Sunday, November 10, 2013

In Wake of LIBOR Scandal, German Regulators Increase Requirements for Quotation Process

In view of the allegations of manipulation relating to quotation processes for LIBOR and other reference rates, the German Federal Financial Supervisory Authority (BaFin) has specified in more detail its requirements in respect of financial institutions reporting associated data. In a letter, which was agreed to with the Bundesbank, the financial regulators calls on the financial institutions to strengthen their internal control processes.

In the summer of 2012, BaFin had already informed certain individual financial institutions of mandatory requirements for quotation processes. The current letter is designed to ensure that the quotation processes are uniformly applied at the firms. At the same time it aims to increase awareness of supposedly low-risk audit areas. BaFin’s requirements with respect to the quotation process include, among other things, the principle of dual control, transparent documentation and the clear allocation of responsibilities. The documentation must at least show who is responsible for the quote, and include a justification for each quote and an explanation of deviations from the previous day quotations.

An escalation procedure must be resorted to in cases of uncertainty that at least goes to upper management, ie the vice presidential level, so that they will be informed of actual implausibilities.

In addition, financial institutions must perform regular checks and risk audits. The amounts stated in the quotations must be verified independently on a regular basis, at least monthly. The quotation process must be given greater prominence within the internal auditing function, which must monitor compliance with the audit measures and perform regular checks to establish whether the quotations that have been reported are correct, and whether the original risk classification assigned to audit areas is still appropriate