1. SREP RISK MODEL – BION EXPERIENCE 2010/2011 dr Piotr Staszkiewicz* 1 Polish Financial Supervision Authority Financial Services, Licensing and Functional Supervision Department *DISCLAIMER The views expressed in this publication do not necessarily reflect the views of KNF

2. Agenda Overview of SREP Risk Model SREP 2010/2011 methodology Financial market evolution – SREP 2010/2011 results SREP 2011/2012 new methodology Communication with the firms Practical pieces of advice for SREP process 2

3. Overview of SREP Risk Model 3 SREP – an abbreviation for the Supervisory Review and Evaluation Process. The SREP is how supervisors assess the overall prudential risks of firm/group, covering inherent business risk, control factors and internal governance. The idea of SREP derives from a scoring method used by the banking sector. Then it was extended on the securities and insurance sector. BION-Polish acronim of SREP SREP OBJECTIVES comprehensive risk assessment compliance with: -legal regulations -prudential regulations identification of business activity misconduct risk management assessment © Polish Financial Supervision Authority. All rights reserved. Proprietary/Confidencial

4. Overview of SREP Risk Model 4 risk - management process = net risk SREP objective is to identify and assess crucial risks as well as improving risk management process. SREP can not be used instead of a risk management process (it is not an operational but a suprrvisory tool).

5. SREP 2010/2011 methodology 5 on-sitequality inspection rating rating has a range form (exception: on-site or a quality inspection, when rating is rounding off to the second decimal point) rating has a range form (exception: on-site or a quality inspection, when rating is rounding off to the second decimal point)

6. SREP 2010/2011 methodology 6 off-site presentation on-site quality inspection Frequency: at least ones in every 12 months Information sources: controls/inspections/presentation meetings/licence procedure/contact with management/financial reports analises/ongoing supervision/additional inquiries art. 88 Act on Trading in Financial Instruments § 4. 4. 1 Regulation on SREP of brokerage houses chapter 4 Act on Capital Market Supervision Form and frequency depend on: - firm’s importance and scale - financial and economic analysis - recent SREP rating monitoring

7. SREP 2010/2011 methodology 7 best worst 1 2 3 4 A firm, which in the whole assessed period, was operating in a stable way and had not got the slightest problem with fulfiling any legal requirement. Moreover, it delivered on time interim reports without any fault. There was also no additional anxiety about risk or risk management. A firm, which in the whole assessed period, was operating in a stable way and fulfilled legal requirements. Moreover, it delivered on time interim reports without any serious fault. Additional anxious issues have already been clarified. A firm, which in the whole assessed period, was generally operating in a stable way and fulfilled minimal legal requirements. Moreover, it delivered on time interim reports which contained few faults. Additional anxious issues were insignificant. A firm, which in the whole assessed period, sometimes behaved unstable and was not able to fulfill minimal legal requirements. Moreover, it delivered time interim reports with unexplained delay. Reports contained many faults and additional anxious issues.

8. 8 Financial market evolution–SREP 2010/2011 results The most serious risk on the market could be identified with: - operational risk - market risk - credit risk - liquidity risk - other prudential risks - ICAAP - profit From the beginning of the year 2010 the most significant imrovement in a risk management process have been noticed according to: - operational risk - market risk - credit risk - liquidity risk - other prudential risks - ICAAP - profit

9. 9 In 2011 the FSA identified new crucial risk sources: trading platforms own trading platforms leashold trading platforms offshore EU operational development legal risk according to regulations unity, implementation of Basel Committee provisions and practical prudential supervision Financial market evolution–SREP 2010/2011 results

10. SREP 2011/2012 new methodology 10 on-sitequality inspection rating technical meeting rating Technical meeting – a meeting with the FSA’s analyst to precisely define information inserted in a power point presantion. There is a possibility to directly rate a firm after the technical meeting. If not the whole SREP process is pursued.

11. 11 Questions’ quantity and quality: - adaptation to firms’ operational activity; - adaptation to firms’ scale; - modification of obscure questions (using a quastionnaire in the electronic system – Portal). SREP methodology modification according to the importance of risk: - time and cost savings; - focusing on risks which are crucial for the financial system. Best Practice Manual for SREP (especially dedicated to the fresh firms): - it explains the whole methodology and requirements to fulfill. SREP educational trainings (CEDUR). SREP 2011/2012 new methodology

12. Communication with the firms 12 Communication with the firms: rating assignment; weak points of the risk management identification (Action Plan); „Correction Plan” (inspection process). Undertaking of appropriate supervisory activities. Ongoing supervision for rating adequacy (possibility to change the rating if assumptions of risk management model fluctuate).

13. Practical pieces of advice for SREP process 13

14. Practical pieces of advice for SREP process 14