resolve complaints against FI decisions. - FI staffing and structure: - FI has a total staff of about 170 persons, of which about only 30 (or 18 percent) work in the Department of Insurance and Mutual Funds. - The Department is divided into three units: Licensing & Legal Matters, Supervision, and Risk Analysis. - The Board of FI settles matters of principle and includes the Director General (chairman), two members of parliament, one representative each from the MoF, the Bank of Sweden, and the National Board for Consumer Policies, three other members with financial and business experience, and two representatives of the employees. - IAIS and assessment framework: - The International Association of Insurance Supervisors (IAIS) formed in 1992; its core objective is to ensure improved supervision of the insurance industry domestically and internationally. - The FSAP insurance assessment is based on the Insurance Core Principles (CPs) of the IAIS focusing on prudential supervision, market conduct, and cross-border issues. - Of 17 assessed principles, Sweden observes 6 principles and broadly observes 11 principles. - Methodology and limitations: - Assessment sources included FI’s self-assessment, discussions with senior FI staff, review of key legislation (most relevant documents available only in Swedish), and review of FI publications including Annual Report and Financial Stability Report. - Absence of English translations impaired the assessment, requiring time-consuming explanations of Swedish texts by FI colleagues. - Private insurance landscape and intermediaries: - Supervision concerns only private insurance; social insurance is administered by special agencies. - Private insurance is mainly carried out by insurance companies, with some friendly societies remaining. - An insurance broker is defined as an independent intermediary paid by commission or fee, must be registered and supervised by FI, must meet requirements on professional indemnity insurance, professional qualifications and fit-and-properness, may collect premiums and assist in claims but not administrate such assets, and must inform clients about commission from insurers if the client so requires. *Source: _cr10131 - 1. the planned business may be assumed to fulfill the requirements of a sound banking operation; and (PDF chapter/section).* ### 26. It is the duty of FI to ascertain that insurance companies remain solvent and conduct ### _cr10131 - 26. It is the duty of FI to ascertain that insurance companies remain solvent and conduct ### Supervision framework and responsibilities - FI’s duty: ascertain that insurance companies remain solvent and conduct their business in accordance with laws and regulations. - Supervision covers legal, financial, technical and economic matters. - Swedish legislation (for domestic companies) establishes principles of solvency, transparency and good insurance standard. - Supervisory activities include: - Examination of annual returns submitted to FI before August 1. - Inspections at the place of business. - Appointment of special auditors by FI for some companies (ca. 40 at the moment). - Requirement for each company (except pure reinsurance companies that do not reinsurance life business or long-term non-life business) to keep a record of the assets covering the technical provisions and follow certain investment regulations. ### Industry organizations and market coordination - Large nation-wide companies: members of the Swedish Insurance Federation (Sveriges Försäkringsförbund) to deal with matters of common interest to Swedish insurers. - Local companies: two different but parallel organizations for their special interests. - Association of general agents of Swedish branches of foreign insurance companies exists. - Since 1994, insurers with licensed agencies or branches in Sweden may, with the consent of the Board, join the Swedish Insurance Federation as members. - Insurance brokers have a separate organization. - Motor Liability Insurance Association: - Membership required for all companies transacting motor liability insurance (domestic companies and Swedish branches of foreign companies). - Objectives: manage insurers’ common responsibility for damage caused by uninsured owners or drivers or untraceable drivers, and facilitate insurance arrangements for foreign cars visiting Sweden or Swedish cars going abroad. - Labor market federations exist for negotiations between insurers and employees/employed agents. - Several industry organizations operate within competition legislation or for broader contacts, including: - Areas of activity: Personal Injury of Liability Insurance; Emergency; Marketing Executive Officers; Legal Expenses; Fire Protection; Accounting; Insurance Law; Insurance Medicine; Insurance Statistics; Actuarial Research; Policy Conditions; Accident and Sickness Insurance; Marine Insurance; Nuclear Insurance Pool; Life Insurance Taxation; Transport Insurance Pool. - Additional bodies: Swedish Actuarial Society, Swedish Insurance Society, Insurance Bureau for Consumers’ Enquiries. - Relations between insurance market organizations and FI: - Not regulated by legislation. - Conducted on an informal basis, including regular information and cooperation in committees and ad hoc groups. ### Market structure and key statistics (year 2000) - Number of insurance companies established on the Swedish market at end-2000: 482. - Market coverage by Federation members: - Nearly 100 percent of the Swedish life market. - 94 percent of the non-life market. - Life insurance premium income in 2000: - Rose by 25 percent to SKR 102.7 billion. - Unit-linked insurance companies’ premium income: up 43 percent. - Traditional life insurance companies’ premium income: increased by 13 percent. - 2000: first year unit-linked insurance premiums surpassed premiums for traditional life insurance. - Life insurance companies’ average solvency ratio in 2000: 11. - Non-life insurance premium income in 2000: - Amounted to SKR 34.9 billion, 5 percent higher than in 1999. - Average solvency ratio in 2000: 17.2. - Labor market insurance companies’ aggregate premium income: SKR 15.8 billion, down 23 percent on 1999. - Aggregate assets under management at year-end 2000: - Total: SKR 1,820 billion, 4 percent higher than at the previous year end. - Invested in shares and participations: SKR 894 billion (49 percent). - Invested in bonds: SKR 711 billion (39 percent). - Foreign assets of aggregate investment assets: SKR 623 billion (34 percent). - Relative importance to banking system (1995 to 2000): - Ratio of domestic insurance liabilities to domestic bank deposits increased from 0.8 to 1.2. ### General preconditions and supervisory effectiveness - Legal framework: Insurance Business Act, regulations, and guidelines for FI operations considered sufficient. - Improvements: supervisory tools and legal amendments on the way, coming into force next year. - IAIS Insurance Core Principles: almost all CPs are observed or broadly observed formally by FI. - Resource constraints and staff shortages at FI: - Serious difficulty in getting skilled staff and insufficient number of skilled employees have forced FI to define priorities. - Resulting supervisory weaknesses and vulnerabilities in non-prioritized areas. - Specific vulnerability: supervision of financial conglomerates — weaknesses in the insurance part may cause contagion risk to other financial sectors within a conglomerate and potentially cause financial instability of the Swedish national economy with cross-border effects. - FI lacks time to examine insurer reports sufficiently, which is one of FI’s primary tasks. - FI needs time to develop new methods to enable a risk-based supervision approach. - Conclusion: effective insurance supervision seems to be jeopardized at the moment due to resource constraints. ### Social context and market segments - General social system in Sweden provides a large part of security for individuals; Social Insurance Board and other public institutions do not compete with the private insurance sector. - Pension reform element: - Mandatory unit-linked pension saving where the insured can choose external investment funds from a list administered by the Premium Pension Authority. - Existence of specialized life insurance providers: - Some life insurance companies provide pensions and certain other payments exclusively under collective schemes; employers and employees are partners in these companies. - Private life insurers and friendly societies also operate in the pension/collective payments field. *Source: _cr10131 - 26. It is the duty of FI to ascertain that insurance companies remain solvent and conduct* ### 44. In accordance with the above-mentioned disassociation between social and private ### _cr10131 - 44. In accordance with the above-mentioned disassociation between social and private ### Principle 1. Organization of an Insurance Supervisor - Description - FI is an independent authority with its own Board, with representatives from the parliament, the Central Bank, other authorities and the financial industry. - Director General is top decision-maker; Board advises and decides on issues like the annual financial report. - FI makes its own budget requests within the state budget framework; an amount equivalent to the approved budget is charged to supervised financial institutions. - FI must propose new rules to the government to fill legal gaps; government decisions are binding on FI for equal and similar future cases. - FI fully controls its approved budget (including salaries, training, equipment, travels) though parliament may not grant 100 percent of requests. - Head of FI appointed by government for a minimum term; removal during term only for reasons specified in law and must be publicly disclosed. - Assessment: Broadly observed. - Comments / Key facts - Scope for further improvement in professional resources given new supervisory responsibilities. - FI has difficulties recruiting qualified staff, especially actuaries; engages consulting firms for special actuarial and auditing tasks (costs paid by FI but budget restricted). - Appointment of external auditors restricted to 5 years; associated expenditure is paid by the concerned insurance undertakings. - Cooperation between FI, University of Stockholm and industry for recruitment and tailored in-house training. - Turnover of staff rate amounts to at least 15 percent. - Average period of employment amounts to 5 to 10 years. ### Principle 2. Licensing - Description - Concession by supervisory authority required to pursue insurance business (Insurance Business Act (1982:713)). - Comprehensive licensing regulation in insurance supervision law and Insurance Business ordinance; supplemented by FI regulations and general guidelines. - Conditions for license include suitability of direct/indirect qualifying participants, and that directors/managing director/deputy-managing director have sufficient qualifications. - Application must account for qualified owners; authority obtains information from tax authority, enforcement service, national police board, register of companies, register of insider trading, register of trade prohibition. - Company obliged to provide a business plan; minimum capital regulated by law; supervisory authority normally requires a capital base doubling the required solvency margin. - Outsourcing prerequisites and criteria stated in a standpoint issued by the authority; authority checks outsourcing contracts before granting a license. - Documents required for licensing include formation, management, auditors, authorized signatory, evidence of payment of share capital or initial fund; company must have access to an authorized actuary (required by authority before registering). - As a general rule life and non-life insurance cannot be operated in same company except limited cases; if both operated they must be separate with separate capital base calculations. - FI usually decides on licensing; matters of principal nature referred to government with comprehensive motivation. - EEA insurers: establishment or cross-border activities allowed if home supervisor certifies compliance; insurers outside EEA must have license issued by Swedish authority. - Assessment: Broadly observed. - Comments / Key facts - Sweden does not observe the licensing principle fully: lack in relevant Act prevents FI from carrying out fit and proper test for an insurance company’s senior management/key persons (e.g., heads of investment and legal departments, controller). - Existing composite insurance companies allowed to continue operations but obliged to keep separate accounting and records for life and non-life activity. - Hierarchy of Swedish legal sources: act (strongest), regulation (compulsory), guideline (recommendation); non-compliance with guideline requires sound reasons. - Recommendation: formulate requirement to inform FI of all outsourcing contracts as a regulation; incorporate Appointed Auditor requirements into guideline and long-term into Insurance Business Act. - Recommendation: license insurers outside EEA only if home supervisory authority complies with IAIS Insurance Core Principles. ### Principle 3. Changes in Control - Description - FI permission prerequisite for acquisition of shares leading to a qualified holding; seller of a qualified holding obliged to inform FI (Chapter 2 Section 3 and Chapter 3 Sections 2, 2a–2d Insurance Business Act (1982:713)). - FI evaluates proposed ownership change using same information as for licensing, but no fit and proper test including sufficiency of qualification, experience and suitability of persons concerned. - “Qualified holding” defined in law (Chapter 1 Section 9a Insurance Business Act (1982:713)). - Assessment: Broadly observed. - Comments / Key facts - Sweden does not observe the change of control principle fully due to lack in the relevant Act preventing fit and proper tests for senior management/key persons. - Essential and additional criteria largely fulfilled by compulsory prescriptions in law or regulations (FFFS 1998:14); more detailed rules in non-compulsory general guidelines which are generally complied with. ### Principle 4. Corporate Governance - Description - Comprehensive regulation of management functions and responsibility in law (Chapter 8 Insurance Business Act (1982:713)). - Law supplemented by general guidelines on management, internal information and internal control (FFFS 2000:3). - Guidelines require Board to set objectives/strategies, guidelines for risks, written instructions for management and internal information, and instruction for internal control organization. - Law contains board decision competence and majority resolution requirement; chairman cannot be same person as managing director. - Company obliged to have an auditor elected by general meeting independent of company; guidelines recommend independent audit function and good internal control. - General guidelines on complaints handling and ethical standards (FFFS 1998:22); FI is member of CIIB Board. - Assessment: Observed. - Comments / Key facts - Cross-subsidizing is possible; FI scrutiny detects cross-subsidizing via annual accounts leading to further investigations. - Four sources regulate use of surplus: Insurance Business Act (1982:713), Chapter 12 Sections 5 and 6 Statute, Insurance contracts, and Accounting legislation. - Surplus use: bonus to policyholders unless used for dividends or covering losses as per statute; statute must be approved by FI. - No approval routine for policy conditions but FI may discuss them with company. - Legislation introduced January 1, 2000; many life insurers postponed application until January 1, 2002, so limited experience from new legislation to date. - Complaint procedures vary by insurer; CIIB assists complainants and reports problems to FI. - FI reviewed implementation of ethical standards in more than 10 of the biggest Swedish insurance companies; implemented but amendments needed in some cases. ### Principle 5. Internal Controls - Description - FI reviews internal control via on-site inspections and review of demanded accounts; prior to on-site inspection FI reviews company guidelines/policies and Board protocols. - FI meets Managing Director, Chairman, internal