Information and methodology used for assessment

The Swiss authorities were requested to complete a self-assessment questionnaire in advance of the mission pertaining to the above-mentioned regulatory standards and principles. The questionnaire and self-assessments, where performed, were made available to the peer group of experts in advance of the mission. During the mission, the responses to the questionnaire and self-assessments of compliance with the standards and principles were clarified and checked through subsequent discussion with the authorities and market participants in critical areas. In the case of the Basel Core Principles, the banking specialists reviewed documents made available in advance of the mission, met with host country supervisors in the United States and the United Kingdom of the largest two Swiss banks (the Credit Suisse Group and UBS), and spent several days interviewing representatives of the Swiss Federal Banking Commission (SFBC), bankers, bankers association representatives, and accountants in order to clarify and/or verify the facts contained in the questionnaire responses.

The responses to the IMF questionnaire by the Swiss authorities, detailed information available on the SFBC's Internet website (http://www.ebk.admin.ch/) plus the websites of KPMG Switzerland, the Swiss Bankers' Association (SBA), the Federal Department of Finance (FDF), and the two large Swiss banks, facilitated the initial drafting of this report. The Basel Core Principles assessors were able to focus their discussions and verify information provided with the Federal Law on Banks and Savings Banks of November 8, 1934 (Banking Act), as amended through April 22, 1999, the Ordinance of the Swiss Federal Council on Banks and Savings Banks of May 17, 1972 (Banking Ordinance), as amended through October 4, 1999, other ordinances and SFBC Circulars and Guidelines, Codes, Conventions and Agreements issued by the SBA. Implementing Swiss regulations, SFBC administrative notices and statutory instruments, audit and accounting guidelines and the SFBC's Guidelines on Financial Statement Reporting Requirements, which provide instructions/guidance for periodic financial and prudential reports, were incorporated into the assessment process. Follow-up questions were discussed with SFBC staff and supplemental information was provided to the banking specialists as necessary.

Institutional and macroprudential setting, market structure overview

Banking is one of the prime industries in the Swiss economy accounting for significant employment opportunities and contributing 11 percent to GDP. Bank activities have undergone changes in the last decade with reduction in bank savings accounts, increased investment funds, initiation of mortgage backed securities, increased global custody, fiduciary business, derivatives and investment counseling, and asset management business. Swiss banks offer global consultancy services, primarily in private banking that include tax, pension plan and inheritance counseling.

There are 375 banks licensed in Switzerland.² The number of banks has been shrinking in the last decade due to increased competition, mergers and acquisitions. The banking sector is dominated by three large Swiss-licensed banks (part of two banking groups) with significant global presence. There are 24 cantonal banks, 103 regional banks, one cooperative bank (with 537 independent members), 17 private banks, 23 subsidiaries of major international financial conglomerates and 204 institutions categorized as “other banks.”

The two largest banking groups represent about 60 percent of total Swiss banks' assets and deposits and dominate the Swiss banking system. The spread of their operations into many different financial markets—including both banking and insurance—in many different countries, which resulted from an extended process of national and international mergers and acquisitions, has significantly complicated the establishment and management of their risk profile, both for their managements and supervisory boards, and for the supervisors. Recently, these large and complex financial institutions have been affected by turmoil on international financial markets. These two aspects–their increasing complexity and their sensitivity to international asset market developments–as well as their key role within the Swiss financial system underscore the importance of an intense, hands-on, and risk-based form of monitoring and supervision by the banking supervisor, including with regard to aspects of corporate governance in these large and often culturally diverse organizations.

The authority and responsibility of the SFBC in bank licensing and supervision are explicitly set out in the Banking Act and various ordinances, circulars, and guidelines. All credit institutions are subject to supervision and regulation by the SFBC. The SFBC is not responsible for the supervision of insurance companies, insurance intermediaries, investment advisors or industrial deposit-taking entities. Thus these entities are not included in this BCP assessment. However, recent recommendations issued by an expert working group include legislation to transfer the supervision of insurance intermediaries to the SFBC.

General preconditions for effective banking supervision

The SFBC and Swiss Government have achieved a high degree of implementation of the recommendations of the Basel Committee's reports. Although not a member of the European Union (EU), Switzerland has incorporated many of the EU Directives into its ordinances, guidelines and supervisory practices. To a large extent, the Basel Core Principles parallel the EU Directives and this contributed to Switzerland's compliance with the Basel Core Principles. The SFBC has recently taken steps to enhance its supervisory process by establishing a separate Large Bank Supervision unit to oversee the two large banking groups. The SFBC has also created a unit responsible for the assessment and validation of bank models. These two new units, focused primarily on the two main banks, have somewhat altered the traditional Swiss “indirect” supervision of these two banks. The changes allow the SFBC to better coordinate its supervisory activities for the two large banks with external auditors, bank management, foreign host supervisors, and the insurance supervisors. This approach shifts limited supervisory resources to the financial sector's greatest risk, that is, the largest banks. The risk-based supervision approach more fully integrates the SFBC's off-site analysis of these banks' prudential returns with the bank examinations performed by SFBC-licensed and approved external auditors. The new approach includes quarterly management meetings with the two institutions, semi-annual trilateral meetings with the U.K. and U.S. supervisors and the SFBC and annual trilateral meetings with the bank, its external auditor and the SFBC. Cooperation between the SFBC and the Swiss insurance supervisor has also been strengthened.

