MUMBAI (Reuters) - Hedge funds and other systemically big financial institutions must be more closely regulated and compensation packages must be linked with prudent risk-taking, a G20 working group said in a report.
The G20 Working Group on Enhancing Strong Regulation and Strengthening Transparency was co-chaired by Reserve Bank of India Deputy Governor Rakesh Mohan.
The report has 25 recommendations in 14 broad areas, ranging from credit rating agencies, over-the-counter derivatives and accounting standards and compensation schemes.
Highlights of the recommendations follow:
* Mandates of all national financial regulators, central banks and oversight authorities should take into account financial system stability.
* Authorities need a mechanism to jointly assess systemic risks in a country and co-ordinate policy response to limit the buildup in systemic risk.
* Financial sector authorities should have suitable macroprudential tools to address systemic vulnerabilities.
* The financial stability forum and International Monetary Fund should create a way for key national financial authorities to meet foreign counterparts regularly to assess systemic risks to the global system.
* All systemically important financial institutions, markets and instruments should be subject to an appropriate degree of regulation and oversight. Large complex financial institutions require particularly robust oversight.
* Boundaries of the regulatory framework should be reviewed periodically within national jurisdictions, in light of financial innovation and broader trends in the financial system.
* All credit rating agencies whose ratings are used for regulatory purposes should be subject to a regulatory oversight regime that includes registration and requires compliance.
* Hedge funds or their managers and other private pools of capital should be required to register with financial authorities and disclose information to assess the risks they pose.
* All G20 members should commit to undertake a Financial Sector Assessment Program report and publish its conclusions.
* Accounting standard setters should strengthen accounting recognition of loan-loss provisions by considering alternative approaches for recognizing and measuring loan losses.
* Adequacy of international standards for minimum levels of capital for banks should be reviewed and the quality and global consistency of capital should be enhanced.
* G20 leaders should support the progressive adoption of the Basel II capital framework.
* Prudential supervisors and central banks should deliver a global framework for promoting stronger liquidity buffers at banks, including cross-border institutions.
* Financial institutions should continue to strengthen the infrastructure supporting over-the-counter derivatives markets.
* Central counterparties, such as clearing houses, should be subject to transparent and effective oversight by prudential supervisors and other relevant authorities.
* Large financial institutions should ensure that their compensation frameworks are consistent with long-term goals and prudent risk-taking. Prudential supervisors should enhance their oversight of compensation schemes by taking remuneration systems into account when assessing risk management practices.
* Accounting standard setters should accelerate efforts to reduce the complexity of accounting standards for financial instruments and enhance presentation standards.
* Effective enforcement of regulation should be a priority of all financial regulators.
Compiled by V. Ramakrishnan and Saikat Chatterjee; Editing by John Mair