auditor, area directors and investment staff; produces on-site inspection reports and can issue critical comments or injunctions. - FI has detailed guidelines about internal control (FFFS 2000:3), underwriting and reinsurance risk (FFFS 2000:5), and valuation of technical provisions (FFFS 2000:4). - FI designates an appointed auditor who reports to authority and participates in insurer audit; FI demands regular reports in specific areas. - Assessment: Observed. - Comments / Key facts - Internal control generally satisfactory in bigger companies; FI issues more remarks to smaller companies often about internal audit. - Guideline FFFS 2000:3 requires every insurer to set up a reporting system for internal control/risk management; risk management report submitted to Board and can be reviewed by FI via appointed auditor or presented to FI on demand. - Report submission to FI is not mandatory; recommendation: implement into Insurance Business Act that annual risk management report must be presented to FI for scrutiny due to importance of risk-based supervision. ### Principle 6. Assets - Description - Law contains compulsory rules on capital investment regarding assets equal to technical provisions addressing diversification, limits by asset type and individual investments, valuation basis, asset-liability matching, and liquidity. - Safekeeping and accountability for asset transactions regulated in regulations and general guidelines on register of assets equal to technical provisions (FFFS 1996:30). - Company required to set and observe strategic investment policy concerning assets equal to technical provisions adopted by Board; no regulations on policy contents. - FI reviews company guidelines on ad hoc/off-site basis and can emphasize non-compliance but cannot take remedial actions unless guidelines conflict with law. - Assessment: Observed. - Comments / Key facts - FI applies a very simple stress test at the moment (FSSS 1997:5); intends to introduce a more sophisticated dynamic resilience test in 2002. - In life insurance liabilities are prudently assessed; assets assessed on basis of market values. - In non-life liabilities technical provisions are not discounted and assessment is close to expected value; annual premium used as estimator for technical provisions; assets assessed on market values. - Policyholder’s surplus is not part of technical provisions. - In unit linked policies investment risk is transferred to policyholders. - Guaranteed interest rate amounts to 3.0 percent per annum at the moment. - FI established general guideline on register of assets equal to technical provisions (FFFS 1996:30). - Strategic investment policy report required by Chapter 7 Section 10g Insurance Business Act (1982:713) is submitted to FI on demand only; parts disclosed publicly via economic journalism. - Shortfall of qualified staff limits FI’s ability to react when reports indicate breach of investment regulation. ### Principle 7. Liabilities - Description - Company technical provisions must correspond to amount required to meet liabilities reasonably expected from policies (Chapter 7, Section 1 Insurance Business Act (1982:713)). - Technical provisions include claims, administration and other costs for remaining contract periods; claims incurred but not paid; guaranteed bonuses; bonuses dependent on asset changes where policyholder carries financial risk; equalization of losses in credit insurance; unit-linked insurance where policyholder carries financial risk. - If more than one company holds liability for a contract, each company’s technical provisions calculated proportionally. - Technical provisions for incurred but not paid claims assessed individually and checked case by case by FI staff; actuaries responsible for correct calculation in life and non-life. - IBNR, amounts in dispute, and premiums received in advance included in technical provisions. - For life business technical provision = present value of liability minus present value of expected premiums. - For non-life unearned premium provision equal to provisions for each individual policy; unpaid claims provision includes future costs related to policies in force. - No specific limit for reduction of liabilities for reinsurance recoverables; FI may reject credit amount if reinsurer or contract does not meet necessary standards. - Assessment: Observed. - Comments / Key facts - General guideline (FFFS 2000:4) assigns Board responsibility for instructions concerning technical provisions and liabilities. - Quarterly reports on assets covering liabilities; at least yearly analysis comparing companies and over years; FI contacts companies if concerns arise. - Chapter 7 Section 3 requires insurers to introduce technical principles for calculation, premiums, reinsurance, solvency etc., adopted by Board; life insurers must notify FI of technical bases applied. - FI method for incurred but not paid claims (non-life): calculate ratio r = (technical provision for incurred but not paid claims/premiums written) annually for each non-life insurer; compute sample expected value and sample variance of r; use industry average sample values as assessment criteria; assume r follows normal distribution and apply goodness of fit if sufficient representative data. ### Principle 8. Capital Adequacy and Solvency - Description - Sweden follows EU jurisdiction; local law reflects EU rules with few complementary regulations. - FI requires three years business plans for companies seeking a license; solvency at end of three-year period should fulfill jurisdiction requirements. - Jurisdiction does not regulate size of capital required; evaluation performed by FI and can vary case by case. - Each company reports yearly end of May the solvency status; reporting registered and reviewed electronically. - Insurers with material declines in solvency margin since prior reporting period or reporting solvency margin below required minimum levels are manually followed up by FI. - FI contacts companies with solvency problems to discuss measures for improving solvency margin. - Assessment: Broadly observed. - Comments / Key facts - FI complies with corresponding EU-directives. - Solvency requirement currently measured and evaluated yearly; FI plans requirement that at given time intervals companies assess amount of available solvency margins (Solvency I). - FI’s experience: differences in asset market values are single major reason for changes in solvency margin during a year. - FI requires companies in difficulties to present a plan for quick restoring of capital in compliance with solvency rules. - FI can require higher than minimum margin for companies seeking license depending on circumstances; practice for older companies less clear but option exists in principle. - Disclosure note in register needed to inform FI whether parts of assets are not free (collaterals) or cannot cover technical reserves. - FI intends to introduce qualitative risk assessment for insurance risks in spring 2002. - Regulation to eliminate inflation of supervisory capital through double/multiple gearing or other financing techniques in an “insurance group” and to ensure transparent group structure is not finalized yet; envisaged for January 1, 2002. ### Principle 9. Derivatives and ‘Off-Balance Sheet’ Items - Description - Use of derivatives restricted to reduce financial risk and rationalize asset management (Chapter 7 Section 17b Insurance Business Act, 1982:713). - Supervisory authority has right to issue regulations concerning application of law but has not used it (no such rules for Swedish banks either). - FI reviews capital investments and can take remedial actions regarding Board responsibility to maintain sufficient equity, liquidity and control over investment risks. - FI controls internal controls and monitoring of derivative positions via on-site inspections and appointed auditors. - Assessment: Broadly observed. - Comments / Key facts - FI issues regulations and general guidelines concerning annual and interim reports (FFFS 2000:22) including disclosure requirements for derivatives and off-balance sheet items (quantitative and qualitative), largely based on IAS 32. - Application of mark to market values as shown in IAS 32 preferred over historical values. - FI requires insurers using derivatives to have Board-formulated policy consistent with company activities, strategic investment policy and asset/liability management strategy. - Derivatives policy must address purposes, exposure limits, restrictions on types of derivatives, delineation of responsibilities and accountability for derivatives functions. ### Principle 10. Reinsurance - Description - Pure reinsurance companies treated equal to primary insurers under Insurance Business Act but with special rules: - Investment restrictions apply to primary insurers; pure reinsurers do not comprise the rules except life reinsurers and long-term non-life reinsurers. - If company has both primary insurance and reinsurance, investment restrictions apply to whole company business. - Pure reinsurers do not need a special board member for insured interests. - FI issued general guideline on management of underwriting risk and reinsurance (FFFS 2000:5) — not compulsory; companies not following must account and FI judges adequacy. - Guideline expects Board to establish reinsurance program covering principles for ceding reinsurance, self-retention and principles for choice of reinsurers (security). - FI’s supervision of reinsurance is done through: (section ends in source content). - Assessment: (Assessment text appears earlier for reinsurance context: guideline applicability; no explicit assessment line in supplied excerpt) - Comments / Key facts - Reinsurance program recommendations and Board responsibility emphasized in FFFS 2000:5. - No explicit quantitative limits for credit taken for reinsurance recoverables stated in provided text; FI may reject amounts if reinsurer or contract does not meet necessary standards. *Source: IMF Staff Report excerpt _cr10131 - Detailed Assessment of Observance of the IAIS Insurance Core Principles (selected Principles 1–10) from the supplied PDF content.* ### 1. On-site inspection, in accordance with the general guideline FFFS 2000:5. The focus ### _cr10131 - 1. On-site inspection, in accordance with the general guideline FFFS 2000:5. The focus ### On-site inspection and reinsurance oversight - Focus of inspections: that the Board of Directors takes its responsibility in accordance with the general guideline FFFS 2000:5, the company has appropriate routines and the internal control is good. - Companies with a big part of ceded reinsurance: - Asked at the beginning of the year to give a written description of their greater reinsurance contract. - FI especially wants to know about the security of the reinsures they use. - Companies who use reinsures with a low security will be followed up. - A model to assess the companies ceding of large exposures is under processing. - Supervision of pure reinsurance companies in practice is limited to licensing, reporting of the annual report and the solvency report. - Current market structure: - In Sweden today there are only a few Swedish reinsurance companies in business. - Most of the big insurance groups have set their reinsurance companies in run-off. - Assessment: Broadly observed. - Comments and constraints: - Pure reinsurance companies are supervised in almost the same way as primary insurance undertakings; FI has set up a general guideline (FFFS 2000:5). - Because of the shortfall of qualified staff FI is not able to scrutinize the reinsurance contracts regularly (increment of reinsurance risk; see recommendation to Principle 1). - Primary insurers’ ceded reinsurance will be supervised through on-site inspections, although the frequency has not yet been stipulated. - Used reinsures security will be supervised through the yearly questionnaire. - A model that assesses the companies ceding large exposures is on the way; introducing this supervisory instrument, as envisaged in 2002, is a welcome development. ### Principle 11 — Market Conduct (insurer and intermediary behaviour) - Principle summary: Insurers and intermediaries should, inter alia: - at all times act honestly and in a straightforward manner; - act with due skill, care, and diligence in conducting their business activities; - conduct their business and organize their affairs with prudence; - pay due regard to the information needs of their customers and treat them fairly; - seek from their customers information which might reasonably be expected before giving advice or concluding a contract; - avoid conflicts of interest; - deal with their regulators in an open and cooperative way; - support a system of complaints handling, where applicable; and - organize and control their affairs effectively. - Description of FI responsibilities and practices: - Acquisition of insurance is FI’s responsibility but marketing is not. - An insurance broker must have certain skills to get licensed by FI (FFFS 1996:19); FI has issued rules about experience and theoretical knowledge for brokers. A person who gets a license must be fit and proper. - Insurance companies have full responsibility for all other persons selling insurance. - On-site inspections of internal control usually include information about a company’s selling-organization and its policy in that area. Life and non-life insurance are usually separated in this exercise. - Life insurance focus: information given to the insured and presumptive customers; ensuring the customer understands and that the information is relevant. - FI makes on-site inspections to see how insurers prepare for newly issued information-rules. - Non-life insurance focus: broker/seller must identify customer needs; FI does not accept double insurance for same risk—broker/seller needs relevant information from the customer. - FI inspects how insurers deal with claims and specialty personal injuries; emphasis that injured get compensation on objective grounds even without a lawyer, and that claims are handled in due order with secrecy. - FI reviews how companies deal with customer complaints; every company must appoint a person responsible for customer complaints; FI maintains a register of appointed persons and can assist claimants with information. - In on-site inspections on internal control, FI always demands to see guidelines for handling complaints (FFFS 1996:25). - FI does not handle complaints but uses complaint information; starts off-site inspections if it receives many similar complaints. - Assessment: Broadly observed. - Comments and constraints: - Due to insufficient resources in the insurance division of FI the authority does not usually make on-site inspections at insurance-brokers, ad hoc-inspections not included. - FI receives a lot of information that brokers do not fulfill the requirements but FI does not have the possibility to respond to such information. - In general in Sweden it is difficult to have any supervision concerning market conduct, which presents an increment of underwriting risk (see recommendation to Principle 1). - Normally FI has no problems with market conduct and acts against complaints; FI has carried out company inspections on claims and personal injuries in recent years. - General problem: it takes too long for companies to handle personal injuries due to a certain shortage of adjusters. - Recommendation: establish procedures to ensure that companies are in compliance with legislation and guidelines. ### Principle 12 — Financial Reporting - Principle summary: supervisors need information to form an opinion on financial strength; establish processes for: - setting the scope and frequency of reports requested/received from all licensed companies (financial, statistical, actuarial reports, other information); - setting accounting requirements for preparation of financial reports in the jurisdiction; - ensuring external audits of insurance companies are acceptable; - setting standards for establishment of technical provisions or policy and other liabilities to be included in financial reports. - Description of FI powers and practice: - According to Insurance Business Act, Insurance Business Decree and other