The overall assessment of the peer review team is that Switzerland is generally in compliance with the Basel Core Principles with two exceptions where the SFBC is deemed largely compliant. The two exceptions are in the area of budgetary independence and banking activities not subject to SFBC supervision. Both exceptions are discussed in more detail in the detailed assessment that follows. It is important to note that the assessment tailored the principles to the Swiss market. Switzerland has a relatively unique banking sector, with a high market concentration by the two largest domestic banks, and a relatively low level of complex bank activities conducted in most other banks, which are primarily involved with mortgage banking activities or private banking and asset management

Currently the SFBC—which is a small organization in comparison to the size of the system it oversees—relies heavily on the dualistic system of supervision whereby the on-site examinations are outsourced by the SFBC to approved and licensed external auditors. The supervisory process is enhanced by the self-regulatory activities of the industry via the Swiss Bankers Association (SBA) who, together with the SFBC issues guidance to the industry. The SFBC is aware of the risks of outsourcing on-site work and takes a number of steps to check that the work done meets the standards required. This dualistic approach, however, would benefit from a more formalized quality assurance program for supervising external auditors and an increase in joint on-site inspections. This, as well as preparations for the new Basel Capital Accord, will require the SFBC, among other things, to recruit and retain a sufficient number of additional competent staff. The SFBC is taking steps in this direction.

Frequent communication between the SFBC and the banks and the external auditors is key to the Swiss current supervisory process. The SFBC's licensing and supervisory policies and practices are clearly communicated to the banks and external auditors. As a member of the Basel Committee, the Joint Forum, and several other international standards and principle-setting bodies, the SFBC participates in setting the standards for financial sector supervision and actively strives to implement them.

The SFBC will continue to be challenged by innovative licensing proposals (such as Internet banks) and requests for approval of new business activities and increasingly complex investment products, many of the same issues being faced by supervisors in other financially developed countries. As banks expand or enter new businesses, supervisors need to remain vigilant in their supervision in order to minimize associated risks in the industry. This should include a more formalized system of supervision with more explicit supervisory directives being incorporated into the Banking Act. The SFBC is responding to recent regulatory initiatives put forth by various expert commissions and working groups to enhance the supervisory process. Several recommendations have come out of these projects and are being considered by the government as a good start in closing supervisory gaps among all financial companies.

Swiss legislation, SFBC ordinances and circulars, or SBA guidelines and circulars cover all the Basel Core Principles. Although the Banking Act is broad in some instances, the SFBC's implementation of the Banking Act through regulations and guidance to external auditors in their examination mandate reflects effective supervision and works well with the Swiss-licensed institutions.

Various expert commissions and working groups have been created in the last several years to analyze the Swiss financial system and supervision. In December 1998, Switzerland's Minister of Finance mandated an expert commission “Financial Market Supervision,” chaired by Prof. Zufferey, with an analysis of the strengths and weakness of the system for the supervision of the financial services industry in Switzerland. In November 2000, the expert commission issued a report and 42 general recommendations for a reform of the supervisory framework in the financial sector (“Bericht über die Finanzmarktregulierung und–aufsicht in der Schweiz,” Zufferey Report).

In May 1999, Switzerland's Finance Minister mandated an expert commission to review the existing bank reorganization and liquidation law and the deposit insurance system. In October 2000, the Expert Commission submitted its findings in a report along with a proposal for an amendment to the Banking Act. The trigger that started that reform process was the failure of the Spar and Leihkasse Thun in 1991, a large regional bank. This incident had brought several shortcomings of the existing legal framework for dealing with insolvent banks to the surface.

In February 2000, the SFBC mandated a working group, chaired by Prof. Nobel, with an analysis of the dualistic concept of the supervisory system. The working group published its report and 17 recommendations in December 2000. In March 2001, the working group “Auditing and Supervision of Banks” was established to follow up on those recommendations and put forward proposals to revise the Banking Act, the Banking Ordinance and the SFBC Circulars to implement the expert commission's recommendations.

In November 2001, the Federal Council instituted an Expert Commission with nine members that will be chaired by Prof. Zimmerli. The Expert Commission was mandated to put forward a legislative proposal for the creation of a unified financial supervisory authority. While the mission team was aware of the work of the various commissions and working groups, it was agreed prior to the start of the mission that the assessment of the Basel Core Principles would be done based on the laws, policies, and procedures in effect as of the start of the mission. This Basel Core Principles assessment arrived at many of the same conclusions as those of the commissions and working groups, and generally supports the various groups' recommendations.

At this time (and pending the revision of the Banking Act) a potential vulnerability exists because nonbank industrial deposit-taking entities and certain nonbank asset management/investment advisors are not under the SFBC's supervision or covered by the Basel Core Principles. There is vulnerability anytime non-regulated institutions compete with regulated institutions in banking-type activities.

