18 July, 2017
Study Group on International Financial Regulation
Japan Securities Research institute
Opinion Paper by the Study Group on International Financial Regulation“Issues for International Financial Regulation and International Standards”

I. Purpose of the Study Group on International Financial Regulation
The Study Group was established for the purpose of monitoring developments
in recent international financial regulatory developments, enabling relevant
parties in Japan to appropriately express their opinion in the process of
introducing various regulations, and supporting Japanese financial institutions
to respond smoothly to the new regulatory environment.
Accordingly, the following result of discussions was compiled after
conducting exchanges of views in seven meetings from November 2016 to July
2017, between experts in business categories with expertise across a broad
range of financial regulation.
The Study Group plans to widely disseminate abroad this paper in English inorder to make recommendations on the future course of global financial
regulation to financial regulatory and supervisory authorities across countries.
Going forward, the Study Group intends to continue a follow-up of this Opinion
Paper as necessary.
We would like to express our sincere appreciation to not only the Members of
this Study Group but also researchers, etc. in many fields who have helped us
greatly in preparing this report.
II. Reform of International Financial Regulation after the Financial Crisis: The
Current Status and Assessment
After almost ten years from the outbreak of the Global Financial Crisis as
symbolized by the so-called Lehman Shock, it is said that reform of international
regulation has moved from the design stage to the implementation stage.
Nonetheless, the design stage is still partially continuing, as, for example, final
agreement on Basel III -- scheduled for the end of last year has been postponed,
1and uncertainties remain in the details of national regulations. On the other hand,practical issues and requests for various revisions concerning the basic direction
and the numerous international standards which have been agreed on at the G20
Summit since 2009, have been presented.
Accordingly, there are currently many problems in terms of transparency,
comparability, fairness of competitive conditions, etc. in national regulation,
which call for improvement.
It is also unclear what impact Brexit and the review of financial regulation
started by the new U.S. administration will have; there is considerable uncertainty
over what impact these developments could have on international financial
regulation.
Moreover, in some jurisdictions, we are seeing moves to apply stricter (orlooser)regulation

thaninternational

standards

byintroducing

jurisdiction-specific regulation not embodied in those standards, such as toring-fence capital and liquidity within the respective jurisdictions.
Due to such developments, national regulations have become inconsistent,
causing the fragmentation of regulation, which is in turn heightening the risk offragmenting financial markets.
In the Study Group meetings, there were reports from participants incross-border transactions, and financial institutions and market infrastructure
operators active in cross-border businesses, that excessive cost increases and
impediments to transactions are being caused by failing to sufficiently ensure
consistencyofcross-borderregulation

andsupervision,

or

to

avoid

contradictions, duplications, and gaps between national regulations.
Moreover, more than one Study Group member who engages in financial
businesses pointed out that a part of the highly diverse and cumulative layers offinancial regulations that have been added are impairing or restricting the smoothfunctioning of financial and capital markets.
With the progress made in international financial regulatory reform, work has
started at the FSB (Financial Stability Board) to assess the effects of regulatory
reform, but it is still at the stage of developing methodologies and is also
basically limited to an ex-post assessment.
However, if regulations is indeed having such negative effects, one should
identify and correct the regulation causing them as soon as possible. Moreover, if
any negative effects of regulations are expected, one should consider correcting
them before their implementation as much as possible.
2

In previous reforms of international financial regulation, the priority was toprevent the recurrence of financial crises and secure financial stability. However,if the post-regulatory reform financial system cannot sufficiently fulfill its
essential financial functions, the reform cannot be said to have achieved its
original goal.
If markets shrink due to regulatory reform, or are fragmented by jurisdiction,risks in financial systems may decrease; however, the functions of financial
markets to sustain corporate activities and support economic growth will be
impaired, thereby rendering the financial regulatory reforms unable to achieve
their original purposes.
In particular, upon entry into the implementation stage of international financial
regulatory reform, members of the Study Group reported that the front lines offinancial businesses have been experiencing many “unintended effects” notexpected in advance. Among those reports, we cannot ignore the point thatvarious costs borne by market participants are increasing rapidly, when
considering the proper functioning of capital markets.
Moreover, since many regulations have been developed and establishedsimultaneously in a relatively short period of time, there are, as mentioned above,some contradictions, duplications, and gaps. Having just started on assessing
the cumulative and collective effects of the numerous regulations, such work has
not yet led to actual revisions.
Furthermore, partly due to the hurried development of new regulations and theinsufficient resources of the relevant international organizations such as the FSB
and BCBS (Basel Committee on Banking Supervision,) there are criticisms that
their discussions lack sufficient transparency, or that they are not fully
accountable. It has been pointed out that there are many cases in which drafts are
not fully presented in the development process, or that it is not clear how far the
results of public comments have been reflected in revisions to the original draft.
Such issues are also pointed out in the report of the U.S. Treasury Department to
the President published in June of this year, showing that the transparency of thestandard-setting process, its accountability, and the provision of sufficient
opportunities for expressing stakeholder opinions are important issues not only
for Japan but also for all countries concerned.
The current framework of international regulatory reform, which is led by the
G20/FSB, and for which the development of specific international standards is3

delegated to standard-setting bodies such as the BCBS, does not have a legal
basis, such as international treaties. This could have been the cause of
substantial differences in the content and implementation timing of international
standards in relevant countries. Accordingly, it may be worthwhile to consider amechanism for developing and implementing standards with a clearer legal basis
in the future, as well as reconfirming the commitment of the G20 towards reform.
As stated above, it is true that efforts for international financial regulatory
reform have shown substantial progress after nearly ten years from the outbreakof the global financial crisis. On the other hand, upon entry into the full
implementation stage, it appears to be the appropriate timing to assess again theentirety of the achievements and the effects in order to make any necessary
revisions.
Our attention is currently drawn to the fact that the new U.S. administration has
announced a policy of relaxing financial regulation. We can support the overall
direction of reviewing excessive regulations to avoid impairing financial
intermediary functions to support economic growth, but, on the other hand, we
will need to pay close attention as such regulatory reviews may generate newcosts or harmful side-effects.
In addition to the developments above, we have recently been witnessing
protectionist assertions to review free trade agreements on trade in goods andservices including financial services, or to announce a reduction in current
account deficits as a national policy in some countries. As a result of thosemovements, in the area of financial regulation, there are also concerns about
possible damages being caused to the observance of such principles as market
access, national treatment, and most-favored-nation treatment which have beenrecognized by free trade agreements and economic partnership agreements up tonow.
Precisely because of such circumstances, it is required for internationalorganizations which are responsible for establishing standards for international
financial regulation, as well as national regulatory and supervisory authorities, tolisten carefully with humility to the views of a broad range of stakeholders
including those in this report, and conduct future work carefully, revising existing
regulations as necessary.
All regulatory and supervisory authorities should be highly conscious ofsharing the responsibility for achieving the ultimate purpose of regulation; i.e.,
4building financial systems and financial markets which contribute to soundeconomic growth and sustainable economic development.
III. The Ideal Design of International Financial Regulation
Regarding the ideal design of regulation, it is never easy to extract common
principles thereof, as there are many elements and interests to consider, and it isgreatly influenced by the actual political and economic situation of each country
However, the following points should be considered as the criteria for ideal
regulation in the design stage of international financial regulation.
These principles could first be compiled and enhanced as the “Ten Principles
of International Financial Regulation”, for example, and then agreed upon andadopted by fora leading the reform of international financial regulation such as
the G20 and FSB.
i.