laws (Insurance Brokers Act, Friendly Societies Act) FI has permission to set scope and frequency of reports requested and received from all companies licensed in the jurisdiction. - FI has issued regulations concerning statistical data (profit and loss accounts; performance analysis; solvency; analysis of profitability; cross-border activities; and assets (quarterly reports)). - External auditors in Sweden have a good reputation as competent and independent. - FI has the permission to appoint an auditor; an appointed auditor works for FI but is paid by the company and has the same rights and responsibilities as auditors appointed by the general meeting. FI has appointed auditors in nation-wide larger insurance companies and in companies with known problems. - FI can stipulate principles and norms regarding accounting and consolidation techniques (groups and conglomerates (IAS 22, 27 (consolidated financial statements)) to be used for supervisory reporting purposes. - FI requires insurance companies to utilize valuation rules that are consistent, realistic and prudent. - FI has permission to issue principles for establishment of technical provisions and other liabilities to be included in financial reports (FFFS 2000:22 pages 18, 20). - Assessment: Broadly observed. - Comments and ongoing items: - FI has the permission to request necessary information; a review of requested reporting has started with the aim to find if it is possible to reduce the amount of information reported to FI. - Insurance companies must comply with the Annual Accounts Act for Insurance Companies, ”Lagen om årsredovisning i försäkringsföretag, (1995:1560), ÅRFL” (implementation of Insurance Accounting Directive, 91/674/EEG, IAD). - ÅRFL refers to the Annual Accounts Act, ”Årsredovisningslagen, (1995:1554), ÅRL.” According to Chapter 1 Section 4 of ÅRFL, FI has the right to issue binding regulations in the accounting area and has done so. - In annual financial statements, insurance companies must state whether they comply with regulations issued by FI; deviations must be disclosed and could render a qualified auditor opinion. - The Annual Accounts Act for Insurance Companies states that all Swedish insurance companies must issue annual reports. - Regulations issued by FI state that insurance companies with net assets exceeding SKR 1 million must publish one interim report yearly. - FI’s view: auditors are in general acceptable and have a high standard in knowledge and independence. - FI can require valuation rules that are consistent, realistic and prudent under certain circumstances. - FI has permission to issue principles for technical provisions under certain circumstances and special provisions in the Insurance Business Act (Försäkringsrörelselagen) (Chapter 7 Sections 1, 2) (FFFS 1998:25 (discount-rate)). - Specific actuarial report recommendations: - (a) Life insurance: the Responsible Actuary should take into account the asset-side when forming an opinion of the financial status of the company. A corresponding prescription should be incorporated into the Insurance Business Act. - (b) Non-life insurance: non-life actuaries are reporting more about the reserves’ development; for quality-guarantee the non-life Responsible Actuary should sign his report. This procedure should be written into a FI-regulation. ### Principle 13 — On-Site Inspection (procedures and capacity) - Principle summary: supervisor should be able to carry out on-site inspections of company books, records, accounts, other documents (may include other jurisdictions subject to agreement) and request/receive any information from licensed companies. - Description of FI on-site inspection process and powers: - Legislation guides FI’s activities; Insurance Business Act obliges Board of Directors, managing directors and other officers to provide requested information to FI. - FI can review company-branches and has a bilateral MOU with Kredittilsynet in Norway about inspections and information concerning an insurance company. - FI works with different manuals and usually demands written information before visiting a company. - For larger insurers, an on-site inspection lasts 2-3 days and is carried out at least once a year. - On-site inspection procedure: - FI sends a special questionnaire designed by FI to the insurer. - After a period the insurer submits answers to FI. - FI analyzes replies; analysis usually leads to further questions discussed with company senior people during the visit. - Afterwards FI sends an official letter including the on-site inspection report to the inspected insurer for comments; the report is revised; the final report is sent to the insurance undertaking for information only. - Assessment: Observed. - Comments: - FI has not had problems getting the information it needs or in conducting inspections. - Normally FI gives companies time to prepare a visit. For the IAIS assessment, FI has demanded information the same day or arranged a meeting in a few days. ### Principle 14 — Sanctions (remedial powers) - Principle summary: supervisors must have the power to take remedial action and a range of actions to apply appropriate sanctions (restrict activities; direct company to stop unsafe practices or remedy them; revoke license; impose remedial measures). - Legal powers and practice: - Law references: Chapter 2 Section 3 Insurance Business Act (1982:713); Chapter 19 Section 11 Insurance Business Act (1982:713). - FI shall refuse a license if the company has a close connection to someone that will hinder effective supervision; if the company no longer meets requirements FI shall revoke the license. - FI may issue a reminder when appraised necessary; in more severe cases FI shall issue an injunction. Purpose: oblige the company to comply with FI’s decision. - Injunctions can be combined with a conditional fine; if the company does not comply FI may revoke the license. - In practice FI usually first makes an informal reminder. If no correction, FI takes measures as prescribed. - FI has the power to restrict the company’s freedom to dispose of assets. - FI requests remedial plans and recovery plans from the company and Board of Directors when formal sanctions are imposed; plans must be submitted within a certain time for FI approval. - In case of winding up FI may appoint a special liquidator to carry through winding up together with the liquidators appointed by the general meeting. - If the capital base falls below the solvency margin FI is obliged to issue an injunction to oblige the company to restore financial equilibrium; the company must submit a recovery plan. - FI can issue injunctions to oblige managing director or Board of Directors to make proper applications for registration and provide certain information on letters, invoices and order forms (this is the only sanction FI can address to natural persons). Natural persons may be prosecuted under criminal law in general court. - Assessment: Broadly observed. - Comments and limitation: - FI has the power to take remedial actions and generally can choose adequate sanctions. - FI lacks the possibility of issuing a formal criticism in cases where a sharp reprimand is needed but not measures that obliges the company to take corrective actions. ### Principle 15 — Cross-Border Business Operations - Principle summary: supervisor should ensure no foreign establishment escapes supervision; all establishments of international groups subject to effective supervision; creation of cross-border establishment subject to consultation between host and home supervisors; foreign insurers providing cover on cross-border services basis are subject to effective supervision. - Legal framework and practice: - Provisions: Chapter 2a Insurance Business Act (1982:713) and Chapter 2 Act on Foreign Insurance Companies operating in Sweden (1998:293). - FI acts in accordance with the Directives on life assurance and non-life insurance and the protocol relating to collaboration of supervisory authorities of Member States of the European Community in particular in application of the Directives. - For EEA insurers: home country control and the principle of one single license are valid according to the third generation EC insurance directives as implemented into Swedish legislation. - Activities of a Swiss insurer in Sweden are regulated in accordance with the special arrangements between Switzerland and the EC, as implemented in Swedish law (FFFS 1996:222). - Cross-border activities for EEA insurers are possible after prescribed notification to the home country authority of the head-office; home country authorities are responsible for supervision and the capital requirements of the home country apply. - For non-EEA insurers, the same rules apply as for domestic companies. *Source: _cr10131 - 1. On-site inspection, in accordance with the general guideline FFFS 2000:5. The focus* ### Chapter 4 Act on Foreign Insurance Companies operating in Sweden contains provisions ### Chapter 4 Act on Foreign Insurance Companies operating in Sweden contains provisions ### Cross-border operations and authorization (Chapter 4 and Chapter 9 Section 7) - For non-EEA insurers: - Cross-border activities without authorization are only possible through intermediation by an independent insurance broker or when insurance is sought actively by the policyholder. - Otherwise they can operate only through an insurer authorized in Sweden with whom they have an agreement of cooperation or if they both belong to the same group of companies. - Authorization from FI is then needed. - The creation of cross-border insurance establishments is subject to consultation between host and home supervisors. - Supervisory authorities are obliged to conduct a mutual consultation before approving a transfer of portfolio, according to Chapter 9 Section 7 Act on Foreign Insurance Companies operating in Sweden. - Assessment: Broadly observed. - Comment: It is not clear whether Sweden can actively supervise branches of Swedish-based insurers in other EEA member States in practice, given the very limited resources of the supervisor. ### Actual foreign presence and supervisory division of responsibilities - There is only one foreign insurance undertaking operating business in Sweden: a general agency of the Swiss insurer ZFS (Zürich Financial Services) running non-life insurance business in Sweden only. - The general agent has been licensed by FI. - Supervisory split: - FI supervises all legal matters of this general agency (e.g., claims compensation, fit and proper aspects). - The Swiss insurance supervisory authority does all financial matters (e.g., solvency, accounting). ### Principle 16 — Coordination and Cooperation (assessment and practice) - Principle summary: Insurance supervisors should be able to liaise, enter agreements, share information, be permitted to share information subject to confidentiality, be informed of findings by other investigative bodies, and set out types/basis of information sharing. - Description of FI practice: - FI supervises the financial sector; within FI everyone has access to information. - Exchange of information between authorities is subject to secrecy legislation. - FI has the authority to enter into agreements with foreign financial supervisory authorities. - Example: an agreement with Kredittilsynet (Norwegian financial supervisory authority) about a non-life company where a Swedish non-life company has about 40 percent of the Norwegian insurance business of the private area; the agreement stipulates exchange of information. - Companies supervised by FI must inform FI if exposed to an attempt to fraud, money laundering, etc. - Assessment: Observed. - Comment: - All information within FI is public; requests trigger a secrecy trial before disclosure. - Business secrets are always classified. - If FI has signed a cooperation agreement with duty of confidentiality, it is possible to share classified information. - FI supervises seven financial conglomerates and carries out an overall assessment for 13 entities: 6 insurance companies, 4 banking groups, and 3 security firms. - Note: Remaining aspects of the principle are referred to Principle 17. ### Principle 17 — Confidentiality (assessment and legal framework) - Principle summary: Supervisors must observe professional secrecy for information obtained; must hold confidential information received from other supervisors unless constrained by law or authorized for release by the provider. - Description of FI practice and legal basis: - FI has statutory power to share prudential information with other supervisors with few limitations, provided it is deemed in Swedish interests to share. - In accordance with the Act (1982:713) on the Insurance business, FI has a duty to have close cooperation with supervisors, especially in other EU-countries. FI participates in international cooperations, e.g., IAIS. - Swedish legislation normally requires consideration of possible harm in each disclosure case, based primarily on the Act on Secrecy. - By Swedish law, confidentiality cannot normally be maintained by originator control once information is provided to another Swedish authority; information is in principle at the receiver’s disposal. - Exception: information received from another foreign authority according to a MOU can retain confidentiality. - Chapter 1 Section 3 of the Act on Secrecy and Chapter 8 Section 5 govern when information classified as secret may be disclosed to a foreign authority. - The government may decide that secrecy applies at FI on information received under an agreement with a foreign authority by adding the agreement to Section 1c of the Secrecy Ordinance (SFS 1980:657); government has so far always decided secrecy applies to information received according to MOUs, and those agreements have always been added to Section 1c. - The Act on Secrecy provisions are applicable to information provided under EU-directive based provisions. - Insurance-specific MOUs are few; there exist the “Protocol relating to the collaboration of the supervisory authorities of the member states of the European community in particular in the application of the directives on life assurance and non-life insurance” and the “Helsinki-Protocol” concerning insurance groups; these envisage exchange of confidential information within limits of the Third Life and Non-life Directives (Articles 16.1 and 16.2 of the Third Non-life Directive and 15.1 and 15.2 of the Third Life Directive). - Assessment: Broadly observed. - Comments: - Implementation is by law, MOUs and to some extent by the Protocol. - FI has negotiated several cross-sectoral MOUs with Norway, Baltic countries and Denmark, Finland, Norway as a group. - To achieve completely free exchange of information (including potentially negative facts about supervised institutes) would require modification of the Swedish Act on Secrecy and an international convention or bilateral agreements. ### Summary of IAIS Insurance Core Principles observance (Table 5) - Assessment Grade — Observed: - Count: 6 - List: CP 4, 5, 6, 7, 13, 16 - Assessment Grade — Broadly observed: - Count: 11 - List: CP 1, 2, 3, 8, 9, 10, 11, 12, 14, 15, 17 ### Recommended Action Plan (selected recommendations impacting cross-border, supervision, confidentiality and broader supervisory strengthening) - Organization of an Insurance Supervisor (CP 1) - It is recommended that staff resources in several areas including fit and proper testing, investments, reinsurance and market conduct be strengthened in order to fulfill FI’s legal tasks. - Licensing and Changes in Control (CPs 2–3) - Recommended that: 1. insurance companies should inform FI of all outsourcing contracts entered into when pursuing business; this requirement should be formulated as a regulation; 2. an Appointed Auditor should be required to review outsourcing contracts case by case depending on the decision of FI; this requirement should be incorporated into the guideline for Appointed Auditors and in the long run into the Insurance Business Act; in the short run establish a new guideline concerning general lines of outsourcing contracts; 3. insurers outside the EEA should receive a license issued by FI only if the corresponding home insurance supervisory authority complies with the IAIS Insurance Core Principles. - To bring Sweden into compliance with ICPs 2 and 3 it is recommended that: 1. the Insurance Business Act should be amended to require a fit and proper test for an insurance company’s senior management/key persons; and 2. relevant law should be strengthened with a fit and proper test including sufficiency of qualification, experience and suitability of the persons concerned. - Corporate Governance and Internal Controls (CPs 4–5) - Recommended that submission of the insurance company’s annual risk management report to FI should be mandatory, and that a corresponding prescription into the Insurance Business Act be implemented. - Prudential Rules (CPs 6–10) - Recommended that in analysis of reserves in non-life insurance the distribution-assumption of a normal distribution should be reviewed for a fitter distribution, provided the collection of data is representative for the analysis concerned. - To bring Sweden into observance with CP 9 it is recommended that disclosure requirements are established for derivatives and off-balance sheet items. - Market Conduct (CP 11) - Recommended to establish procedures to ensure that companies are in compliance with legislation and guidelines. - Monitoring, Inspection, and Sanctions (CPs 12–14) - Recommended that: 1. FI should set up a legal basis for the possibility of issuing a formal criticism in cases where a sharp reprimand is needed rather than obliging a company to take measures. 