Priorities of SESC’s Oversight- in relation to Financial Administration Policy-

Kiyotaka Sasaki
Director General
Securities and Exchange
Surveillance Commission (SESC)IBA Presentation (Nov. 2015)1

Three pillars ofFinancial Oversight
1.

2.

3.

Oversight of regulated entities;
licensing/registration, off- and on-sitemonitoring, enforcement
Market oversight; surveillance ofmarket participants and transactions,enforcement
Integrated oversight both domestic
and global; globalization of regulated
entities and transactions
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SESC’s role for Three Pillars
1.

2.

3.

Oversight of regulated entities; on-site
inspection of investment banks, broker
dealers and other firms
Market oversight; surveillance formarket integrity and enforcement
actions against market misconducts
Integrated oversight both domestic
and global; global firms and crossborder transactions
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SESC’s priorities:
Market integrity
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Leveraging SESC’s cross-functions
Surveillance of cross-border transactions
Timely and effective enforcement actions
Root cause analysis
Enhanced market discipline
Response to IT
Fair disclosure by listed companies
Enhanced audit quality
Risk-based on-site inspections of regulated entities
Increased accountability of SESCIBA Presentation (Nov. 2015)

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Leveraging cross-functions
SESC’s power- market surveillance- inspection of regulated entities- inspection of market misconducts(insider dealings, marketmanipulations)- inspection of financial fraud and false
financial disclosures- criminal investigation

IBA Presentation (Nov. 2015)

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Leveraging cross-functions
Closer information sharing across functions
within SESC
 Multiple use of information for otherfunctions/cases within SESC
 Deeper and horizontal analysis of results ofeach inspection/investigation
 Identification of common trends and issues formarket integrity
 Contribution to efforts by other stakeholders
for market integrity; rule making by FSA,
preventive measures by SROs

IBA Presentation (Nov. 2015)6

Surveillance ofcross-border transactions
On-going monitoring of cross-bordertransactions
 Enhanced cooperation with stock
exchanges and broker dealers Enhanced cooperation with foreign
oversight bodies; information exchange,
joint inspection,
 Increased cases of enforcement actions
against investors overseas

IBA Presentation (Nov. 2015)7

Timely and effective
enforcement actions
Timely inspections and investigations
 Increased use of administrative
monetary penalty inspection; inparticular, for false financial disclosures
 Effective use of criminal investigations
against serious misconducts
 Enhanced cooperation with otherbodies; SROs, criminal authorities,
foreign regulators


IBA Presentation (Nov. 2015)8

Root cause analysis
SESC’s focus on non-compliance and failure inrisk management
 Increased SESC’s attention to root cause
analysis of non-compliance/risk management;
prevent recurrence of problems
 Root causes- business models- incentives (HR, salaries/bonuses)- culture- tone at the top …
IBA Presentation (Nov. 2015)

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Enhanced market discipline
Importance of preventive measures vs. expost actions by SESC
 Preventive measures by stakeholders formarket integrity- SROs; rule making and monitoring- Securities firms and broker dealers; 3 Lines ofdefense- PIEs; enhanced corporate governance- Audit firms; enhanced audit quality- Law firms and other gatekeepers- Investors
IBA Presentation (Nov. 2015)10Enhanced market discipline
Raising awareness about SESC’soversight; increased visibility andexposures of SESC
 Outreach to stakeholders formarket integrity;
horizontal/industry-wide issues
and implications identified by
SESC’s inspections/investigations
IBA Presentation (Nov. 2015)11

Response to IT
Market surveillance; HFT
 Inspections/investigations; digitalforensics
 FinTech and AI (artificial intelligence);- impact to business models of regulatedfirms- impact to transactions and theirsurveillanceIBA Presentation (Nov. 2015)12

Fair disclosures
by Listed Companies
A group of problematic companies (so-called`Box companies`): continuous monitoring,enforcement actions, delisting from stockexchanges
 Majority of listed companies; new monitoring
approach- Macro analysis; impact by economic changes- Industry specific and thematic reviews
 Root cause analysis; corporate governance,
Board of Directors, Audit Committees
IBA Presentation (Nov. 2015)13

Enhanced audit quality
Heightened expectation for audit firms
as gatekeeper for market integrity
 Issues of audit firms for fair disclosuresand effective corporate governance ofPIEs
 Closer cooperation with Certified Public
Accountants and Audit Oversight Board(CPAAOB), FSA

IBA Presentation (Nov. 2015)

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Risk-based on-site inspections ofregulated entities
Integration of off-site monitoring by
FSA and on-site inspection by SESC as
seamless process More risk-based approach based on
effective risk assessment off-site Developing monitoring policy for eachfirm and group/category of entities; GSIFIs, med- and small-sized firms,Internet Brokers…
IBA Presentation (Nov. 2015)

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Risk-based on-site inspections ofregulated entities
Continuous monitoring; more off-sitethan on-site Horizontal/thematic reviews
 Review of three Lines of Defense- 1st Line; business- 2nd Line; risk management andcompliance- 3rd Line; internal audit

IBA Presentation (Nov. 2015)16

Focus of monitoringof regulated entities
Effectiveness of each three line ofdefense Business models and theirchanges/sustainability
 Governance; effectiveness of board ofdirectors and audit committees
 Root cause analysis; business model,
governance, HR, incentives, culture

IBA Presentation (Nov. 2015)17

Issues for IBA members;
Local governance and accountability
Business models and changes(downsizing, deleveraging); beyond
control by local management
 Local governance and accountability
 Local compliance Risk/compliance culture Oversight by global management
 Balance between global/matrix
management and local management

IBA Presentation (Nov. 2015)18

Issues for IBA members
Outsourcing outside Japan IT governance；cybersecurity
 Surveillance of transactions ofmarket misconducts
 Risk management; Compliance,liquidity risk, market risk,operational risk

IBA Presentation (Nov. 2015)19

Approach for IBA members
FSA (Inspection and SupervisoryDepartment)-SESC joint/coordinatedmonitoring, including risk-assessment
 Continuous monitoring; more off-site,
frequent meetings with three lines ofdefense On-site monitoring/inspection withfocused issues/areas


IBA Presentation (Nov. 2015)20

Expectation for IBA members
Frequent meetings with local andglobal/regional management for threelines of defense In particular, meetings with CEO, CFO,COO, CRO, CIO, CCO, members of Board
and Audit Committee, and Chief
Internal Auditor

IBA Presentation (Nov. 2015)21

Increased accountability of SESC
External communications; more
information on backgrounds anddetails of cases of marketmisconducts Outreach to stakeholders; lectures,speeches, publications
 SESC’s first meeting in Osaka (Nov2015)
IBA Presentation (Nov. 2015)22

Thank you

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