It should be repeatedly recognized that the ultimate goal of regulation is
to contribute to sound economic growth and sustainable economic
development, and confirmed that the stability of financial systems andthe securing of the soundness of financial institutions are merely themeans to achieve those goals. Regulatory reform should not place
excessive emphasis on avoiding risks so as to hamper proper risk-taking
which is necessary to provide finance for growth.

ii.

In order to ensure consistency among different jurisdictions, national
financial regulation should follow international standards to the extent
possible. However, while international standards are regarded asminimum standards, the addition of nation-specific regulations and theintroduction of exceptional treatment should be resisted, so as to prevent
fragmentation of regulation among countries. On the other hand, if there
are significant differences in the current situations of national financial
systems, or in the historical background and business practices ofnational markets, we should be fully aware that application of uniform
regulations (one-size-fits-all) will not be appropriate.

iii.

Market access, national treatment, and most-favored-nation treatment,
which have been recognized in free trade agreements or economic
partnership agreements should not be impeded. (Not effectively
complying with such obligations under the agreements in the name of theprudential carve-out should be avoided.)5

iv.

Regulation should be proportionate to risks based on the principle ofproportionality, while consistency between the purpose and thesubstance of regulation, and the necessity of the regulation (i.e. theinability to achieve the regulatory goal by other means) should be
proven.

v.

Any negative impact on market efficiency should be minimized, while thefairness and transparency of regulation should be ensured. While faircompetitive conditions are important, they should be judged on the basisof substantial outcomes rather than formal requirements.

vi.

One should not pursue the development of detailed rules only, but pursue
an optimal combination of principles-based and rules-based approaches,making use of the advantages of the principles-based approach.

vii.

One should aim at an optimal combination of entity-based regulation andactivities-based regulation. (Identical regulation should be applied to
identical business activities, regardless of the performing entities.

viii.

Counter-cyclical macro-prudential regulation should be introduced andmade use of, while pro-cyclicality of regulation should be eliminated asmuch as possible.

ix.

Restrictions on free economic activity by ex-ante regulation should be
kept to a minimum, and make use of rigorous ex-post regulation on
violations as they occur; an optimal combination of the two approaches
should be sought.

x.

Alwaysconsidertheenforceabilityofregulation;international

coordination and cooperation between enforcing authorities should be
strengthened. Furthermore, supervision of financial groups on aconsolidated basis should be emphasized through strengthened
cooperation among authorities.
In addition to the above principles concerning the purpose, substance andimplementation of regulations, improvements are also deemed to be necessary
for proceeding with international financial regulatory reform as mentioned above,
including the strengthening of governance in the process of developing
international standards, and the clarification of accountability.
Further, it is pointed out that the reforms so far may have overemphasized thestrengthening of rules as a whole, possibly lacking the perspective of
encouraging through more intensive supervision voluntary risk management of6

financial institutions and improving incentives through enhancement ofgovernance or review of corporate culture.
With the precondition of avoiding excessive intervention by government indaily activities of financial institutions, it is advisable for authorities to emphasize
supervision with greater focus on substance rather than formal compliance withrules. Furthermore, appropriate supervision can also play a substantial role infacilitating forward-looking responses and reviews of management focused noton the parts but on the entirety of the business. While useful, stress tests shouldbe treated with care in order to respect the autonomy of financial institutions to
the greatest extent, and in a manner not to effectively introduce regulation basedon supervisory authority.
IV. Recommendations on Individual Regulations(Note) The following is a list of opinions expressed by members, etc. of the Study
Group. Not all members necessarily agree with all of the opinions.
1. Basel Regulations
・Consideration should be given to the conflict between the liquidity standards
and the leverage ratio standard.
・Consideration should be given to a decline in market liquidity caused by theleverage ratio standard.
・In order to encourage risk-sensitivity of banks’ business operations andfurther enhancement in risk management, it is important to retain risk
sensitivity in risk asset measurement. Risk sensitivity in risk asset
measurement should be allowed to the maximum extent so long as it isconsidered reasonable to use internal models.
・Even if the approach using internal models needs to be reviewed when risk
asset calculation by using excessively complex models could cause
substantial discrepancies between individual financial institutions, it should
be noted that the standardized approach will not fundamentally resolve suchdiscrepancies in risk assets and could introduce a new regulatory distortion.
・ Regarding the review of the credit valuation adjustment (CVA) in the
finalization process of Basel III, since there are many problems which require
substantial time to be resolved associated with the introduction of the CVA
based on market valuation in many jurisdictions except the US etc., including7

the fact that there is only a small number of traded issues and low liquidity in
CDS markets, consideration must be given to providing sufficient transition
periods upon implementation.
・In order to mitigate regulatory uncertainties, the finalization of Basel III shouldbe agreed upon as soon as possible, after making necessary adjustments toearlier drafts. Since final agreement has been delayed by more than six months
from the initial plan, the relevant authorities should endeavor to reduce
uncertainties by ensuring transparency of the process as much as possible.
・In implementing new regulation, given that the levels of capital and liquidity attarget financial institutions have already been substantially strengthened,sufficiently long transition periods should be provided so that preparatory
moves by the covered institutions, in particular, will not have negative effects
on lending for growth finance etc.
・Commitments should be reconfirmed at the Basel Committee, etc. to enhancethe effectiveness and normative powers of the agreed-upon international
standards, so that the substance and timing of implementation of the new
Basel rules to be finalized will not differ substantially across major
jurisdictions.
・A follow-up of the implementation status of the new regulations should be
conducted early on, using a format which is more simple and which would will
clarify differences among countries. Unimplemented rules should also becompared and assessed as soon as the substance is finalized.
2. Issue of the so-called “Too-big-to-fail” systemically important financial
institutions (SIFIs)
・First, while the previous methods for identifying SIFIs have not depended
solely on the indicators of size of the financial institutions, and a a method toassess systemic importance based on various indicators has been adopted,
there is room for improvement in the methodology. In particular the
methodologies for non-banks are not yet clear.
・It is argued, mainly in the U.S., that identification is not necessary fornon-bank SIFIs in the first place; on the other hand, it cannot be ignored fromthe perspective of ensuring fair competitive conditions between banks andnon-banks. Going forward, improvements should be made in the methodology
for identifying systemic importance to adhere to “risk-proportionate regulationand supervision” (Principle of proportionality). For example, it is pointed out
8that the methodology for identifying SIFIs does not duly reflect the reduction insystemic risk due to progress in derivative market reforms etc.
・Regulatory responses in the U.S. and Europe to this issue focus on primarily
conducting orderly resolution without taxpayer bailout, mainly relying on
regulation and supervision which place significant burden on financial
institutions and financial markets, including the imposition of capitalsurcharges, etc., the development of recovery and resolution plans, businessrestructuring and liquidation, and the issuance of liabilities eligible for bail-in.
・While these measures may be necessary and appropriate for giant, globally
active financial institutions in the U.S. and Europe, applying one-size-fits-all
regulation and supervision is sometimes not appropriate when national
financial systems and financial markets differ, and business models differ
greatly even among major financial institutions. Especially in Japan, it should
be noted that during the financial crisis from the end of 1990s to the start of the
21st century, the crisis was contained by recapitalizing financial institutions
using public funds and conducting orderly resolution, in order to avoid
systemic risk.
・Moreover, regarding the issue of imposing a temporary suspension (stay) of
early termination rights for derivatives, it is still largely unknown whether
effective orderly resolution can be carried out, while there exist substantial
differences in national legal systems for resolution.
・Accordingly, in order to deal with this issue, and bearing in mind that global
harmonization of legal systems for resolution is not achieved easily, it should
first be made a precondition to develop safety nets, including a robust deposit
insurance system in accordance with the actual situation in individual
countries.
・In particular, given that in a financial crisis, a loss of confidence in thecreditworthiness of some financial institutions lead to a loss of confidence inthe entire financial system (i.e. contagion occurs), it should not be denied thatdecisive public intervention using public funds may be effective depending on
the situation. Depending on the situation individual countries are in, it should
therefore be confirmed that recapitalization of financial institutions and/or thefull protection of liabilities including deposits using public funds are
sometimes necessary, with the necessary precondition that strict measures toprevent moral hazard and cost sharing by the relevant industries, etc. areprovided for.
9