2. amend the actuarial report: - Life insurance: the Responsible Actuary should take into account the asset-side when forming an opinion of the financial status of the insurance company; prescribe this in the Insurance Business Act. - Non-life insurance: non-life Responsible Actuary should sign his report; prescribe this in the form of a FI-regulation. - Cross-Border Operations, Supervisory Coordination and Cooperation, and Confidentiality (CPs 15–17) - To bring Sweden into observance with CP 15 it is recommended that appropriate action is taken to see that branches of Swedish companies in EEA member states are supervised. - To strengthen the Swedish supervisory regime it is recommended that Sweden takes measures to maintain and ensure shared confidentiality. ### Authorities’ response - FI had no specific comments on the detailed assessment and noted that it would do its best to implement the recommendations made in the report as soon as available resources permit. *Source: _cr10131 - Chapter 4 Act on Foreign Insurance Companies operating in Sweden contains provisions* ### 54. There are 70 fund managers licensed in Sweden. 80 percent of assets under ### _cr10131 - 54. There are 70 fund managers licensed in Sweden. 80 percent of assets under ### Market structure and ownership - There are 70 fund managers licensed in Sweden. - 80 percent of assets under management in the fund industry are managed by mutual fund companies owned and operated by the four large banks. - The largest institutional investor in Sweden is the Swedish state. Other large investors include the bank-owned mutual funds, the public pension funds, the large banks and insurance companies, foreign mutual funds and a few very large private family holdings. - Ownership of public companies is notably transparent: a complete list of shareholders is publicly available and most shares are held directly in the investor’s name rather than in nominee name. - Figures supplied by Finansinspektionen and the Mutual Funds Association, as of August 2001. ### Exchanges, market activity, and cross-border integration - Sweden’s only stock exchange is Stockholmbörsen, a public demutualized exchange operating a fully electronic equity exchange featuring the SAXESS trading system. - Stockholmbörsen operates an electronic derivatives exchange offering trading in futures and options and a derivatives clearing and settlement system in which Stockholmbörsen acts as a central counterparty. - The derivatives clearing system offers clearing for trades on the Stockholmbörsen as well as the Oslo Børs, the Copenhagen Exchange and the OM London Exchange and undertakes clearing for custom over-the-counter derivatives. - Stockholmbörsen includes the Fixed Income Exchange—offering trading and trade reporting services for corporate and government bonds. Bond trading can take place through the electronic SOX system, through a more limited transparency electronic dealer system or by telephone with electronic daily reporting. - Stockholmbörsen also owns the OM London Exchange. OM AB owns Pulpex, UK PX, and Jiway. - The Stockholmbörsen ranks 15th largest stock market in the world, in terms of market capitalization. - The exchange handles 6 percent of transaction volume on Europe’s listed markets—behind the London Stock Exchange (35.4 percent) and Euronext (24.4 percent). - The equity market lists 310 companies with a market capitalization—declined in the past two years—of SKR 3.583 billion end-2000. - Average daily turnover was 224 million trades worth SKR 15.225 billion in September 2001. - Of Stockholmbörsen’s 63 members, 30 are remote members without residence in Sweden. These remote members account for 20.8 percent of transactions on the exchange. - Stockholmbörsen has entered into the Norex alliance with the Oslo Børs, the Copenhagen Stock Exchange and the Iceland Stock Exchange. The derivatives operations of the Norex alliance are fully integrated; the equity side aims for integration but currently requires cross-membership and clearing is not integrated. - Two authorized marketplaces operating in Sweden: Aktietorget Aktiebolag and Nordic Growth Market NGM Aktiebolag (NGM has applied for a license as a stock exchange). There is also an over-the-counter market in equities without formal requirements. ### Clearing, settlement, and custody (VPC and OM systems) - Equity and debt trades on Stockholmbörsen and the dealer market are cleared and settled through the VPC system which also acts as the securities registry. - VPC is effectively controlled by the four major Swedish banks which own 98.6 percent of shares. - Securities are fully dematerialized in Sweden; most Swedes have direct accounts at VPC and hold securities in their own names. Transactions are settled and registered simultaneously. - Equity and bond trades are cleared on a T+3 basis, and treasury bills on T+2. - The legal framework supports extensive use of securities borrowing and lending, finality of settlement and protection of client assets from insolvency. - Straight Through Processing has not yet been adopted in Sweden. - Unlike the VPC system, the OM Derivatives clearing system acts as a central counterparty. - The VPC clearing and settlement system features an unprotected netting scheme for both equity and debt trade settlements; a partial guarantee system mitigates equity trade risk but the risk in the debt market is significant. - Payment banks are not required to guarantee trades of clearing members who use them as payment banks, leaving open the possibility of a default. - VPC does not act as a central counterparty nor is collateral required to cover market risk, nor are there liquidity arrangements to cover liquidity risk. - The perpetuation of the VPC system has removed incentives to participate in the RTGS system, which is underutilized. ### Regulatory framework, self-regulation, and investor protection - The Swedish regulatory system makes extensive use of trade associations for self-regulation—these include the Mutual Funds Association (MFA), the SSDA and the Swedish Industry and Commerce Stock Exchange Committee (NBK). None of these organizations is officially recognized as a self-regulatory organization. - The National Board of Consumer Complaints, set up under the Authority, handles consumer complaints on a voluntary basis and is widely used as an inexpensive alternative to court actions. - The Bank and Finance Bureau, owned by FI, the major banks, the MFA and the SSDA, is responsible for investor education. - FI does not license individuals nor does it set proficiency requirements for traders, advisors, portfolio managers, compliance officers or officers and directors of the investment firms and mutual fund managers. FI plans to issue general guidelines on proficiency in the near future. - Svedsec, a subsidiary of the SSDA, began operations in April 2001 to register and license individual employees of investment firms; Svedsec sets an examination, enters licensees into a public registry and its disciplinary committee may bar an individual from the industry for up to three years. ### Supervisory capacity and resource constraints (Finansinspektionen — FI) - FI is an independent and accountable regulator employing high professional standards but requires additional resources and authority. - FI has recently reorganized its supervision planning and, on the basis of risk to the system, designated 13 institutions or groups of institutions as priorities for supervision. VPC and Stockholmbörsen constitute two of the thirteen groups. - None of the independent investment firms has been designated priorities, but each of the large banks are designated priorities and all of them have securities and mutual fund businesses. - FI is short of resources and is not able to carry out in-depth on-site inspections of investment firms or mutual funds. FI’s on-site inspections of Stockholmbörsen and VPC are currently very limited and do not cover all relevant risks in clearing and settlement such as legal risk, operational risk, counterparty risk, liquidity risk and systemic risk. - Expertise appears to be lacking in the mutual fund area and in the area of clearing and settlement. - FI can object to material changes to a license and can enjoin a regulated entity to cease an activity that contravenes legal requirements (or order the entity to cease operations). FI does not have the ability to impose positive actions on a regulated entity or change the terms and conditions of a license. - Enforcement tools are limited to warnings and revocation of license—there are no fines or penalties and no possibility of settlement agreements. - FI has the right to share information and has entered into a number of information sharing arrangements. FI routinely consults industry and stakeholder groups, makes a great deal of information available on its website and is subject to freedom of information and privacy laws. ### Main findings, risks, and recommended supervisory measures - General finding: The securities regulatory system appears to function smoothly; legislation and FI rules form a sound basis for regulation and FI enjoys most of the authority it requires over regulated entities. FI would benefit from additional power to levy fines and other penalties. - Resource and implementation challenge: FI lacks resources to implement many rules, limiting on-site inspection coverage and depth; current levels of on-site inspection work are insufficient to gauge compliance among market participants. - Clearing and settlement risks: - The VPC system does not adequately prevent an unwinding in the event of the failure of a participant to meet its obligations, introducing market risk, liquidity risk and potential systemic risk. - The unprotected netting scheme and absence of central counterparty, collateral requirements, and liquidity arrangements are significant vulnerabilities. - FI has been unable to exercise its supervisory authority sufficiently to resolve VPC system inadequacies. - Supervision of systemically important infrastructure: - The systemic importance of VPC and Stockholmbörsen requires significant supervisory attention, including on-site inspections, risk management assessments and review of corporate governance structures. - FI has revised its supervisory plan with increased attention to VPC; the plan should include on-site inspections and corporate governance review. - Regulatory powers and enforcement: - FI should be granted authority to take interim action and to assess penalties and fines as a result of enforcement actions. - FI should be able to impose conditions or require corrective corporate governance changes on regulated entities. - Mutual funds and conflicts of interest: - Mutual fund licensing requirements are generally satisfactory but conflicts of interest rules, particularly in a conglomerate setting, could be improved. - Supervision of mutual funds should be strengthened; related depositories and valuation of illiquid securities require more stringent rules and monitoring. - Market intermediaries and investor relationships: - Full licensing and capital adequacy rules are in place for investment firms, but inspections and the ability to take interim measures should be strengthened. - Capital regulation could be improved with more frequent financial reporting requirements. - Gaps exist in regulation of the client-investment firm relationship and in internal supervisory requirements for investment firms; many gaps will be addressed by proposed EU directives. - Marketplaces: - FI has set clear and adequate standards for exchanges and alternative trading systems; transparency requirements and market abuse detection rules are adequate. - Supervision of Stockholmbörsen requires improvement. - Self-regulatory organizations (SROs): - Use of SROs is generally in compliance with IOSCO Principles, but SROs should complement rather than replace regulation by the regulatory authority. - Where SROs carry out supervision, such supervision should be subject to vigorous oversight by FI. - Legal framework and market practices: - The legal framework could be improved to align with current market practices including repledging of collateral. - The law does not always reflect actual market practice, creating a lack of transparency that makes it difficult to assess legal risk. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10131.pdf* ### 78. Clearing and settlement systems—There are weaknesses in the supervision of ### _cr10131 - 78. Clearing and settlement systems—There are weaknesses in the supervision of ### Executive summary of core issue - There are weaknesses in the supervision of clearing and settlement systems—both at the Stockholmbörsen and VPC. - Inadequate risk management for exposures in debt clearing and equity clearing in the VPC system has been allowed to continue. - The governance structures of VPC and Stockholmbörsen give rise to conflicts of interest that require serious supervisory attention. ### Regulatory capacity and supervisory assessments (selected Principles) - Principle 1: Implemented — FI is the sole regulatory authority; responsibilities set out in legislation and FI regulations. - Principle 2: Implemented — FI operationally independent in practice but relies on the MoF for budget; Director General and governing board appointments described. - Principle 3: Partially implemented — FI has many powers but lacks authority to compel third parties, levy fines, suspend activities, or impose many corrective measures. - Principle 6: Partly implemented — Heavy reliance on SROs and industry associations; oversight gaps and conflicts of interest noted. - Principle 7: Partly implemented — Limited on-site inspections and weak mitigation of conflicts of interest for Stockholmbörsen; recommendation to increase supervision. - Principle 8: Implemented — FI has inspection, surveillance and investigation powers over regulated entities, but limited authority over third parties and individuals not regulated. - Principle 9: Partly implemented — FI can warn or withdraw licenses and suspend trading in a security, but lacks full enforcement powers (fines, suspensions, direct penalties on individuals). - Principle 10: Partly implemented — Inspections exist but are limited in depth and resources; inspection statistics: 43 onsite inspections of investment firms in 1999, 31 in 2000 and 6 to date in 2001; 33 mutual fund inspections in 1999 and 2000. - Principle 11–13: Implemented — FI can share information domestically and internationally subject to Secrecy Act; MOUs with EU members, Latvia, CESR. - Principle 14: Partly implemented — Prospectus disclosure meets EU standards but prospectus review limited for O list and OTC issuers; continuous disclosure applies only to listed companies. - Principle 15: Partly