,*,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,C,L,I,F,F,O,R,D,C,H,A,N,C,E,Legal Risk,ISDA/PRMIA Risk Management Seminar,Dermot Turing,London-2/1430864/01,Legal Risk Latest Developments,Basel II,With a footnote on business continuity,Securities Certainty Giovannini,The new Basel Framework,Operational risk charge,Definition of operational risk,the risk of loss resulting from inadequate or failed internal processes,people,and systems or from external events,includes legal risk but excludes strategic and reputational risk,but?presumably not credit or market risk,Computing the charge,Basic Indicator Approach,15%average gross income over 3 years,Standardised Approach,percentage*average gross income over 3 years,summed over each of 8 business lines,regulatory requirements apply,Advanced Management Approach,bespoke model,subject to qualifying criteria,regulatory requirements apply,The AMA in practice,Using P&L,Relying on historical loss data,reliability,problems you have cured,Getting credit for safe operational risk management,“business environment and control factors can be taken into account if relevant,quantifiable,and sensitive to change,and can be audited/validated,Insurance for up to 20%of the capital charge,The main operational risk areas,Business continuity,Outsourcing,Employment practices,Collateral,collateral management failures count as credit risk for capital but must be captured in operational risk statistics,Mergers,IT resources,and legal risk?,Legal Risk under Basel II,What is legal risk?,The risk that one is unable to enforce rights against,or rely on obligations incurred by,a counterparty in the event of a default or a dispute.,The risk that contracts are not legally enforceable or documented correctly(an old Basel/IOSCO definition),Financial Markets Law Committee,IBA Legal Risk Working Party,Reducing“legal risk for Basel,Difficulties with documentation and rights,not just documentation:ownership;non-contractual liabilities,no agreement;no documentation;counterparty misled;terms do not work in circumstances;supervening events;unreliable legal environment;etc,Historical loss data,Making risk reduction more quantitative,investigating what“legal sign-off means,legal opinions from external counsel,Integration of legal with the business line,Business Continuity,What is the meaning of the counterpartys failure to perform?,A common framework for giving grace in times of disruption?,should exchanges or regulators mandate a period of standstill?,bank holidays,force majeure clauses,definition of“business day,1430864,Securities Account Certainty,What the Collateral Directive does,Abolishes formalities for taking and enforcing collateral,Provides legal certainty for outright transfer collateral and netting,What the Hague(PRIMA)Convention does,Determines which legal system answers“ownership questions about securities held with an intermediary,What neither of them does,Answers the“ownership questions,Ownership issues with securities,Upper tier attachment,For example,Italian investor holds a portfolio of bonds via a London account with a US custodian.Investor pledges the contents of his account to Bank.Investor goes bankrupt.Can his liquidator seize the Italian securities on the basis that the pledge was not perfected in Italy?,Certification/Is it a“security,Effect of reconciliation mismatch between intermediaries,Set-off between investor and issuer,Giovannini proposals,When securities are held with an intermediary,the accounts of the intermediary establish ownership of the securities,Nature and extent of ownership rights,Protection from insolvency of intermediary,Debits and credits are definitive,Priority of competing interests,Shortfall protection,