・If loss is incurred by such temporary injection of public funds, a systemshould be developed ex ante for relevant industries to bear the loss in advanceor ex post, by making use of frameworks such as deposit insurance fundcontributions or special charges.
・A framework should be secured to smoothly provide liquidity necessary toenable an orderly resolution to the financial institution in question. In doing so,in the event a loss is incurred, the relevant industries should bear the loss
under the system.
・The FSB’s Key Attributes establishes to a significant extent an internationallystandardized orderly resolution framework, their one-size-fits-all and rigid
application should be avoided.
・In particular, the development of a bail-in framework should aim for a flexible
framework since the potential market size for bail-in bonds differs greatly
among jurisdictions, there is a risk that contagion can be exacerbated by such
instruments depending on the situation, and it is difficult to gain fullunderstanding of depositors and small creditors, while such a framework has
the merit of preventing moral hazard and introducing governance by creditors.
・In the U.S. and Europe, there have been moves to require the establishmentof intermediate parent entities for foreign banking groups. Such a framework
would not only impede the optimal allocation of capital from the viewpoint ofbusiness, but also would make it a challenge in ensuring consistent design
and implementation of the resolution plans that are formulated by the homeresolution authorities for G-SIBs (global systemically important banking
groups) in countries such as Japan that adopts the SPE (single-point-of-entry)
resolution model. In order to realize regulation and supervision which enable
an effective orderly resolution, coordination, understanding, and cooperation
among national authorities are decisive elements, and they should be further
promoted. Resolution plans have not been generally made public for G-SIBs
up to now, but at least the main elements of the resolution process should beclarified and made more transparent to the extent possible.
(Insurance)
・The International Association of Insurance Supervisors (IAIS) has beendeveloping international regulatory standards for insurers by classifying theminto three categories: global systemically important insurers (G-SIIs),internationally active insurance groups (IAIGs) and other insurance groups. In
this work to date, there appears to be a generally-held view that the systemic10risk of insurers are deemed to be lower than that of banks of equivalent size,
but, in the work to develop a common supervisory framework for IAIGs(Comframe), there is a move to impose rules equivalent to those for G-SIIs on
IAIGs. Such an approach could run the risk of imposing excessive regulationon IAIGs compared to the risks they pose.
・Regarding international regulatory standards on insurers, there is also amove to have common international standards for the corporate governance of
insurers, and risk management systems, etc. Since insurance businesses havestrong local characteristics compared to banking businesses, a certain degreeof discretion should be allowed to the management of insurance companies,
and therefore, excessively uniform regulation should not be imposed.
3. Regulation of Over-the-Counter (OTC) Derivatives(Regulation of margin)
・Consideration should be made of possible negative side-effects and market
fragmentation due to incentives created by margin regulation, as well as
differences in the substance and the timing in implementing national rules. In
particular, if there are differences in the scope of covered products or that oftransactions, they should be aligned across jurisdictions as much as possible.
・It is regrettable that although the relevant authorities once agreed on thesubstance and timing of implementation of the new rules at the start of theirdevelopment stage, in the end the substance and timing of implementation bynational authorities diverged substantially in the subsequent implementation
process.
・For such changes of regulation, which have major impacts on cross-bordertransactions, communication between authorities and market participants
should be made much closer. While it was relatively smooth in Japan,
concerns of market participants cannot be said to have fully dissipated, whichcalls for further effort going forward.
(Mandatory central clearing)・In the application of the so-called FMI principles (PFMIs, Principles for
Financial Market Infrastructures), consideration should be made of differencesin the capability of market infrastructures such as national CCPs (Central
Counterparties) and differences in the actual market conditions. Furthermore,consideration should be made so that regulation would enhance the capabilityof market infrastructures.
11

・It is pointed out that capital charges on collateralized assets related to OTC
derivative transactions and applicable liquidity requirements in Basel III havebecome disincentives to central clearing of OTC derivatives at CCPs. As
regards the leverage ratio requirement, there is still an ongoing argument as towhether initial margin for derivative transactions should have the effect of
reducing exposures. While there has been discussion of practical solutions tosuch issues at the Basel Committee and International Organization of
Securities Commissions (IOSCO), etc., it is reported that for banks etc.
providing clearing services for clients (client clearing providers) the regulatoryburden as whole is particularly onerous in practice. This issue should be
examined further in light of actual evidence, and adjustments should be madeif necessary.
(Cross-border derivative transactions)・ Ideally, even when national rules are not the same, it would not be
problematic if the outcome of the implementation of the rules were similar or
equivalent, and authorities could rely on the rules of other countries.
Nevertheless, at present, extra-territorial application has come to the forefront.
If the rules of more than one jurisdiction are applicable to a single transaction,
an authority should, as a matter of principle, rely on the other authority’s
regulation and supervision as much as possible, and a relationship enabling
coordination and cooperation among regulatory and supervisory authorities
should be developed. The need for developing a relationship for coordinationand cooperation among regulatory and supervisory authorities is not limited toderivative transactions; it would apply to any other financial market
transaction.
(Trade reporting obligation)
・ At present, since the format and scope, etc. of the trade reporting
requirements differ significantly from country to country, the burden on market
participants is very heavy in terms of system costs etc. for compiling, andsubmitting data etc. On the other hand, there are concerns that the submitted
data are not sufficiently made use of by CCPs and authorities, which requires
further efforts for improvement.
4. Regulation applicable to Asset Management Businesses
・Appropriate regulation would need to be crafted for shadow banking entities
and activities, especially for those in the asset management business, in12accordance with not only their diverse nature, but also with the functions they
perform and the degree of risks they pose to financial systems.
・While regulated funds such as investment trusts, etc. are discussed under“shadow banking” as part of the asset management business in the context ofinternational financial regulatory reform, such funds -- excluding MMFs forwhich regulation has already been strengthened -- cannot be said to havecaused the instability of financial systems in the first place, and their risks are
small.
・Moreover, since, apart from a few exceptions, investors bear the risks in theasset management business, regulation should remain minimal to the extent
that distributors and investment management companies, etc. are offering
financial products in accordance with their fiduciary duties.
・Accordingly, negative side-effects could be caused if such businesses areclassified as shadow banking entities performing the same functions asfinancial institutions such as banks and are applied the same rules as banks,etc. .
・ In markets like Japan where further growth of the asset managementbusiness is anticipated going forward, attention should be paid so that new
regulation will not impede such growth and undermine the efficiency ofmarkets.
・ While not being an internationally agreed-upon rule, regulation aimed
primarily for investor protection such as those requirements to unbundle
research fees, which could have a significant impact on the asset managementbusiness, would need to be developed carefully, taking into full account theeffects of the rule on business activities outside the jurisdiction in which therules are directly applicable.
5. Regulation of Insurance
・It is important for the development of international capital standards to beflexible, given that the business environment for insurers differ significantly
from country to country. In particular, regarding the treatment of economic
value assessment of liabilities for which the basic thinking of national
authorities differ significantly even among major countries, the standards
should provide for a range of options for the time being, rather than uniformly
applying