implemented — Company Act protections exist; minority shareholder protections limited (public float requirement and voting differentials highlighted). - Principle 16: Implemented — Accounting/auditing standards: listed companies subject to IAS via exchange; auditors required to be independent. - Principle 17–20: Partly/Partly observed — Mutual funds regime present (Mutual Funds Act), but conflicts of interest, owner fit-and-proper, NAV monitoring and valuation of illiquid securities require improvement; minimum capital for fund company: SKR 1 million; NAV must be calculated and published at least once a week; illiquid securities may constitute up to 10 percent of portfolio. - Principle 21: Implemented — Entry standards for investment firms established; licensing requirements described. - Principle 22: Partly implemented — Capital requirements comply with EU Directive; quarterly reporting required; suggestion to consider more frequent reporting. - Principle 23: Partially implemented — Internal organization and conduct rules exist but gaps: no books-and-records or audit trail requirements for trading/sales, no mandatory personnel proficiency standards, limited reporting on disciplinary actions and terminations. - Principle 24: Partially implemented — FI can manage wind-downs and require rectification; Investor Guarantee Fund protects up to SKR 250,000 per customer but has no reserves presently. - Principle 25: Implemented — Trading systems/exchanges require license and oversight; authorized marketplaces rules described. - Principle 26: Partly implemented — Ongoing supervision present (monthly meetings, reporting) but limited on-site inspections and lack of prescribed capital requirement for Stockholmbörsen. - Principle 27: Implemented — Transparency requirements exist; equity trading on Stockholmbörsen: pre-trade orders displayed, immediate post-trade reporting; fixed income and OTC have more limited transparency. - Principle 28: Implemented — Market abuse rules exist (Insider Penalties Act (2000:1086); Reporting Obligations for Certain Holdings of Financial Instruments Act (2000:1087) — insiders must report trades within 5 days); gaps in rules on front running, corporate finance supervision, and disclosure of firm ownership in securities being sold. - Principle 29: Partially implemented — Default risk addressed via capital requirements and clearing systems, but VPC has unchecked settlement risk in fixed income settlements (no guarantee fund and no collateralization). - Principle 30: Partially implemented — Clearing and settlement systems licensed and supervised but FI has not reviewed or approved VPC/Stockholmbörsen risk models, stress testing or set reporting requirements; supervision has been relatively informal. ### Key numeric and threshold facts (preserve source figures exactly) - Inspection counts for investment firms: 43 in 1999; 31 in 2000; 6 to date in 2001. - Mutual fund inspections: 33 in 1999 and 2000. - Investor Guarantee Fund coverage: up to SKR 250,000 per customer. - Mutual fund company minimum capital requirement: SKR 1 million. - Net-asset-value (NAV) publication frequency requirement: at least once a week. - Illiquid securities can form up to 10 percent of a mutual fund portfolio. - Listing criteria for A list stocks include market value of SKR 300 million; three year history of operation and profitability; 10 percent of voting shares held by general public; at least 2,000 shareholders owning a half board lot each. - O list shareholders threshold: at least 300 shareholders holding a quarter board lot each; 10 percent public float requirement. - Ownership thresholds triggering reporting under Financial Instruments Trading Act: 10 percent, 20 percent, 33 1/3 percent, 50 percent or 66 2/3 percent. - New Company Act voting differential guidance: generally 10 to 1 limit for new companies. - Table 8 summary counts: Implemented 14; Partially Implemented 16. ### Principal supervisory shortcomings identified - Weak oversight and limited on-site inspections of Stockholmbörsen and VPC despite their systemic importance. - FI lacks several enforcement and remedial powers (compel third-party evidence, levy fines, impose interim corrective measures, impose conditions on licenses beyond limited circumstances, sanction individuals directly). - Heavy reliance on SROs and industry associations (e.g., NBK, SSDA, MFA) for issuer regulation and market conduct, with insufficient FI oversight of these bodies. - Conflicts of interest in mutual fund sector and bank-owned concentration: banks often act as owners, custodians and related securities firms for mutual funds. - Incomplete monitoring of NAV calculations and absence of valuation standards for illiquid securities. - Settlement risk in fixed income at VPC: no guarantee fund and no collateralization for fixed income settlement default exposures. - Limited books-and-records, audit-trail and sales conduct standards; absence of mandatory proficiency/registration for individual employees. - Investor Guarantee Fund has no reserves currently and cannot act prior to bankruptcy proceedings. ### Recommended actions (from Table 9) - Principle 3: Grant FI authority over third parties; amend legislation or licensing to enable FI to take interim or corrective measures. - Principle 6: Reconsider relationships with informal SROs; FI should balance its own supervisory role and increase presence in market intermediary and listed company regulation. - Principle 7: Vigorously pursue strengthening supervision of Stockholmbörsen and VPC. - Principle 8: Grant FI authority to compel evidence from third parties. - Principle 9: Grant FI authority to carry out full enforcement proceedings and levy fines and penalties. - Principle 10: Increase resources devoted to inspections of investment firms, mutual funds and SROs. - Principle 11: Strengthen supervision of regulation of listed companies by Stockholmbörsen; strengthen prospectus review at FI; apply continuous disclosure standards to unlisted issuers. - Principle 12: Enhance FI activity in minority shareholder rights and extend protections to unlisted issuers. - Principles 17 & 18: Address conflicts of interest between related companies with stronger requirements and on-site inspections; subject owners of mutual fund companies to fit-and-proper testing. - Principle 20: Establish a system for monitoring NAV requirements and develop rules for valuation of illiquid securities. - Principle 22: Consider more frequent reporting of capital positions. - Principle 23: Support proposed CESR-driven detailed rules for investment firms; devote greater resources to inspection program. - Principle 24: Consider FI’s practical ability to handle a large failure, including authority to act as administrator prior to bankruptcy to enable client account transfers. - Principles 29 & 30: Strengthen oversight of VPC and Stockholmbörsen clearing systems; address shortcomings in the VPC risk management system. ### Immediate supervisory priorities implied by assessment - Increase FI-led on-site inspections of Stockholmbörsen and VPC regulatory functions and risk-management frameworks. - Secure legal powers to compel third-party information and to apply a broader set of enforcement remedies (fines, interim measures, individual sanctions). - Institute a formal regime for oversight and approval of clearing/settlement risk models and stress tests for VPC and Stockholmbörsen. - Enhance mutual fund oversight: require owner fit-and-proper checks, independent custodians where appropriate, NAV monitoring, and valuation rules for illiquid assets. - Strengthen continuous disclosure and prospectus review capacity at FI, and reduce over-reliance on industry SROs for issuer regulation. *Source: IMF assessment text on implementation of the IOSCO Objectives and Principles of Securities Regulation (excerpts concerning clearing and settlement systems, Stockholmbörsen and VPC).* ### 79. The authorities were in broad agreement with the assessment―pointing out that many ### _cr10131 - 79. The authorities were in broad agreement with the assessment―pointing out that many ### Assessment and planned actions - The authorities were in broad agreement with the assessment, noting that many issues, including enhanced standards for issuers and investment firms, will be implemented as a result of on-going work at the EU. - The current FI business plan contemplates increased attention to both VPC and Stockholmborsen; authorities believe that once the new plan is fully operational oversight concerns will be satisfactorily addressed. - VPC is adopting a two-step approach to address risks in the VPC, which will fully eliminate the present “unwinding” procedure and has adopted a plan to eliminate indirect participation. ### CPSS Core Principles assessment — scope and method - Assessment performed by Mr. Jan Woltjer of the Nederlandsche Bank. - Main sources for assessment included: - the Blue book, payments and securities settlement systems in the European Union; - The Swedish Financial Market, an annual review published by the Riksbank; - Settlement of payments in the RIX-system (Riksbank publication); - Financial Market Report 1997-I and Sveriges Riksbank Economic Review 2001-3; - Sveriges Riksbank act and other relevant laws; - Rules and Regulations for settlement of payment in RIX; - Decision of the executive board of the Riksbank on collateral requirements and Information on eligibility requirements for collateral in RIX; - a confidential risk analysis performed by the Riksbank using the TARGET risk analysis methodology of the European System of Central Banks. - Several meetings held with Riksbank officials, FI, the Banking Association, Bankgirocentralen, VPC, Stockholmbörsen, and representatives of the banking sector. - Assessment used the CPSS methodology and the guidance note for assessing observance; Riksbank and Bankgirocentralen submitted self-assessments. Prior FSAP work included assessment of VPC with CPSS/IOSCO recommendations and Stockholmbörsen clearing and settlement for derivatives. ### Institutional and market structure — major players/systems - Sveriges Riksbank - Owns and operates RIX, an RTGS interbank settlement system primarily for large-value payments. - RIX consists of two parallel but separate systems: K-RIX for Swedish kronor and E-RIX for euro. E-RIX is inter-linked to the ECB’s TARGET system. - VPC - A clearing and settlement organization operating two securities settlement systems (equities and fixed income) and providing central securities depository services. - Equities, bonds and money market instruments dematerialized in VPC. - Cash settlement in central bank money via Riksbank accounts in RIX. - Settlement on a multilateral net basis or on an RTGS basis (latter manually operated). Delivery-versus-payment achieved. - Stockholmbörsen - Clears and settles derivatives and acts as central counterparty for cleared transactions, covering exchange-traded and OTC-cleared products. - Funds settlements made via Stockholm Exchange account in RIX on a multilateral net basis. - Bankgirocentralen (BGC) - Manages Bankgirot system; processes retail payments and some large-value payments. - Adopted a new technical platform and clearing/settlement procedures leading to full integration with RIX and participants’ systems. - Payments settled on a bilateral net basis in RIX at a number of times per day. - Postgirot - System for credit transfers within Postgirot Bank; settlement in commercial bank money. - Postgirot Bank has become a full member of Bankgirot, creating interoperability. - Riksgäldskontoret - Swedish National Debt Office participates in RIX for government payments. ### Market participation and activity — key statistics (preserve original figures) - RIX-system participation: sixteen banks, seven participants are branches of foreign banks. - Annually nearly 575 thousand payments are cleared and settled in RIX with a nominal value of SKR 122 trillion ($14 704 billion). - Part of turnover relates to payments in Euro: in 2000: 62 000 payments with a value of 1 718 billion of euro. - Approximately 85 percent of the transactions in kronor and almost all transactions in euro are stemming from the four largest financial groups in Sweden. - Value of transactions in BGC forms only 4 percent of the value cleared and settled in the RIX-system but surpasses in numbers of transactions the RIX-system by large with an amount of 424 million transactions in 1999. - In 1999 VPC clears and settles 431 thousand transactions in government securities and 8.4 million transactions in equities. - Value cleared in bonds and money market paper amounted up to SKR 84 trillion in 1999; total annual value cleared in the equity market SKR 4 trillion. ### Retail payments and instruments - Bankgirot and Postgirot together accounted for more than 75 percent of all non-cash transactions in 1999. - A growing proportion of transactions in the giro systems are initiated electronically: around 80 percent in terms of value in 1999. - Direct debits (autogiro) account for around 8 percent of the total number of non-cash transactions. - Use of cards has increased; debit cards linked to bank accounts gained importance. One prepaid card scheme (Cash card) exists, issued by the four major Swedish banks, but customer acceptance has been rather low. ### Structural and operational drivers - Factors impacting the Swedish payment system: - Rapid growth in financial markets increased number and total value of transactions in Riksbank settlement system. - Highly concentrated banking sector: major groups (FöreningsSparbanken, Handelsbanken, Nordbanken and SEB) are major counterparts in RIX and majority owners of BGC and VPC; progressive integration strengthens Four Major Financial Groups (FMFG) influence. - Rapid growth of internet penetration: more than half of Swedish population has internet at home and about 50 percent of them have access to their bank’s internet services. ### Major payment system reforms (chronology preserved) - 1990: Riksbank implemented the RTGS system RIX. - 1997–98: Riksbank implemented SWIFT-service SWIFT FinCopy enabling straight-through-processing (STP). - 1999: Riksbank implemented E-RIX, interlinked to ECB’s TARGET system. - BGC adopted a new technical platform and new clearing/settlement procedures leading to full integration with RIX and participants’ systems; new internet-based information channel and real-time position monitoring; number of clearing and settlement cycles per day will be increased and system will allow possibility of real-time clearing and settlement of single retail payments once fully operational. - Riksbank and major banks established a working group to elaborate a strategy for a future central settlement system; chairman is a representative from one of the major banks. ### Systemic risk, oversight and operational resilience - RIX-system described as the heart of Swedish wholesale markets: advanced, complex and overall sound; RIX is well shaped, efficient, safe and fully automated, operating on RTGS principles; legal framework supports finality and electronic processing; no zero-hour rule exists. - Riksbank offers unlimited intraday credit against a broad range of collateral to ensure sufficient liquidity during stress. - Crisis arrangements: - Incident-organization and crisis-committee within the Riksbank involve operational payment, financial stability, and monetary departments. Decisions can be taken in a timely manner; crisis-handling tested regularly. - In case of serious liquidity problems the Riksbank can support an illiquid but solvent bank and grant liquidity under special terms; loans under emergency liquidity arrangement (ELA) might not be fully collateralized. - Identified risks: - Potential systemic and contagion risk from absence of adequate risk management in VPC’s netting schemes for securities settlement; both systems final settle in RIX. Measures needed to prevent unwinding and to address market risk and liquidity risk if participant with largest positions cannot settle. - Oversight responsibilities overlap between Riksbank and Finansinspectionen (FI), causing lack of clarity and transparency for providers and participants. - Concerns: (i) lack of regulatory powers of the Riksbank hampering