susan schmidt bies : financial supervision issues remarks by ms susan schmidt bies, member of the board of governors of the us federal reserve system, at the securities industry association annual meeting, boca raton, florida, 5 november 2004. * * * i want to thank you for the invitation to speak at this annual meeting of the securities industry association ( sia ). the financial services industry continues to evolve to meet the challenges posed by mergers, new financial instruments, and changing regulatory frameworks. the federal reserve board, as the umbrella supervisor of financial holding companies, has been working with other regulators and financial institutions to improve the effectiveness and relevance of regulation and supervision in this changing environment. some of the issues that we have been dealing with recently are of mutual concern to both broker - dealers and commercial bankers - albeit they may represent different sides of the coin. others involve reconciling the differing perspectives and regulatory environments of investment firms and commercial banks around similar financial products and activities in the wake of financial conglomeration. today i would like to bring you up - to - date on three such issues, as well as highlight some aspects of the federal reserve ’ s proposed anti - tying guidelines. in all of these areas, i encourage your participation as we work toward new regulatory guidance. accounting for securities the first supervisory issue i would like to discuss involves accounting for investment securities. the recent accounting guidance, the meaning of other - than - temporary impairment and its application to certain investments, or eitf 03 - 1, has raised serious questions about accounting for investments that are held in available - for - sale portfolios. as many of you are aware, when the emerging issues task force ( eitf ) of the financial accounting standards board ( fasb ) came to its consensus earlier this year, it was not intending to dramatically change accounting practices for debt securities. but in early august, the public accounting firms began interpreting the guidance very differently. specifically, if a security was sold from the available - for - sale investment portfolio at a loss, the new interpretation called into question the facts and circumstances that should be used to determine if the remaining portfolio should be viewed as “ other than temporarily impaired, ” and thereby marked down to the lower of cost or market through earnings ( locom ). at the federal reserve, we were concerned about the interpretation since most banks use their available - for - sale portfolio to manage their net interest margin on longer - term, fixed - rate deposits and funding. a loco

trade reporting and compliance engine, or trace system, will do much to improve the regulatory agencies ’ understanding of the dynamics of this market. but as in the past, we should also be concerned about creating a level playing field. for that reason, the board of governors is continuing to negotiate with finra for it to act as our agent in collecting similar data from banks. we do not want to create a regulatory arbitrage where the same activity done within a brokerdealer is treated differently than when it is done within a bank. 2 / 3 bis central bankers'speeches the tmpg and similar groups around the world play an important role by helping both regulators and industry leaders address market concerns before they threaten market function. i thank the members for their service and look forward to today ’ s discussions. 1 alice schroeder, the snowball : warren buffett and the business of life ( new york : bantam, 2009 ). 2 the icap fed funds open rate was a daily indicator published by icap, a broker in the federal funds market, as to where a representative federal fund transaction would be priced at the start of the u. s. trading day. icap did not consider the rate to be international organizations of securities commissions compliant, although it was nonetheless used as a financial benchmark by some market participants. icap ceased publication of the index in september 2016. 3 / 3 bis central bankers'speeches