ruled-based

international

convergence of national regulations.
13

standards,

and

aim

for

gradual・As with the opinion of this Study Group on Basel III for banks, regarding thecapital requirements of insurers, they should aim for risk-based regulatory
systems, and tools such as restrictions on leverage, applied regardless of themagnitude of risks, should not be used as an expedient.
・Risk characteristics of private insurance products differ greatly by country
and by region, depending on the social security systems and public healthcare
and medical insurance systems in respective jurisdictions, or on differences indamages caused by natural disasters, etc. Accordingly, regarding the global
Insurance Capital Standard (ICS) currently under consideration by the IAIS,
aiming for completion in 2019, it should also be appropriately designed to take
into account the diversity of risk characteristics when setting the standards forrisk measurement, calibration, capital structure, etc.
・In Japan which is exposed to various natural disasters and are witnessing a
rapidly aging society with fewer children, private insurance is playing animportant role by providing long-term protection that supplements social
security systems and public medical insurance systems, etc. In thedevelopment of the ICS, consideration should be given so as not to impair the
insurers’ ability to provide natural disaster damage relief and long-term
protection.

In

particular,

the

ICS

shouldsubstantively

reflectthecharacteristics of insurers such as the long-term nature of insurance policies
in the assessment of insurance risks and the mark-to-market valuation ofultra-long-term liabilities. For example, the introduction of the long-term
forward rate (LTFR) in the valuation of liabilities under ICS can be considered
an appropriate step.
・One should also note that international capital standards are being developed
following the evolution of enterprise risk management (ERM). For example,
there is also a view that the introduction of the LTFR above would seem todeviate from a pure economic-value-based assessment of liabilities. Therefore,
due attention is needed so that the ICS does not impede progress in ERM of
insurers.
・In the midst of developing ERM systems at insurance companies, a minimum
capital standard on an economic-value-basis could become an additional
constraint on business management of companies; in such a case, the statedminimum capital standard should not be the sole yardstick for authorities tojudge the firm’s soundness. In such a case, the soundness of insurers should
not be assessed solely by economic-value-based indicators but should be
14

judged on a comprehensive basis by also considering qualitative elements
including the respective companies’ actual risk-taking behavior, the quality ofrisk management systems, and its medium- to long-term business outlook.
・ These points are deemed extremely important, as economic value
assessment tends to increase the volatility of net assets, especially for life
insurance which provides long-term guarantees.
・ Accordingly, when introducing economic-value-based indicators, it isworthwhile to consider such options as starting their application as soft
standards such as monitoring indicators, and subsequently refine themthrough close communication between supervisory authorities and insurers.
Moreover,regardingthedisclosureoffirm-specificfiguresof

economic-value-based capital by companies, sufficient and careful thought
should be given to their content and frequency.
・More discussion is needed on the ideal formulation of medium to longer-term
economic-value-based capital standards, as to whether they should beconstraints on the firm’s internal risk management, or should be as aligned as
possible with the economic-value-based ERM of firms. If one pursues theformer approach, capital standards based on economic value could become
constraints on the firm’s risk management and capital allocation. If one takes
the latter approach, there can be an issue as to whether it would be truly
possible to construct comparable regulation across countries and firms,
bearing in mind that insurance risk has strong local characteristics reflecting
each country’s risk profile and social security systems etc.
・In considering international capital standards for insurance businesses, close
attention needs to be paid to unintended effects, as compared to banking andsecurity businesses for which the standards have been further advanced, as
there seems to be a larger unknown concerning the effects of regulation on
financial markets and the real economy.
6. Regulatory Reform in the U.S.
・In the U.S., there were analyses finding that the DF Act (Dodd-Frank WallStreet Reform and Consumer Protection Act), especially the Volker Rule, etc.,
constituted excessive regulation, or had unintended negative effects, and inaccordance with the Presidential Order of February this year, the U.S Treasury
Department has been making recommendations from June in successiveorder.
15

・Such developments are welcome as an initiative to reconfirm the original
purpose of financial regulatory reform.
・When regulation is reviewed as a result of an exercise, thorough in-depth
discussion should be conducted for making necessary adjustments so that theachievements of the previous reforms will not be lost, and, in particular, that
financial systems will not be unintentionally destabilized or weakened.
・In the process, moreover, sufficient opportunities for expressing opinions
should be provided to foreign financial institutions and authorities.
・Not only the U.S. but also other countries should not apply their national rules
as they are on an extra-territorial basis, and should proceed with mutualdeference to each other’s regulation and supervision. For that purpose,
authorities should expeditiously promote the granting of substitutedcompliance to reduce regulatory uncertainty as much as possible.
・Furthermore, in the currently ongoing review for relaxing U.S. financial
regulation, discriminatory treatment of foreign financial institutions andmarkets should not be made, and fair competitive conditions should be firmly
maintained and national treatment guaranteed.
・On the other hand, regarding the regulation of Foreign Banking Organizations(FBOs) in the U.S., the current regulation requiring FBOs to establish anintermediate holding company on the grounds of smooth resolution and equal
competition conditions with domestic banks should be replaced withregulations relying on home country authorities, giving more confidence tosupervision by home country authorities.
・In reviewing regulation which could affect foreign financial institutions andmarkets, maximum effort should be made to ensure that the views of foreign
stakeholders are fully heard of, and to bring about win-win results in relation toother countries.
7. European Regulation
・Equivalence assessments should be promptly conducted under MIFIDII (theSecond Markets in Financial Instruments Directive) and MIFIR (Markets in
Financial Instruments Regulation) to minimize legal uncertainty and opacity.
Moreover, sufficient consideration should be given to negative side effects
which could be caused by the new rules such as the research unbundlingrequirement.
・ The current complex and excessively time-consuming equivalence
16

