THE NEW FINANCIAL SUPERVISOR IN COLOMBIA Washington D.C. June 6, 2006

Index 1.Financial System main trends 2.Pre-merge financial scenario 3.New structure for financial supervision 4.The challenges today 5.The challenges tomorrow

Total Assets Under Surveillance Market Share Trend 95/05

Total Assets Under Surveillance: Main Participants

Fixed Income And Equity Daily Traded Volumes: 97-06

Trading Platforms Market Share: SEN: Central Bank wholesale government debt trading system. MEC: Stock Exchange retail fixed income and equity trading system opened to all financial sector market participants plus some large portfolio holders (government agencies). The market was demutualized as the unified Colombian Stock Exchange started operations in July 2001.

Forex Operations

Main Market Participants MEC + SEN

Stock Market Participants

USD - TES – IGBC Prices

Institutions, assets and daily traded volume by institutions

Main Financial Conglomerates Market Share

Index 1.Financial System main trends 2.Pre-merge financial scenario 3.New structure for financial supervision 4.The Challenges today 5.The Challenges tomorrow

Stable macroeconomic and political environmentStable macroeconomic and political environment Relevant institutional savings growthRelevant institutional savings growth New challenges for risk management among market participants, regulators and supervisorsNew challenges for risk management among market participants, regulators and supervisors Strong growth of fixed income and equity trade with important implications and demands on market conduct regulation and supervisionStrong growth of fixed income and equity trade with important implications and demands on market conduct regulation and supervision Market demutualizationMarket demutualization Basic market infrastructure development (Trading platforms, Central Depositories, Payment Systems, Centralized Asset Valuation)Basic market infrastructure development (Trading platforms, Central Depositories, Payment Systems, Centralized Asset Valuation) Pre-merge financial scenario

Finance Minister commitment to renew regulation and supervision for the Financial SectorFinance Minister commitment to renew regulation and supervision for the Financial Sector Need for consensus building among former Banking and Securities Superintendencies and Finance MinistryNeed for consensus building among former Banking and Securities Superintendencies and Finance Ministry Overall Governance of the Financial SectorOverall Governance of the Financial Sector –Policy definitions – Congress –Regulation – Finance Ministry – Supervision – Banking/Securities Superintendences

1.Different kinds of financial sector institutions perform similar activities. 2.Common activities exposed to common risks. 3.Financial System stability and consumer protection highly dependent on adequate and specialized risk management Pre-merge financial scenario

Index 1.Financial System main trends 2.Pre-merge financial scenario 3.New structure for financial supervision 4.The Challenges today 5.The Challenges tomorrow

Main Objectives Avoid/Eliminate regulatory arbitrage.Avoid/Eliminate regulatory arbitrage. Financial system stability.Financial system stability. Consumer protection.Consumer protection.

CORE SUPERVISORY STRUCTURE RESEARCH AND DEVELOPMENT SUPERVISORY METHODOLOGIES DESIGN / RISK ANALYSIS RESEARCH / MARKET ANALYSIS / INFO ADMINISTRATION REGULATORY COORDINATION FINANCIAL SYSTEM CONSUMER PROTECTION SECRETARY GENERAL AND ADMINISTRATION LEGAL AFFAIRS INFORMATION TECHNOLOGY SUPPORT AREAS REGULATIONREGULATION CUSTOMERCUSTOMER Value Chain

Core Supervisory Structure Relationship Matrix

SECRETARY GENERAL LEGAL AFFAIRS R&D JUDICIAL REPRESENTATION APPEALS SUPERVISION METHODOLOGIES DESIGN / RIKS ANALYSIS INFO ANALYSIS UNDER NORMATIVE COORDINATION UNDER DOCTRINE UNDER DIRECTORATE CONSUMER PROTECTION ADMINISTRATIVE AND FINANCIAL HUMANS RESOURCES I & T INFORMATION SYSTEMS UNDER OPERATIONS UNDER GROUP COORDINATION ADVISORY LEGAL ORIGIN COORDINATION FOR THE FINANCIAL SYSTEM FINANCIAL SUPERINTENDENT OF COLOMBIA DISCIPLINARY CONTROL INTERNAL AFFAIRS OVERALL MANAGEMENT CONSULTATIVE SECURITIES INTERMEDIAR IES AND OTHER AGENTS INSURANCE AND REINSURANCE AGENTS INSTITUTIONAL / PRUDENTIAL DEFINED BENEFIT / DEFINED CONTRIBUTION SYSTEMS CREDIT INSTITUTIONS CREDIT INSTITUTIONS FIDUCIARIES SUPERVISORY LEGAL INSURANCE AGENTS PENSION AND SEVERANCE FUNDS FIDUCIARY AGENTS, CREDIT INSTITUTIONS SECURITIES ISSUERS, PORTFOLIOS AND OTHER AGENTS INSURANCE TCHNICHAL RISKS INVESTMENT PORTFOLIO ACCESS TO MARKET SECURITIES ISSUERS SUPERVISORY SECURITIES INTERMEDIARIES/ SELF REGULATED AGENTS INFRAESTRUCTURE SUPPLIERS /MONEY EXCHANGE AGENTS LEGAL GLOBAL RISKS CREDIT RISK SUPERVISORY MONEY LAUNDERING PREVENTION/ CONTROL SUPERVISORY CREDIT RISK MARKET RISKS SUPERVISORY CONDUCT SUPERVISORY TECNOLOGY AND OPERATIONAL RISKS SUPERVISORY PROCESSES RISK CONGLOMERATES RISKS SUPERVISORY CORPORATE GOVERNANCE LEGAL CREDIT RISK SUPERVISORY MONEY LAUNDERING RISK MARKET RISK AND INTEGRITY OPERATIONAL RISK CONGLOMERATES RISK AND CORPORATE GOVERNANCE SFC Organizational Structure