oversight effectiveness; (ii) lack of explicitly formulated objectives and the present supervisory approach of Finansinspectionen not fully meeting needs in dealing with payment and securities settlement system risks, especially systemic risk. ### Operational and market efficiency issues and recommendations - Counterparty risk reduction: - Promote collateralization of interbank loans to reduce counterparty risk in interbank, foreign exchange and money markets. - Facilitate use of collateral by developing a full automated trade-for-trade settlement system for securities transactions that settles transactions on a real time basis and is capable to handle settlement of repo-transactions, including the reversed transaction at the agreed point in time. - Liquidity timing: - Small time-window for settlement of payments related to foreign customers causes liquidity stress and temporary blocking of outgoing payments. Improvements could be made by adapting the code of conduct and/or introducing incentives for early settlement. - Efficiency and cost recovery: - Core Principle VIII only broadly observed: RIX not fully cost recovering due to small number of payments in a highly concentrated banking sector and need to operate two systems (kronor and euro) for potential EMU membership. - Riksbank is developing a longer-term strategy with banking sector to broaden economic base; options include outsourcing operational tasks to private sector and cooperation with other central banks in Nordic countries. - Access criteria: - CP IX: RIX has objective and publicly disclosed access criteria permitting fair and open access. - Recommendation: Riksbank should evaluate access criteria to allow access to all investment firms to reduce strong concentration risk in securities markets. Broadening access only makes sense if the annual fee of SKR 200.000 is lowered substantially, as this fee is too high a threshold for smaller banks and investment firms. ### Main CPSS findings — summary of observance (selected points) - Legal foundation (CP I): Fully observed. - Understanding and management of risks (CPs II–III): Both fully observed. Note: amount of intra-day credit for E-RIX limited because Sweden has not joined the EMU. - Settlement (CPs IV–VI): Fully observed; settlement in central bank money in kronor and euro; payments final and irrevocable except in limited cases (criminal offences or fraud). - Security and operational reliability, contingency arrangements (CP VII): Operational reliability very high; adequate contingency and security measures in place. - Efficiency and practicality (CP VIII): Broadly observed (not fully) due to cost recovery and dual-system operation. - Criteria for participation (CP IX): Objective and publicly disclosed; recommendation to evaluate access criteria and address fee SKR 200.000 barrier. - Governance (CP X): Riksbank fully owns RIX; banking sector and other participants involved in adaptation and strategy development. - Central bank responsibilities: Riksbank has fully disclosed oversight role in Financial Market Report 1997–01 and Sveriges Riksbank Economic Review. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 2001. A specific department, the financial stability department, is created and charged ### _cr10131 - 2001. A specific department, the financial stability department, is created and charged ### Financial stability department, oversight and institutional issues - A specific department, the financial stability department, is created and charged with the analysis of the financial stability and the oversight of the financial infrastructure. - Part of the oversight task is to ensure that the RIX-system fully complies with the core principles. - Weaker points: - The Riksbank has no power to enforce compliance and can give no regulations with respect to safety and efficiency of payment systems in Sweden. - At the moment there exist no regulatory framework in which the core principles are worked out. - Overlap with the supervision of Finansinspectionen and the lack of a memorandum of cooperation between these two institutions makes it difficult for the market to know what the requirements are and how the requirements of the two overseers/supervisors cohere and who controls what. ### CP I — Legal basis (Principle I) - Description: - The Sveriges Riksbank Act forms the legal basis for the payment system and states that the Riksbank shall, inter alia, "promote a safe and efficient payment system and may provide settlement system facilities and participate in the settlement of payments." - The Act allows the Riksbank to grant intra-day credit to participants. - There are nine principal laws in Sweden that form the legal framework for the functioning of clearing and settling transactions under the Settlement Systems Act. - Within this framework, the RIX-system is designated by the European Commission as a designated payment system. - Designated system transfer orders vis-à-vis a third party shall be valid notwithstanding a collective insolvency procedure, provided such orders were placed prior to the insolvency decision. - Swedish laws recognize the validity of electronic processing of payments; no judicial obstacles to citing electronic documentation; codified by the act on qualified electronic signatures. - The RIX-system settles large value payments in Swedish Kronor (K-RIX) and in euro-denominated payments (E-RIX) and participates in TARGET. - Rules and regulations of RIX are based on TARGET guidelines (PSS/97/479, version 2.01, November 1997) and multilateral agreement with the ECB; changes are subject to ECB Governing Board approval. - Rules and regulations updated recently (June 1, 2001) and published. - All credit has to be fully collateralized; requirements for collateral are specified and published; collateral for intra-day credit and standing overnight facilities must be pledged according to the pledge agreement for credit in RIX. - Assessment: Observed - Comments: None ### CP II — Transparency of rules and procedures (Principle II) - Description: - Clear and transparent description of RIX functioning and key rules available in the Riksbank publication "Settlement of payments in the RIX system, SKR and EURO", published and made available to all participants. - Assessment: Observed - Comments: None ### CP III — Management of credit and liquidity risks (Principle III) - Description: - RIX is a RTGS-system reducing systemic financial risk for large value payments in Kronor and euro. - Rules, regulations and documentation set out credit and liquidity management policies and procedures; opening-times and cut-off times included in an appendix. - Riksbank extends intra-day credit to qualified participants; in K-RIX credit line limited to value of collateral pledged. - In E-RIX, total intra-day credit granted to all participants together may not exceed euro 0,5 billion. - Riksbank decides allocation of access to intra-day credit in E-RIX and allocation of associated costs; may withdraw access in emergency situations. - Riksbank accepts a broad range of collateral including debt instruments denominated in foreign currency; foreign currency may be accepted as collateral for credit in Swedish Kronor. - Debt instruments accepted must be issued by a central bank, public body or company with a satisfactory credit rating and acceptable liquidity; issuer country and currency should have satisfactory credit standard. - Riksbank imposes haircuts and values collateral according to actual market prices on a daily basis; additional collateral required if market value is less than amount of credit paid out. - In exceptional circumstances, Riksbank may grant credit or provide guarantees on special terms to banking institutions and Swedish companies under FI supervision (Provision on the Emergency Liquidity Assistance (ELA), Sveriges Riksbank act, §6:8). - Participants can monitor incoming/outgoing payment flows and liquidity on-line; can schedule payments and manipulate waiting queue. - Between the largest banks, intra-day liquidity can be borrowed for a maximum of 4 hours without any fee. - Banks can bring in fresh collateral same day but sometimes up to one hour before the transfer order to VPC results in enlargement of the credit limit in RIX. - Assessment: Observed - Comments: - The broad range of collateral and acceptance of foreign currency collateral eases access to central bank liquidity for banks active abroad or foreign bank branches; shortage of collateral is not an actual threat even if outstanding government debt might be reduced in the longer term in Sweden. - Some banks requested automation of manual handling of collateral to adapt credit-lines almost on–line real–time; Riksbank has scheduled an IT-project for next year to realize this. ### CP IV — Finality of settlement (Principle IV) - Description: - RIX is RTGS; settlement takes place throughout the day whenever a payment is accepted. - A payment will only be accepted if the paying bank has sufficient funds or credit on its account with the Riksbank. - According to TARGET guidelines finality means the settlement order cannot be revoked, reversed or made void by sending NCB/ECB, sending participant or any third party, even in insolvency, except in cases of imperfections arising from criminal offences or fraudulent acts. - A payment in RIX becomes final for the sending participant when its account is debited and for the receiving participant when its account in RIX is credited. - Assessment: Observed - Comments: None ### CP V — Multilateral netting systems (Principle V) - Description: The RIX-system is a RTGSSystem - Assessment: Not applicable - Comments: None ### CP VI — Settlement asset quality (Principle VI) - Description: The RIX-system settles in central bank money as well as in Kronor as in Euro. - Assessment: Observed - Comments: None ### CP VII — Security, operational reliability and contingency (Principle VII) - Description: - Securities and reliability requirements are outlined in TARGET Security Requirements and conform to good business practices and international standards. - Guidelines developed for annual risk analysis in standardized form; Riksbank performed the 6th Risk analysis in accordance with these guidelines on 25 September this year and made it available to the IMF mission. - RIX System and IT infrastructure subject to audits by securities specialists in 1997, 1999 and 2001. - Payment process and IT system continuously monitored; irregularities reported, logged and attended to; well documented procedures describe decision making during daily operation incidents. - Operational availability goal: 99.9 percent, which is above the ECB standard. - Secondary goal: 100 percent availability for 10 out of 12 month during the year 2001. - Targeted performance for full system recovery: two hours (stricter than TARGET guideline of 4 hours per disaster failure). - A special manual of procedures for contingency situations has been distributed to participants. - Riksbank maintains a secondary site at a distance of 4-5 km with real–time mirroring between sites; back–up robot stores all data; well–documented back–up procedures form part of business contingency arrangements. - Riksbank crisis organization has well defined tasks and responsibilities. - On-line network used for position and payment flow information can be used as back-up facility if the SWIFT network is out of operation; participants can input orders manually on Riksbank premises in emergency. - Transfer orders and related messages in RIX are sent via the SWIFT-network using the Swift Fin-Copy services; data integrity, authorization, authentication, non-repudiation and confidentiality are assured. - Separate on-line network for payments flows, account information and waiting queue is secured and encrypted. - Adequate measures to prevent unauthorized access; procurement, development and modification procedures to avoid disturbing production processes; three levels of tests in three different environments before production deployment. - Assessment: Observed - Comments: None ### CP VIII — Practicality and efficiency (Principle VIII) - Description: - Cost and pricing: RIX is not fully cost–recovering due to small numbers of payments in a concentrated banking sector. - Riksbank is developing, in cooperation with the banking sector, a long-term strategy to broaden the system’s economic base. - Outsourcing operational tasks by integrating large value and retail payment systems is being examined. - Cooperation and integration of large value systems of central banks in Nordic countries might broaden economic base, share development costs and future IT investments when current system must be replaced. - Short-term efficiency enhanced by changing code of conduct and settling certain foreign-customer related transactions on a gross basis in K-RIX. - At the moment these payments are accumulated and paid at a specific moment; the limit for an individual payment of this type has been lowered in steps to SKR 500.000 in the beginning of 2002. - This has reduced liquidity stress and will enlarge efficiency by lowering necessary amount of collateral in relation to turnover. - Assessment: Broadly observed - Comments: - It may be worthwhile to examine whether efficiency could be further enhanced and liquidity stress reduced by broadening the time window for foreign-customer related payments. - The times at which the kronor leg of FX transactions in RIX must be settled could be better aligned with times for the other currency (e.g., kronor leg for Asian currency early morning; kronor leg related to dollar transactions in the afternoon). - To avoid free rider problems around liquidity that make banks reluctant to liberalize the code of conduct further, Riksbank could examine minimum collateral requirements in relation to individual turnover. - A price incentive that would stimulate earlier input and settlement of payments could also be explored. ### CP IX — Participation criteria and access (Principle IX) - Description: - Institutions eligible for RIX participation: - Credit institutions; - Investment firms on condition that the firm is permitted to carry out trading with financial instruments on behalf of others in its own name or on its own account, or provide guarantees in connection with issues of securities and that the firm is a counterpart (primary dealer) in the Riksbank’s operation on the money market; - Clearing organizations; - Treasury departments and public bodies responsible for a state’s payment and cash settlement. - Riksbank is open to remote access participants and may accept a foreign central bank as a participant in K-RIX; in case of remote access a legal opinion is required per TARGET Guidelines. - Rules define prerequisites for exclusion or suspension from RIX. - All criteria are applied in a non-discriminatory manner. - Assessment: Observed - Comments: - Only investment firms that are eligible counterparties in the Riksbank’s open market operations have access to RIX; eligibility of counterparties in monetary operations is very restricted and only one investment firm fulfills the access criteria. - Due to strict access criteria investment firms generally use a settlement bank, exacerbating concentration risk in the Swedish financial system. - Recommendation: Riksbank should evaluate its access criteria and consider whether access should be given to all supervised investment firms and whether they should be granted access to intra-day credit facilities. This would align with proposals for the new EU investment directive. - Caveat: A broadening of access criteria will only make sense if the annual fee of SKR [text ends in source]. *Source: _cr10131 - 2001. A specific department, the financial stability department, is created and charged* ### 200.000 is lowered substantially—while this fee is too high a threshold for investment ### 200.000 is lowered substantially—while this fee is too high a threshold for investment ### Governance (CP X) - Description: - The Riksbank owns the RIX-system (100 percent). - Strategic objectives: reduction of risk in the financial system, promoting efficiency, cost recovering and a client and service orientated organization. - Short-term: detailed business plans on development of