assessment process should be reviewed expeditiously to reduce, as much as
possible, regulatory uncertainty.
・The draft set of revisions to EU banking regulation issued by the European
Commission contains many proposals which are relaxed versions ofinternational agreements on capital and liquidity of banks. On the other hand,
it contains proposals not incorporated in any international agreement such as
the requirement to establish Intermediate Parent Undertakings (IPU). Such
proposals could encourage regulatory fragmentation by inducing similar
initiatives in other jurisdictions, and, as a result, damage confidence in andeffectiveness of the agreed international standards.
・When introducing regulation which might affect foreign financial institutions
and markets, maximum consideration should be made to ensure that theopinions of foreign stakeholders are fully heard, and win-win results areachieved in relation to other countries.
・Regarding trade issues with the U.K. related to Brexit and equivalence
assessment negotiations with other countries, The EU authorities should deal
with trade issues with the U.K. and equivalence assessments of othercountries as separate issues, and deal with the latter as quickly as possible. In
particular, it should be noted that postponing the equivalence assessments ofthird countries until the conclusion of the Brexit negotiations will not only
hamper the activities in the EU of financial institutions from these countries
but also negatively affect the activities of EU financial institutions.
8. BREXIT
・Regrettably, it has become difficult to foresee how the results of the Brexit
negotiations will affect financial institutions and markets of third countries
including Japan, due to the unclear political situation in the U.K.
・In the area of financial services, regulatory arbitrage can occur relatively
easily with globalization. Under such circumstances, if an unclear situation is
prolonged or an agreement cannot be reached in negotiations, it may cause
unexpected turmoil in financial markets or even instability of the global
financial system.
・The European and U.K. authorities should make utmost effort in the Brexit
negotiation process in order not to damage the functions of the financial
system in supporting sustainable economic growth, and not to prolong theuncertainty for a long period of time. As stated above, moreover, regarding17

trade issues with the U.K. related to Brexit and equivalence assessment
negotiations with other countries, they should be dealt with as separate issues
and as quickly as possible.
9. Financial Benchmark Regulation
・Financial benchmark regulation is required to be both consistent globally andflexible according to the actual situation of individual countries.
・While financial benchmarks should be calculated by eliminating fraudulent
operations and arbitrary use of data, etc., it should be recognized that theycannot exist independently from the history or market practices of individual
financial markets, such as those for the currency on which the benchmark isbased, and that they should be designed and operationalized by incorporating
practical solutions for avoiding negative impact on the functioning of themarkets.
・Attention should be paid to the risk that a system which increases regulatoryburden such as excessive costs on reference financial institutions providing
data for the calculation of financial benchmarks, could bring about market
dislocations.
・ Especially in EU where new regulations are to be introduced on the
cross-border use of financial benchmarks, their restrictive effects oncompetition should be watched carefully, and a designing of systems whichdevelops competitive markets is desired.
10. Response to New Risks
・ Regulation and supervision should be constantly reviewed in order to
respond promptly and flexibly to new risks for financial stability that
constantly emerge, including threats of cybercrimes and terrorism, emergenceof new financial businesses and services due to the development of Fintech,
and financial sector responses to environmental issues.
・In doing so, approaches to facilitate risk-based measures should be adopted,
taking into account the differences in national laws and regulations as well as
market practices related to financial systems. Moreover, regarding initiatives
such as the regulatory sandbox which many authorities are beginning to adopt,it seems worthwhile to consider global guidelines to maintain a level playing
field and prevent de facto competition towards excessive deregulation.

18

V. Recommendations for International Financial Regulation
1. Development and Management of International Standards
Standards agreed upon at international standard-setting bodies such as theBasel Committee are not based on international treaties, and are therefore notlegally binding. Nevertheless, international standards have exerted de facto
enforcement power. That is because, for the implementation of international
standards, national governments and central banks have expressed strong
commitments and implemented them, with close cooperation and collaboration.
On the other hand, although rules were formulated and agreed for the financial
service sector under the WTO’s GATS (General Agreement on Trade in Services)in 1997, they cannot be said to be fully functioning as the standards for financial
regulation because regulation, etc. for maintaining the integrity and stability of
the financial system were carved-out from their application (the so-called
prudential carve-out).
As already stated, in major global financial markets today, we are witnessing a
successive flow of introductions of or proposals for new regulations that diverge
from international standards, which can be characterized as ‘regulatory
fragmentation’; if the unifying power of international standards is notstrengthened, such developments may only be accelerated. (See the Attached“Examples of Fragmentation of Financial Regulations” for reference.)
International standards such as those in the area of financial regulation preventthe distortion of markets due to regulatory arbitrage or evasive market behavior,and perform excellent functions in securing transparency, comparability andfairness in competitive conditions, all of which are beneficial to all participating
countries (i.e. a win-win).
In the future, those international standards may be re-positioned astreaty-based standards with a stronger normative powers, although it will benecessary to devise a framework in which, rather than putting all the details into
the treaties, basic standards pursuant to the principle-based approach are givena legal foundation, while the relevant authorities retain their ability to flexibly
revise the detailed rules upon agreement at the respective standard-setting
bodies.
In any case, emphasizing fairness in competitive conditions, transparency andcomparability of international standards should not result in the flooding ofdetailed rules-based standards. Rather, it will be required to pursue an optimal
19combination of principles-based and rules-based approaches, taking advantageof the merits of a principles-based approach.
One possible suggestion is that there could be a framework in whichinternational standards are given a certain legal basis, including an international
treaty and qualitative standards are developed pursuant to a principles-based
approach; then, building on this legal foundation, the respective standard-setting
bodies can develop detailed rules upon agreement, if necessary; and finally thesubstance of the agreement can be flexibly applied by countries according totheir actual market and other situations. As stated below, it seems that the rules
on financial cooperation currently stipulated in bilateral economic partnershipagreements can be referred to in considering such a framework.
In any case, in the rapidly changing landscape of global financial systems andmarkets, such international standards will require constant review, necessitatinga framework which can enable expeditious review of regulation, if there is any
regulation that does not correspond to the changing realties.
2. Enhancement of the Functions, and Reinforcement of Transparency andAccountability of International Standard Setting Bodies.
International standard-setting bodies, including the FSB, BCBS, IOSCO, andIAIS, have been endeavoring to enhance transparency and accountability byfrequent use of public comments, strengthened dialogues with stakeholders, etc.
However, there is still substantial room for improvement.
In order to develop international financial regulation withlong-term

perspectives, more appropriate systems are required which are commensuratewith the roles of global organizations, such as improving the functions of therelevant international organizations, having a more balanced staff composition,and strengthening their financial statuses.
Needless to say, while providing for an international legal basis for thoseinternational organizations will not solve all such problems, measures should beconsidered going forward to improve the situation.
3. Towards a More Consistent Regulatory System
Members of the Study Group, especially those engaged in financial businesses,
pointed out that the current system of international financial regulation consistsof a patchwork of regulations crafted for the respective sectors and sub-sectors,
and lack an overall vision, consistency, and integrity.
20