GROUP COORDINATION ADVISORY LEGAL ORIGIN COORDINATION FOR THE FINANCIAL SYSTEM FINANCIAL SUPERINTENDENT DISCIPLINARY CONTROL INTERNAL CONTROL OVERALL MANAGEMENT CONSULTATIVE Present SFC Governance Structure EXTERNAL COMMITTEES MANAGERIAL COMMITTEES

External Committees Consultative: representatives of the financial sector associations (10)Consultative: representatives of the financial sector associations (10) Advisory: independent professional advisors (5)Advisory: independent professional advisors (5) Coordination for the Financial System:Coordination for the Financial System: –Finance Minister –Central Bank Governor –Fogafin Director –Financial Superintendent

The Committees are divided in: Overall Management 1. Management Committee 2. Human Resources Committee 3. Quality Assurance Committee Group Coordination 1. Core Supervisory Structure 2. Research and Development 3. Research and Development and core supervisory structure 4. Legal Control directors Legal Origin 1. Internal Control Committee 2. Conciliation and Judicial Defense Committee 3. New financial sector managers approval Committee 4. Purchases and Bids Committee Managerial Committees

SFC New Proposed Governance Structure Board of DirectorsBoard of Directors Fixed term and clearly defined appointment procedures for head of SFC.Fixed term and clearly defined appointment procedures for head of SFC. Accountability rulesAccountability rules Judicial protection regime for SupervisorsJudicial protection regime for Supervisors Strengthened administrative and budgetary independence.Strengthened administrative and budgetary independence. Supervision of competition practices and rules within the financial sector.Supervision of competition practices and rules within the financial sector.

Index 1.Financial System main trends 2.Pre-merge financial scenario 3.New structure for financial supervision 4.The Challenges today 5.The Challenges tomorrow

Main Challenges of Initial Phase Cohesion and motivation of the executive group, explanation and promotion of the new conceptual framework both within and outside SFCCohesion and motivation of the executive group, explanation and promotion of the new conceptual framework both within and outside SFC Active commitment of the SFC staff to the definition and development of particular objectives by areas.Active commitment of the SFC staff to the definition and development of particular objectives by areas. Assimilation of new functions, team-work and coordination among the new areas.Assimilation of new functions, team-work and coordination among the new areas. Financial System understanding of the SFC new structure, functions and responsibilities.Financial System understanding of the SFC new structure, functions and responsibilities.

The Challenges Today Full development of Law 964 of 2005 – Securities LawFull development of Law 964 of 2005 – Securities Law –Self-regulated organization for securities markets –Promotion of information disclosure. –Trading systems improvements –Organization of a fully developed futures market Adoption of international standards for prudential regulation.Adoption of international standards for prudential regulation. New supervision methodologies designNew supervision methodologies design ISO certification of supervision core processes.ISO certification of supervision core processes.

Index 1.Financial System main trends 2.Pre-merge financial scenario 3.New structure for financial supervision 4.The challenges today 5.The challenges tomorrow

Consolidation of the new risk based supervision model.Consolidation of the new risk based supervision model. Widespread adoption of Corporate Governance standards, both within SFC and supervised institutions.Widespread adoption of Corporate Governance standards, both within SFC and supervised institutions. Consolidated supervision of conglomerates.Consolidated supervision of conglomerates. Development of long term approach to issues related with pension funds and annuities.Development of long term approach to issues related with pension funds and annuities. Strengthened regulation for portfolio management and market conducts.Strengthened regulation for portfolio management and market conducts. Enhanced information disclosure.Enhanced information disclosure. The Challenges Tomorrow

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