systems, developed after consultation with all relevant parties including the system overseer. - Internal arrangements: clear lines of responsibility, thorough planning and budgets instruments, direct accountability to the board of the Riksbank. - Controls: independent internal audit department; RIX-system overseen by a separate division—the financial stability department. - External benchmarking: comparison with central banks within the EU gives management an incentive to ensure system objectives are realized. - Stakeholder involvement: long term strategies and other important aspects discussed in the payments system committee (chief financial officers of the banking sector, VPC and Stockholmbörsen participate); user groups discuss current issues and are involved in testing new system releases. - Assessment: Observed - Comments: None ### Central Bank Responsibilities in Applying the CPSIPS (Responsibilities A–D) - Responsibility A — Define and disclose objectives and policies: - Description: Objectives stated in article 2 of the Sveriges Riksbank Act (1988:1385): Riksbank charged with responsibility to promote a safe and efficient payment system. - The Riksbank has published an article in the Sveriges Riksbank Economic Review on the Riksbank’s oversight of the financial infrastructure (Sveriges Riksbank Economic Review, Sveriges Riksbank,2001/3). - Assessment: Observed - Comments: None - Responsibility B — Ensure systems it operates comply with core principles: - Description: The Financial stability department oversees the RIX-system, taking into account the core principles in their assessment. - Assessment: Observed - Comments: None - Responsibility C — Oversee systems it does not operate and have ability to carry out oversight: - Description: Riksbank charged with oversight but has no legal power to enforce compliance and must rely on moral suasion. Finansinspectionen is involved in supervision of payment system providers outside the Riksbank. Overlapping responsibilities cause in-transparency. - Assessment: Partly observed - Comments: - Consideration should be given to enhancing the Riksbank’s legal powers to issue regulations on payment systems and on clearing and settlement systems for securities. This might be done by re-instating in the Sveriges Riksbank Act the legal powers to give regulations, as they exist in the past. - To avoid in-transparency and promote efficiency it is recommendable that the Riksbank and the Finansinspectionen develop: - An explicit regulatory framework in which the objectives are stated and the international codes and standards are reflected. This framework should also include existing obligations, a fit and proper test for the management of payment systems, the information requirements and the involvement of the overseers in crisis situations; - An explicit framework for cooperation, division of tasks and information sharing. This should be written out in a Protocol on cooperation or a MOU. - Responsibility D — Cooperate with other central banks and relevant authorities: - Description: The Riksbank participates in relevant working groups (BIS, ESCB, EU) and notifies foreign authorities, especially central banks, about issues that can affect them. - Assessment: Observed - Comments: None ### Summary observance of CPSS Core Principles and Central Bank Responsibilities (RIX-system) - Assessment grade counts: - Observed: 8 + 3 — CP 1, 2, 3, 4, 6, 7, 9, 10; Responsibilities A, B and D - Broadly observed: 1 — CP 8 - Partly observed: 1 — Responsibility C - Not applicable: 1 — CP 5 ### Recommended Actions (Table 11) — Key items - Efficiency and practicality of the system (CP VIII): - Strengthen efficiency by broadening the timeframe for the settlement of foreign clients or FX related payments (banking sector has to change the code of conduct). - Investigate incentives to minimize the free rider problem with respect to liquidity and the input of collateral (Riksbank). - Investigate incentives (differentiation of fees, schedule of percentage of payments to be done before specific moments of time during the day etc.) to promote a smoother payment flow during the day and to reduce liquidity stress during peak hours (Riksbank). - Criteria for participation (CP IX): - Evaluate access criteria and fee structure in order to reduce the concentration and contagion risk in the securities settlement business (Riksbank). - Central Bank Responsibilities (A–D): - Strengthen the legal basis for the oversight task of the Riksbank (parliament). - Develop an explicit regulatory framework for the oversight of payment systems in which the objectives of the oversight are stated and the international codes and standards are reflected and the involvement of the overseers in crisis-situations is incorporated (Riksbank/ Finansinspectionen). - Develop a protocol on cooperation, division of tasks and information sharing (Riksbank/ Finansinspectionen). ### Detailed assessment — CPSS/IOSCO Recommendation for Securities Settlement Systems (VPC-system), Recommendation 1 - Legal basis description: - Legal framework includes: Act of Contracts, Banking Business Act, bankruptcy regulations, Securities Operation Act, Exchange and Clearing Operations Act, Trading in Financial Instruments Act, Financial Instrument Account Act and Settlement System Act. VPC rules and regulations complete this framework. - Laws and regulations are publicly available and key aspects for clearing and settlement are covered. - Complexity and division over many laws and occasional misalignment between law and market practice lead to lack of transparency and difficulty in assessing legal risk. - Enforceability of transactions: - The Swedish legal system gives adequate protection to counterparties and provides appropriate means to support and effectuate contractual obligations, including rules regarding liquidations of assets. - Protection of customers' assets: - Swedish law protects financial assets of the customer against an insolvency of the central depository or a custodian in Sweden. - Immobilization and dematerialization: - Financial Account Act regulates dematerialization and immobilization in VPC. Dematerialization of financial instruments issued in Sweden is the underlying principle. - Netting arrangements: - Chapter 5, Section 1 of the Financial Instruments Trading Act supports bilateral netting, and multilateral netting provided that multilateral netting is performed within a designated settlement system according to the rules of such system. - VPC is, according to the Settlement System Act, such a designated system and is notified as such by Finansinspectionen to the European commission. - Securities lending: - Chapter 3, Section 1 of the Financial Instruments Trading Act covers the use of financial instruments belonging to another party, including securities loans, buy and sell backs and repos. - The law allows the requirement of margin calls during the maturity of a repo. - Finality of settlement: - There is no zero hour rule in Sweden. - The Financial Instruments Accounts Act Chapter 6 rules the finality of a transfer of securities on VPC accounts: a credit of securities account in VPC is final and irrevocable and may not be unwound by any party nor by VPC. - VPC rules explicitly state the moment the crediting of the account takes place; after that no retroactive action is possible, not even in the event of an insolvency of a participant. - Delivery versus payment: - The Swedish legal framework supports delivery versus payment procedures explicitly. Blocked securities during a DVP procedure cannot be subject to a claim of a third party (The Financial Instrument Account Act, Chapter 6). *Source: Assessment of the RIX- and VPC-systems as presented in the provided content unit.* ### Section 2). ### _cr10131 - Section 2) ### Legal framework, default rules and enforceability - The rules and regulations of VPC explicitly address procedures in case of a default of a participant: the clearing is unwound and all the transactions of the defaulting party are cancelled. - Liquidation of asset pledged: the right to liquidate assets pledged is not automatically granted by law and must be conducted by contract between relevant parties. - Enforcement vis-à-vis third parties: under the Settlement System Act (SFS 1999:1309) a transfer order in a designated system shall be valid notwithstanding that a collective insolvency procedure has commenced against a participant, provided such orders were placed in the system prior to the issuance of the decision. VPC is a notified system. - Assessment: Broadly compliant - Comments: - Legal framework does not fully support existing practices in clearing and settlement and is not fully transparent. - Legal framework for pledge and custody makes it difficult to re-pledge collateral from one level to another in a Central Counterparty construction. - Clearing members must use their own collateral to cover clients’ positions vis-à-vis a central counterparty, making CCP construction relatively expensive and hampering international competitiveness. - Recommendation to scrutinize the legal framework for clearing and settlement to align with current market practices and European market integration needs. ### Trade confirmation (Recommendation 2) - Recommendation: Confirmation of trades between direct market participants should occur as soon as possible after trade executions, but no later than trade date (T+0). Where confirmation by indirect participants is required, it should occur as soon as possible after trade execution, preferable on t+0, but no later than t+1. - Description: - All trades between direct market participants must be registered in the VPC system within one hour. - In the equities market trades have to be registered before noon on T +1. - Matching is performed in real–time after trades are registered. - Unmatched instructions are excluded automatically when VPC is closed for reporting of transactions with day S as Settlement day. - VPC pre-matching function forwards unmatched instructions up to a maximum of 20 working days. - Bond and money market: 100 percent of trades are confirmed on T+0. - Equity market: 30 percent of trades on T+0 and 70 percent on T+1 (figures enclose only trades between clearing members). - No central trade confirmation system between a direct participant and an indirect participant; custodians/brokers normally do not use STP to communicate with clients. - Assessment: Partly compliant - Comments: Equity market rules should be strengthened; information exchange between clearing members/brokers and their clients, especially foreign customers, requires significant improvement. ### Settlement cycle and rolling settlement (Recommendation 3) - Recommendation: Rolling settlement should be adopted in all securities markets. Final settlement no later than T+3. Evaluate benefits/costs of shorter than T+3. - Description: - Swedish market utilizes rolling settlement; settlement cycle for stock exchange and OTC transactions is T+3. - Short term notes (treasury bills): settlement cycle is T+2. - Stock exchange and OTC transactions normally settled via two netting schemes operated by VPC: Guarantee Clearing (equities) and Money Market Clearing (bonds/short term notes). - If a participant fails to deliver no steps are taken to mitigate market or liquidity risk for the counterparty. - VPC offers an RTGS System, but it is operated manually and hardly used (only to correct mistakes); fully automated RTGS deemed too costly by owners. - New Clear project discusses T+1 preparation; primary obstacle is cross-border trades and late instructions from foreign customers. - STP is not widely used in Sweden; STP implementation seen as primary condition to reduce settlement cycle. - Technically, VPC can adapt to T+0 in money market clearing and T+1 in equities clearing. - No specific sanctions in VPC on late deliveries; VPC publishes monthly fail-rate reports and reputation effects follow repeated high fail rates. - Assessment: Compliant - Comments: None ### Central counterparty evaluation (Recommendation 4) - Recommendation: Evaluate benefits and costs of a CCP; where introduced CCP should rigorously control assumed risks. - Description: - No central counterparty for clearing and settlement of spot market and repo transactions in Sweden. VPC facilitates clearing/settlement but does not guarantee transactions or take responsibility for delivery/payments. - OM Stockholmbörsen offers CCP services only for derivatives. - Regulators positive towards a central solution; a properly designed CCP could reduce systemic risk in current netting schemes. - VPC discussions: - New Clear project: major users/owners discuss introduction of a CCP within VPC; market participants indicate no need for a CCP. - Different institutions exploring domestic CPP, a Nordic CPP, or links to European CPPs. - For Nordic market integration, CCP or range of CCPs (Nordic Clear) are being considered for cross-border settlement. - Assessment: Compliant - Comments: None ### Securities lending and borrowing (Recommendation 5) - Recommendation: Encourage securities lending and remove barriers. - Description: - Well-functioning securities lending market; short selling explicitly allowed influences borrowing demand. - Larger banks and a subsidiary of Stockholmbörsen (Lendtech) facilitate lending/borrowing; Lendtech acts as intermediary. - Upper tier stocks widely lent by major institutional investors to approved counterparties. - Legal framework fully supports lending and borrowing; clear tax interpretation since 1992. - Assessment: Compliant - Comments: None ### Immobilization/dematerialization and book-entry transfer (Recommendation 6) - Recommendation: Securities should be immobilized or dematerialized and transferred by book entry to the greatest extent possible. - Description: - All securities issued in Sweden and held via VPC are dematerialized. Some foreign securities registered in VPC are immobilized with global certificates kept in foreign CSD or custody bank. - All VPC registered securities except premium lottery bonds are fungible. - Transfers and pledges by book-entry only; crediting the beneficial owner’s account makes transfer final and irrevocable. - No underlying register outside VPC and no time lag between settlement and registration. - Swedish law governs transfer and custody of securities directly held via VPC or via Swedish custodian. - VPC is the only CSD in Sweden. - VPC, through contractual relationships with issuers, ensures total securities on VPC accounts equals total issued; for shares checks are made with PRV. - Assessment: Compliant - Comments: None ### Delivery versus Payment (DVP) and principal risk (Recommendation 7) - Recommendation: CSDs should eliminate principal risk by linking securities transfers to funds transfers to achieve DVP. - Description: - VPC rules: all settlements against payments are conducted on a DVP basis. - VPC operates a model 2 DVP system (securities gross; cash settled in RIX on a netting basis). DVP procedures eliminate principal risk: securities blocked in seller’s account prior to cash settlement and immediately delivered after cash settlement. - VPC also operates a model 1 DVP system (gross settlement of securities and gross settlement of cash in RIX). - VPC maintains relationships with major European CSDs but no DVP procedures used in these links: transfers occur free of payment and payment is separate. - Principal risk may be lower in the clearing chain, but internal book entries at clearing member/payment bank level may introduce principal risk; between end investor and broker market practices can create principal risk (clients often pay broker who pays clearing member before delivery). - Assessment: Compliant - Comments: None ### Finality, intraday finality and RTGS (Recommendation 8) - Recommendation: Final settlement should occur no later than the end of the settlement day; intraday or real time finality where necessary. - Description: - Two netting systems of VPC clear and settle at 12.45 hours; deferred settlement systems (T+2 or T+3). - RTGS settlement system provides intraday finality but is operated manually and hardly used. - Existing netting system does not require collateral to cover positions and saves