For example, with regard to Basel regulation, in addition to the capital
adequacy standards , it is undergoing further tightening of existing standards
and introduction of new ones in a number of areas including the leverage ratio
and liquidity requirements, while sufficient analysis has not been made of the
cumulative effects and interactions of such rules. It was reported that these rules
have various effects on liquidity in the markets, etc. in which banks are
participating, and affect transactions in tandem with market regulations on OTC
derivatives, etc.
Furthermore, regarding the disclosure requirement and the trade reporting
requirement to authorities, it was also pointed out that each requirement or eachauthority requires disclosure and reporting of similar information withinconsistencies in the content and in duplication, resulting in significant costs tofinancial institutions.
While the necessity of regulation is understandable for each individual item, if
they are applied without mutually considering their effects, not only duplicationof regulation would occur, but also conflicts and contradictions may result. Suchcombined effects of regulation on the functioning of financial institutions andmarkets cannot be said to have been fully taken into consideration.
In particular, it was pointed out at the Study Group that the simultaneous
introduction of too many regulations may have increased the costs for financial
institutions, so much so as to cause problems in their ability to conduct theirnormal operations. As a consequence, the effectiveness of individual rules could
have been undermined, or incentives could have mutually canceled out.
Furthermore, concerns were reported for cases in which the original purpose of
the regulation has been detached with reality, and seemingly unnecessary
regulations are introduced through inertia or executing authorities facedifficulties in implementation because regulations had not been sufficiently
examined in the design phase. Given such situations, an assessment of theeffects of regulation (as stated below) should be not only be conducted ex post
(i.e. after implementation), as planned by the FSB, but also an ex-ante
assessment to confirm that the advantages of introducing the regulation will
sufficiently exceed the disadvantages.
Even if the purpose and the means of an individual regulations is legitimate, thecumulative outcomes and impacts in combination with the effects of otherregulations may become excessive, resulting in the inconsistencies among
regulations distorting markets, or generating the wrong incentives. Regulatory21

arbitrage by relevant parties sometimes makes the originally appropriate
regulation ineffective, making it inappropriate. In pursuing an ideal set of
regulations, such aspects should be fully considered.
Regarding the above issues, since they are beyond what regulatory authorities
have the time to analyze while dealing with their day-to-day work, it is hoped thatan international examination system is developed which is capable of studying
such issues by gathering global expertise, and outsourcing the analysis toresearch institutes, etc. for example, with specific mandates.
4. Allowing Substituted Compliance and Mutual Deference on Each Other’s
Regulation by Equivalence Assessment.
At present, the regulations of the home and host countries are applied
simultaneously and affecting each other in complex ways, thereby increasing
regulatory costs for financial institutions and markets, with fragmentation
occurring in some markets.
As for the future, it is desirable if national regulations converge globally, withinternational common standards consistently applied in individual countries andregions. On the other hand, it is not appropriate to apply one-size-fits-all rules
globally, given that financial systems and market activities retain theidiosyncratic features of individual countries and regions.
Accordingly, regarding overseas activities and cross-border transactions offinancial

institutions,ratherthan

applying

national

regulations

onanextra-territorial basis, application of other countries’ regulation and supervision
should be mutually allowed through granting substituted compliance status or bymaking a determination of equivalence, thereby ensuring the efficiency andconsistency of regulation and supervision through international cooperation.
The process for allowing substituted compliance and determining equivalence
has been unsatisfactory in that they were slow to progress despite requiring
substantial input in terms of time and effort, and often resulted in conditional
equivalence determinations. Further efforts are required to improve the efficiencyof such processes in order to remove uncertainty.
Moreover, as long as such assessments aim to compare how effective
prudential regulation on financial institutions and market regulation are inindividual jurisdictions, the criteria for assessment should be how much theobjectives of regulation has been effectively achieved in terms of outcome, andshould not focus on the formal aspects of the rules nor allow political elements to22

affect the assessment process.
To deal with the above issues, for the processes of allowing substitutedcompliance and determining equivalence, for example, procedures could also be
standardized and made impartial by international standards, and a standard
processing period can be established. Moreover, for the introduction of new
regulation, it could be agreed among countries in the provisions of the “Financial
Cooperation” chapters of economic partnership agreements, etc. that a processof allowing substituted compliance or making equivalence assessments beestablished without exception, with the necessary procedures to be finished
before the implementation of the new regulation.
As can be discerned from the above, in order to avoid a reduction of liquidityand fragmentation of markets, it is extremely important to remove uncertainty inthe markets and to secure enough time for financial institutions and market
participants to make sufficient preparations.
It may be useful in some cases to determine equivalence on a temporary basis
before making a final determination in order to allow businesses and transactions
to maintain the current status for a certain period of time. However, even whensuch temporary equivalence is determined, it cannot be denied that uncertainties
remain, due to the temporary nature of the determination. Preferably, a systemshould be constructed in such a way that all procedures for the equivalence
determination should be completed before the implementation of new regulation.
If a decision on equivalence is not made before the implementation of the new
regulation, the counterparties of derivative transactions, for example, need toconclude collateral agreements to cover the highest common standard ofregulations in individual jurisdictions and develop infrastructures for exchanging
collateral on that basis. As a result, not only must they bear extra costs, but they
will no longer be able to fully benefit from an equivalence determination even if afavorable decision is reached later.
5. Toward Further Strengthening of Cooperation among National Regulation andSupervision
Going forward, with some hindsight on how the previous regulatory reforms
have been carried out, rather than trying to hastily agree upon and implement
individual parts of regulatory reforms in a piecemeal fashion, better regulatory
systems should be aimed for, taking time to discuss the overall vision. Especiallyin the rapidly changing financial world, financial regulations themselves, if not
23

constantly reviewed, could become the cause of the next financial crisis.
Moreover, it must be pointed out that there are weak points in the current
reform process in which, once the substance and the timing of implementation ofregulations have been agreed upon (without any legal basis,) the entire
implementation process is left to individual countries and jurisdictions, andverification of implementation is conducted afterwards by peer review, with theresults of the peer review published much later.
In economic partnership agreements (EPAs) between countries, there alreadyexist provisions pertaining to regulatory cooperation in finance or to financial
dialogue, such as in the bilateral agreements between Japan and Singapore aswell as between Japan and Switzerland. Regarding the Japan-EU agreement,
negotiations are currently being accelerated.
Along with individual countries participating in discussions at internationalfora, such international treaties could be a useful method for jurisdictions
mutually having significant impact on each other to strengthen commitments
towards cooperation in this manner.
Recently, we have been witnessing increasing trends in which individual
jurisdictions introduce stricter or looser regulations than international standards,
or impose requirements to ring fence capital and liquidity within the jurisdiction.
Such trends could fragment regulatory frameworks and markets among
jurisdictions, reduce competition, and increase costs for the users of financial
services. Going forward, rather than allowing individual jurisdictions to introduce
their own regulations to secure financial stability, measures for financial stability
should be taken through closer cooperation of authorities of individual
jurisdictions based on international standards.
Accordingly, the current reform process should be replaced in the future by amore robust process with a legal basis, which will further reduce differences inthe substance and timing of implementation in individual countries andjurisdictions. On the other hand, it also needs to be a flexible process in which
individual standard-setting bodies are given clear mandates for details of
regulations and are able to develop standards expeditiously.
Moreover, until the transition to such a system, for the time being,commitments at the G20 should be reconfirmed for compliance with thesubstance and timing of implementing international standards as much as
possible.
In order to avoid differences in substance among national regulations and24divergence of timing in the implementation process of regulations, there could beinstitutional

flexibility

introducedfor

individual

countries

topostpone

implementation even just before the implementation due date, or to adjust thesubstance. It is desirable to incorporate such flexibility in the implementation
stage of regulation beforehand, during the design stage of the financial
regulation.
6. Promotion of Impact Analysis and Assessment of the Effects of Regulation
In the face of fundamental questions being raised over the system ofinternational financial regulation, the Study Group has re-acknowledged theimportance of assessing and analyzing the impact of various regulations on
financial businesses and market functions, in pursuing the ideal set of
regulations. Regarding the assessment and analysis on the impact of regulations,
the FSB has started work to establish a framework for assessing the effects ofregulatory reform under the direction of G20, and the Study Group exchanged
views on how such work should be carried forward.
In doing so, the Study Group was especially concerned about the following: (i)while assessment and analysis of impacts of individual regulations havefrequently been conducted by the Basel Committee and other bodies in the formof QISs (Quantitative Impact Studies), etc., comprehensive analysis has not been
conducted to see what impacts these regulations as a whole have on theeconomy and finance; and (ii) whereas the focus of the FSB and other work is
mainly ex-post analysis conducted after the introduction of new regulation,
ex-ante verification before the introduction of the regulation may be more
important as financial institutions and markets react in anticipation of theintroduction of the new regulation.
(Necessity of comprehensive analysis)
In the reform up to now of international financial regulations led by the G20 and
FSB, given the urgency of preventing a recurrence of financial crises, numerous
regulations were developed and implemented successively to deal with individual
risks which could cause financial crisis in a relatively short period of time. As aresult, although QISs were frequently conducted by the Basel Committee andother bodies in regard to individual regulations, comprehensive assessment andanalysis have not been conducted to assess the cumulative or combined effects
from the almost simultaneous implementation of these various regulations.
Comprehensive assessment of the cumulative and combined effects of such25

regulations is not easy to conduct in the process of successive implementationof numerous regulations, and it is almost impossible to quantitatively analyze
their effects on the economies and financial markets separately from the effects
of other factors. However, even if that is the case, it is not appropriate to abandon
such a perspective, and attempts to identify a number of regulations which are
expected to have major effects on financial activities and verify the impacts of
their introduction should always be made.
(Necessity of ex-ante verification)
In the Study Group, it was pointed out that when the impact of regulation isassessed, forward-looking perspectives should be emphasized. For example, as
pointed out by the Federal Reserve Bank of New York Staff Report in December
2016, even if regulations are not a problem when markets are calm, they could
cause problems when markets are under stress. In order to foresee these issues
and link them to regulatory reviews, it is necessary to conduct simulations
beforehand on the impact the introduction of regulation would have on themacro-economy and on the financial and capital markets over all using sometechniques.
Of course, it is not easy to analyze the impact of regulations beforehand in thismanner. In the Study Group, it was also reported that extracting only the impactof regulation from the dynamic developments in finance and the economy entails
difficulties even for regulations already implemented, and there is only limited
data which can be used for such analyses. For ex-ante assessment, quantitative
analysis is even more difficult.
However, it was reported in the Study Group that even unimplemented
regulations are beginning to have effects as financial institutions change their
behaviors in preparation for their introduction. If such effects are expected,
standard-setting bodies should minimize the possibility of the authorities failuresin regulation by having sufficient dialogue with various stakeholders, including
financial institutions and market participants, to fully discuss whether there isany alternative measure in the process of developing new regulatory standards.
VI. Conclusion
The Study Group has made a unique endeavor to try to analyze and assessinternational financial regulations across the various types of financial services
businesses from the perspective of the private sector. Going forward, it is hoped
26

that such discussions will take place further in all countries to widely disseminate
the contents of discussions to authorities and to various stakeholders, leading toconstructive recommendations on future regulation and supervision.

(Reference) Examples of Fragmentation of Financial Regulation[Example 1] Current European Capital Requirements Regulation/Directive(CRR/CRD IV)


The Capital Requirements Regulation/Directive (CRR/CRD IV) currently
applied in the EU have some contents which are more relaxed thaninternational agreement (Basel Accord) such as lighter risk weights for
exposures to SMEs, and exempting the recording of CVA risk assets intransactions with business corporations.

[Example 2] Draft Revised European Capital Requirements Regulation/Directive(CRR II/CRD V)

For the revision of CRR/CRD IV currently proposed by EC, more relaxed
contents than the international agreement (Basel Accord) are proposed,
including further preferential treatments of exposures to SMEs, and theexclusion of the initial margin for derivatives to be settled through CCP fromthe denominator exposure of the leverage ratio. Moreover, there are someitems for which a different implementation schedule from the international
agreement is assumed, including the interest rate risk of bank accounts.

[Example 3] Draft Revised European Capital Requirements Regulation/Directive(CRR II/CRD V) (Requirement to establish “Intermediate Parent Undertaking(IPU)”)
The draft revision (Article 21(b) of CRD) makes a unique EU proposal torequire the establishment of an Intermediate Parent Undertaking (IPU) in EU
in the case of G-SIBs or if assets in the EU exceed 30 billion euros with two or
more subsidiaries in the EU. This raises concerns that it could encourage thering-fencing of capital and liquidity, and the division of regulatory
frameworks and markets in individual jurisdictions.

[Example 4] Prudential Regulation in the U.S.


In the U.S., a layered approach is adopted, imposing different regulations
according to the size of the financial institution. In particular, for large-scalefinancial institutions, considerably stricter regulations than the international
agreement (Basel Accord) are imposed, including G-SIB surcharges andleverage ratios, making them classic examples of so-called Gold Plating.

27

[Example 5] Prudential Regulation for Foreign Banks in the U.S.


Large-scale Foreign Banking Organizations (FBOs) are required to establish
an Intermediate Holding Company (IHC). As with [Example 3], this also raises
concerns that it could encourage the ring-fencing of capital and liquidity, anddivision of regulatory frameworks and markets in individual jurisdictions.

[Example 6] Internal Total Loss-Absorbing Capacity (TLAC) Regulation


The FSB is in the process of formulating international agreement on thedetails of regulatory requirements of internal TLAC, currently conducting
consultations to clarify the regulatory requirements of internal TLAC.
Moreover, the FSB’s “The Key Attributes of Effective Resolution Regimes for
Financial Institutions” (the “Key Attributes”) also stipulates the importanceof cooperation among home and host authorities in G-SIB resolutions.
Nevertheless, some host countries including the U.S. are unilaterally
establishing and proposing strict methods for identifying major subsidiaries
or required levels of internal TLAC.