liquidity, reducing incentive for RTGS transactions. - Riksbank does not use RTGS for monetary operations and collateralizing intraday credit; standing facilities use pre-pledged collateral. - Pledging of collateral is possible continuously during the day. Same-day repo settlement not used frequently; interbank money market is not secured. - VPC does not receive provisional transfers via links with other CSDs. - Assessment: Compliant - Comments: - Present risk arbitrage means no business case for RTGS transactions. - Counterparty risk in inter-bank market is significant and should be reduced to avoid contagion. - Recommend investigating incentives to collateralize interbank loans and implement adequate risk management measures in netting schemes to broaden business case for fully automated RTGS. ### Risk controls for net settlement systems and intraday credit (Recommendation 9) - Recommendation: CSDs that extend intraday credit or operate net settlement systems should institute risk controls (collateral requirements and limits) to ensure timely settlement if largest payer fails. - Description: - VPC is not party to transactions, does not extend intraday/overnight credit, and does not offer securities lending facilities. Overdrafts in securities accounts not allowed. - Both netting schemes operated by VPC are unprotected against a participant failure. - Guarantee Clearing: a payment bank settling cash leg for other clearing members must guarantee payments of its client clearing members; bank can set limits for guarantees per client clearing member; VPC monitors limits and asks for additional guarantees if exceeded. If payment bank refuses additional guarantee, clearing is unwound and underlying transactions of failing clearing member are cancelled. - Money Market Clearing: no such limits/guarantees exist. Clearing member/payment bank is not responsible for obligations of its clients with clearing member status, either for delivery of securities or payment. For indirect participants a clearing member/payment bank is not obligated to fulfill delivery obligations. Default results in cancellation or unwinding. - Current structure: 10 clearing member/payment banks of which 4 settle for 39 other clearing members; large concentration in one bank. 720 indirect participants with large part clients of same bank. - No risk management measures to cover market risk of a failing clearing member or indirect participant; no liquidity arrangements to ensure timely settlement. - Failure handling: negative security positions lead to cancellation of underlying transactions during the morning on settlement day; if cash obligations cannot be fulfilled by 12.45 the clearing is unwound. Market pressure to conduct repo transactions to solve liquidity problems exists but no formal obligation to lend. - Estimates of market risk amounts and peaks in cash positions of largest participant are not available. - VPC requested and received a note from assessor on risks in netting systems and methods to deal with risks. - Assessment: Not compliant - Comments / Recommended actions: - VPC should provide regulators with figures clarifying market risk in both netting schemes and liquidity risk if largest cash obligor fails. Calculations should be based on stress conditions and assumptions about maximum market price moves; include total open positions (transactions during three market days plus normal deferred settlements). - Implement risk management measures on short notice in Equities clearing and Money market clearing to cover market risk in positions. - Implement liquidity arrangements enabling timely settlement even if the participant with largest cash position fails. - Reduce securities-side liquidity risk by making clearing members in Money market responsible for delivery obligations of their clients (clearing member-status and indirect participants); similar responsibility could be applied in Guarantee clearing for securities delivered by clearing member who settles cash leg via a payment bank. ### Cash settlement assets and concentration (Recommendation 10) - Recommendation: Assets used to settle ultimate obligations should carry little or no credit/liquidity risk; if central bank money not used, protect members from failure of cash settlement agent. - Description: - Cash leg settled through transfers on the books of the Riksbank (interbank transfers between ten payment banks in VPC clearing). - Large amount of transactions settled within the books of four payment banks who settle for other clearing members, market participants, foreign customers, etc. - Fund transfers in Euro can be made only within certain limits decided jointly by VPC and the Central Bank. - Assessment: Compliant - Comments: - Strong concentration of cash settlement via four major banks brings serious contagion risk. ### Operational risk, systems and contingency (Recommendation 11) - Recommendation: Identify and minimize operational risk; systems reliable, secure, scalable; contingency plans and backups for timely recovery. - Description: - Operational reliability and controls subject to VPC internal and external audits. - Adequate data management including backup and audit trails. - VPC has three independent operational sites (two operational centers and a back up robot); system synchronously mirrored between two sites. - Restart could take place within one hour. - Contingency plan available. - System availability of 99.99 percent in 2000. - Assessment: Compliant - Comments: None ### Custody protections and nominee accounts (Recommendation 12) - Recommendation: Entities holding securities in custody should protect customers’ securities against custodians’ creditors. - Description: - Financial institutions acting as custodians supervised by Finansinspectionen. - Customers’ assets protected by law against default of a custodian. - Customers may open direct accounts in VPC; if assets held via a custodian, custodian/nominee must open a nominee account in VPC. - To prevent comingling in nominee accounts, only customers’ assets can be booked. - Assessment: Compliant - Comments: None ### Governance of CSDs and CCPs (Recommendation 13) - Recommendation: Governance arrangements should fulfill public interest requirements and promote owners’ and users’ objectives. - Description: - VPC is a private limited company owned by four largest Swedish banks, each with 24.65 percent of shares; remaining 1.4 percent owned by 15 other banks and brokers. - Shareholders appoint 7 Board members; board members must be accepted by Finansinspektionen (fit and proper test). Two other Board members are employee representatives. - VPC overall objectives include acting as central link between issuer and investor (when at least one has Swedish domicile), ensuring traded/settled securities are in a system of high international class, meeting high international functionality and security requirements, developing activities promoting market functioning/transparency, and showing sufficient profitability for long-term development. - Minority shareholders/users can be involved at different levels to express opinions and interests. - Assessment: Partly Compliant - Comments: - In 1999 State sold its 50 percent share in VPC under condition that safety and systemic risk measures be taken. Owners have not changed clearing/settlement design and appear reluctant due to investment costs and consequences for custody services market where they play major role. - Raises question about VPC’s ability to manage governance conflicts of interest and account for public interest. - Oversight/supervision should pay more attention to public interest aspects and reduction of systemic risks to balance profitability, efficiency and safety. ### Participation criteria and access (Recommendation 14) - Recommendation: CSDs and CCPs should have objective and publicly disclosed criteria for participation permitting fair and open access. - Description: - VPC has different requirements for accountholders, nominees, clearing members and settlement banks. - No access criteria for indirect participants, although they represent risks. - In addition to capital requirements, checks on applicants’ knowledge, communication standards and operational systems are performed. - VPC rules and regulations contain explicit exit rules. - Access and exit criteria the same for Swedish and foreign participants; foreign customers require a legal opinion on VPC rules and Swedish law validity in applicant’s home country. - Assessment: Partly compliant - Comments: - Rules, regulations and capital requirements are not transparent; difficult to detect relation to risk and responsibility (e.g., differentiation between clearing members who clear only for themselves and those who clear for others). - Lack of criteria for indirect participants is unclear and increases system risk. ### Cost-effectiveness (Recommendation 15) - Recommendation: Securities settlement systems should be cost-effective while maintaining safe and secure operations. - Description: - System is efficient and cost recovering. - VPC monitors charges against other European CSDs. - A yearly survey among users to assess client satisfaction will be introduced. - Assessment: Compliant - Comments: None ### Communication standards (Recommendation 16) - Recommendation: Use/accommodate relevant international communication standards for cross-border settlement efficiency. - Description: - Normal communication based on proprietary domestic standard. - Possible to communicate via SWIFT using SWIFT standard message types; SWIFT standards used in cross-border communication. - Assessment: Compliant - Comments: None ### Disclosure of risks and costs (Recommendation 17) - Recommendation: Provide sufficient information for participants to identify and evaluate risks and costs of using CSD/CCP. - Description: - VPC published a disclosure framework based on several questionnaires: CPSS/IOSCO Disclosure framework for securities settlement systems, Depository questionnaire of Associations of Global Custodians and ISSA 2000 recommendation. - Disclosure framework under review; IMF mission received draft dated October 2001. - Assessment: Partly compliant - Comments: - Disclosure framework does not provide sufficient information on risks in VPC netting schedules and should explain these risks more explicitly. ### Regulation and oversight (Recommendation 18) - Recommendation: Securities settlement systems should be subject to transparent and effective regulation and oversight; central banks and securities regulators should cooperate. - Description: - Securities settlement systems supervised by FI and overseen by the Riksbank. - FI organization in a transitional period to focus supervision on marketplaces and market service providers; new supervisory methods being developed by project group. - Riksbank financial infrastructure division of Financial Stability Department charged with oversight of VPC. - Assessment: Partly compliant - Comments and recommended actions: - Supervision of VPC underdeveloped: no on-site inspections and no regular reporting of risk assessment to regulatory authority. - FI appears to lack necessary skills to understand broad risks in complex clearing/settlement systems at VPC and Stockholmbörsen. - Legal framework for supervision makes it difficult to take financial stability and public interest into account. No risk-based approach or sufficient attention to legal risk, risk management policy and operational risk in clearing and settlement. - Riksbank aware of systemic risk but lacks legal power to persuade VPC to change risk management design; has used moral suasion only. - Overlapping responsibilities make oversight structure non-transparent. - Recommended actions: - Reinstate regulatory powers of the Riksbank for oversight in the Sveriges Riksbank Act (parliament). - Develop explicit regulatory framework by FI and Riksbank taking into account legal requirements, financial stability aspects and international codes/standards; include fit and proper test for management, information requirements and overseer involvement in crises; publish the framework. - Develop explicit framework for cooperation, division of tasks and sharing of information in a published MOU. ### Links for cross-border settlement (Recommendation 19) - Recommendation: Design and operate cross-border links to reduce risks associated with cross-border settlement. - Description: - VPC only uses free-of-payment links. - Links are not heavily used and do not contain substantial risks. - Assessment: Compliant - Comments: None ### Summary observance of CPSS/IOSCO Recommendations (Table 12) - Assessment grade counts and recommendations: - COMPLIANT: 12 — Rec. 3, 4, 5, 6, 7, 8, 10, 11, 12, 15, 16 and 19 - Broadly compliant: 1 — Rec. 1 - Partly compliant: 5 — Rec. 2, 13, 14, 17 and 18 - Non compliant: 1 — Rec. 9 - Not applicable: 0 ### Recommended actions and authorities’ response (Table 13 — selected) - Legal foundation (Rec. 1): Scrutinize legal framework to make it more transparent, support existing market practices and strengthen custody sector position in European market. (government) - Understanding and management of risks (Rec. 4, 5, 9, 10, 17 and 19): - Provide regulators insight into risks in VPC netting schemes (VPC). - Implement adequate risk management measures in both netting schemes (VPC/regulators). - Reduce liquidity risk on securities side by introducing transparent responsibilities for clearing members who clear/settle for indirect participants (VPC). - Make netting scheme risks transparent for users by adapting disclosure framework (VPC). - Criteria for participation (Rec. 14): Reconsider participation of indirect Participants in Money Market Clearing (VPC/regulators). - Governance (Rec. 13): Give more attention in oversight/supervision to public objectives of VPC (regulators). - Regulation and oversight (Rec. 18): - Strengthen legal powers of Riksbank with respect to oversight (parliament). - Develop explicit oversight/supervision framework considering financial stability (Finansinspectionen/Riksbank). - Develop cooperation framework between Finansinspectionen and Riksbank for oversight (Finansinspectionen/Riksbank). *Source: _cr10131 - Section 2).* ### 96. Efficiency and practicality of the system (CP VIII). The Riksbank is of the opinion, ### _cr10131 - 96. Efficiency and practicality of the system (CP VIII). The Riksbank is of the opinion, ### Efficiency and practicality of the system - The Riksbank is of the opinion that in a small country like Sweden with highly concentrated banking sector it is not possible to charge enough to cover the cost, especially considering the cost to keep the security level high. - The payment sector contains large fixed costs and it is a service that includes elements of a collective good, which also has network externalities. - The burden-sharing between the participants and the society at large needs to be looked at with this in mind. ### Oversight and Central Banks responsibilities in applying the core principles - Both the Riksbank and Finansinspectionen share the view of the assessment that the cooperative arrangement between the Riksbank and Finansinspectionen for the oversight of payment systems and securities settlement systems needs to be formalized and made more transparent. - Both organizations have agreed to develop and publish a MOU about oversight-methodology on payment and securities settlement systems, the responsibility of the respective institutions and the cooperation arrangements between them. - Finansinspectionen will introduce a new supervisory approach for the oversight of payment and securities settlement systems, especially, with respect to VPC and Stockholmbörsen. - In 2002 the rules and regulations of VPC have been changed in such a way, that, as per October the first, indirect participants will no longer be allowed in the systems and the clearing member who has them as customer will be fully responsible for their obligations. - Also a new clearing and settlement model will be introduced to eliminate the existing unwinding procedure. *Source: _cr10131 - 96. Efficiency and practicality of the system (CP VIII). The Riksbank is of the opinion,* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10131.pdf_