[Example 7] Regulation on Clearing Margin

There are differences in the substance of regulations and the timing of
introducing them. For example, regarding the variation margin, only four
jurisdictions -- Japan, the U.S., Canada, and Europe -- started application on
the internationally agreed date of March 1, 2017. There are substantial
differences in the status of introduction; some countries such as Singapore,
Hong Kong, and Australia have established a six-month transition period,
while China and many emerging countries have yet to formulate draft
regulations.

[Example 8] Speech by Mr. Rudin, Superintendent of the Canadian Office of theSuperintendent of Financial Institutions (OSFI) (April 7, 2017)
http://www.osfi-bsif.gc.ca/Eng/Docs/jr20170406.pdf
Superintendent Rudin of the Canadian Office of the Superintendentof Financial Institutions (OSFI) suggested withdrawal from theinternational agreement (Basel Accord), saying that “Negotiations for
the Basel III review have stalled, and if discussions at the BaselCommittee on Banking Supervision (BCBS) do not restart in the near
future, OSFI will put forward a Canada-specific plan for improving
our capital regime.”(Reference) Remarks by Key Persons Expressing Concerns about Fragmentation(1) Speech by Mr. Carney, Chair of FSB (April 20, 2017)
http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech976.pdf
There are nascent risks that, if unchecked, could threaten the28

progress of G20 regulatory reforms. These risks include the outcomeof Brexit negotiations, the need to complete Basel III revision, andthe importance of finishing the job of ending “too big to fail (TBTF).”
The global financial system is now at a crossroads.


If the fragmentation of regulations hardens, domestic authorities
could impose local requirements on domestic entities of foreignbanks. If that happens, in a world where many banks are highlyinterconnected, inefficiencies would be generated.

However, there is another path. This builds on the completion of
introducing regulations and cooperation among national authorities.
The combination of international agreements and trust among
national authorities can create a new global financial system.

(2) Speech by Mr. Coen, Secretary General of the Basel Committee (May 25,
2017)
http://www.bis.org/speeches/sp170525.pdf
Global minimum standards are important. If minimum standards are
not agreed upon and implemented, there is a risk that (i) jurisdictions
will engage in a race to the bottom in terms of regulatory standards,and (ii) there will be less reliance on the global rules, leading tofragmentation. Both create inefficiencies, complexity, and risks andare therefore undesirable for both banks and regulators. That is why
it is so important to agree upon and implement harmonized global
standards for global business.

Jurisdictions are free to adopt a standard that exceeds the Baselminimum standards. The practice is often referred to as “goldplating.” On the other hand, a deviation below the minimum standard
may be unsafe or unsound as it dilutes the global standard to whichinternationally active banks are held. Over the long term, a departurefrom the minimum Basel standards can damage the bank’s viability,
reduce confidence in the banking system and have adverse effects
on economic development and growth.

29

● List of Members, etc. of “Study Group on International Financial Regulation”

Chairperson

Masamichi Kono

(Executive Fellow, Japan Securities
Research Institute)Member

Masao Aratani(Senior Managing Executive Officer,
Meiji Yasuda Life Insurance
Company)(as above)

Koichi Ishikura(Director, Japan Securities Dealers
Association)(as above)

Hiroyuki Inose(Executive Managing Director andChief Risk Officer (CRO), Daiwa
Securities, Co., Ltd.)(as above)

Hideharu Iwamoto(Managing Director, Japanese
Bankers Association)(as above)

Yoshio Okubo(Vice Chairman, Japan Investment
Trust Association)(as above)

Takeshi Okazaki(General Manager Planning Division,
Japan Investment Advisers
Association; replaced by Member
Yamada in April 2017)(as above)

Toshihiro Yamada(General Manager LegalDivision,
Japan Investment Advisers
Association)(as above)

Shigeki Kurihara(Executive Officer, General Managerof the Research Department, Aflac
Japan)(as above)

Kei Kodachi(Senior Analyst, Research
Department, Nomura Institute of
Capital Markets Research)(as above)

Naoyuki Goto

(Senior Manager, International
Bankers Association of Japan)(as above)

Tomohiro Koyanagi
30(Director of the International

Department, the Life Insurance
Association of Japan)(as above)

Jinichi Sakamoto(Director and General Manager,
Corporate Planning Department, The
General Insurance Association ofJapan)(as above)

Yuri Sasaki(Professor, Department of
Economics, Meiji Gakuin University)(as above)

Masahiko Tamamura(Executive Officer, Tokio Marine
Holdings, Inc.; Executive Officer,
Tokio Marine & Nichido Fire
Insurance Co., Ltd.)(as above)

Naoki Tamura(Executive Officer, Sumitomo Mitsui
Banking Corporation; replaced by
Member Nakashima in April 2017)(as above)

Toru Nakashima(Executive Officer, Mitsui Sumitomo
Banking Corporation)(as above)

Iwao Nagashima(Trust Companies Association ofJapan (Senior Managing Executive
Officer, Mitsubishi UFJ Trust andBanking Corporation))(as above)

Yuji Nakata(Executive Managing Director Group
Entity Structure & Co-CRO, Nomura
Holdings, Inc.)(as above)

Takeshi Hirano(Executive Officer, Japan Exchange
Grope, Inc.; replaced by Member
Futagi in May 2017)(as above)

Satoshi Futagi(Executive Officer, Japan Exchange
Grope, Inc.)(as above)

Koji Fujiwara(Member of the Board of Directors &Managing Executive Officer, Mizuho
Financial Group; Executive
Managing Director, Mizuho Bank;31

replaced by Member Iida in April
2017)(as above)

Koichi Iida

(Member of the Board of Directors &Managing Executive Officer, Mizuho
Financial Group; Executive
Managing Director, Mizuho Bank)(as above)

Tomoko Morita(Head of Tokyo Office, ISDA)(as above)

Masamichi Yasuda(Group Chief Risk Officer, Mitsubishi
UFJ Financial Group, Inc.; Senior
Managing Director, CRO, CCO, The
Bank of Tokyo-Mitsubishi UFJ, Ltd.)(as above)

Akihiro Wani

(Senior Counselor, Ito & Mitomi Law
Firm(Foreign law joint business with
Morrison & Foerster LLP))(as above)

Chiaki Wakazono(Senior Researcher, Japan
Securities Research Institute)

Secretary

Kazuya Takahashi(Researcher, Japan Securities
Research Institute)Observer

Satoshi Ikeda(Director, Office of International
Affairs, Planning and Coordination
Bureau, Financial Services Agency)(as above)

Hideo Oishi(Director and Managing Executive
Officer, Development Bank of Japan)

Research

Kiichiro Masui(Chairman, Japan Securities

Institute(as above)

Research Institute)Tadashi Omae

(Executive Director, Japan
Securities Research Institute)(Affiliates and positions of replaced
former Members are those at thetime of their appointment)32

*For discussion topics and summary minutes of the Study Group’s each meeting,please see our website (Japanese): http://www.jsri.or.jp/society/society_15.html.

33