Principle-by-principle assessment

The following assessment of the Basel Core Principles (BCP) is based on the Core Principles Methodology of the Basel Committee on Banking Supervision, October 1999. The methodology makes a distinction between “essential” and “additional” criteria. Essential criteria should be present in order for supervision to be considered effective. Additional criteria further strengthen supervision and countries should strive to implement as many of the additional criteria as possible. This assessment takes both the essential and additional criteria into consideration. Principle 15 on anti-money laundering supervisory activities was supplemented with the August 15, 2001 draft methodology paper issued by the IMF to further facilitate assessments of this particular area and a separate report on anti-money laundering efforts was prepared.

The Basel Core Principles are grouped into seven categories: (1) Preconditions for Effective Banking Supervision; (2) Licensing and Structure; (3) Prudential Regulations and Requirements; (4) Methods of Ongoing Banking Supervision; (5) Information Requirements; (6) Formal Powers of Supervisors; and, (7) Cross-Border Banking.

Table 1.

Detailed Assessment of Compliance with the Basel Core Principles

Table 1.

Detailed Assessment of Compliance with the Basel Core Principles

Principle 1.	Objectives, Autonomy, Powers, and Resources An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to the authorization of banking establishments and their ongoing supervision; powers to address compliance with laws, as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.
Principle 1(1)	An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks.
Description	The Swiss regulatory policies are formulated on three levels. The first two, as mentioned above, are issued by Parliament (all acts such as the Banking Act) and by the Swiss Federal Council (ordinances based on parliamentary acts). The SFBC has substantial influence on the drafting process of regulatory statutes, but agreement by the SFBC is not intended. On more technical policies, the SFBC has powers to issue prudential regulations. The Banking Act is regularly supplemented by amendments, circulars issued by the SFBC, and, as an outcome of the supplementary self regulation system, the Swiss Banking Association issues guidelines with the approval of the SFBC to meet the regulatory needs arising out of the changing industry conditions. The SFBC makes extensive use of this power. The Federal Law on Banks and Savings Banks (Banking Act), based on the Federal Confederation, entered into force on November 8, 1934 (as amended April 22, 1999) and the Banking Ordinance entered into force on May 17, 1972 (as amended October 4, 1999) providing the statutory and legal framework for banking and the agencies involved in banking supervision. In addition, various other ordinances serve as extensions of the Banking Act: – Ordinance of the SFBC on Foreign Banks in Switzerland of October 21, 1996; – Ordinance of the SFBC on Foreign Banks in Switzerland of October 21, 1996;–Ordinance of the Swiss Federal Department of Finance on the Percentage for the Cash Liquidity of November 26, 1987; – Implementing Ordinance on the Federal Law on Banks and Savings Banks of August 30, 1961, as amended May 17, 1972; and – Ordinance of the Swiss Federal Court on Arrangements with Creditors of Banks and Savings Banks of April 11, 1935, as amended June 5, 1996. The various provisions of these acts cover monitoring the activities of banks regarding conformity with laws, compulsory prudential ratios and regulations and, within its jurisdiction, enabling the SFBC to take measures necessary to ensuring adherence to laws, norms and regulations. The Banking Act and the Banking Ordinance lay down the framework of minimum prudential standards that banks must meet. Under Art. 23, the Swiss Federal Banking Commission (SFBC) is the sole agency carrying out banking supervision in Switzerland for all banks. Art. 23 of the Banking Act enables the SFBC to take steps to achieve the orderly resolution of problem banks including restructuring or closure. There is no legal basis for forcing a problem bank to merge with another institution. But indirectly, the SFBC is searching for such a solution. Presently 21 circulars are issued and published by the SFBC. In certain fields the SFBC officially backs (but does not formally approve) self-regulatory guidelines issued by the banking industry (e.g., codes of conduct in securities dealing). Whenever the SFBC gives this type of official backing it may also exert substantial influence in the issuing process. If the SFBC is not satisfied with the outcome of self-regulation it may prefer to issue an official regulation: SFBC Circulars – Circular 72/1 on Public Solicitation of Deposits of September 14, 1972 – Circular 81/1 on Recording of Precious Metals of April 30, 1981, as amended February 1, 1995 – Circular 86/1 on Monies from Blocked Pension Arrangements of May 6, 1986, as amended February 1, 1995 – Circular 90/3 on Cash Liquidity of December 17, 1990 – Circular 92/1 on Approval and Notification Requirements for Stock Exchanges, Banks, in Securities Dealers and Banking Auditors of September 24, 1992, as amended July 1, 1999 – Circular 93/1 on the Interrelationship between Banking Law and Revised Company Law of August 25, 1993, as amended February 1, 1995 – Guidelines of the SFBC on Financial-Statement Reporting Requirements set out by Arts. 23 to 27 of the Ordinance on Banks and Savings Banks of December 14, 1994, as amended October 28, 1999 – Circular 95/1 on the Internal Audit of December 14, 1995 – Circular 96/3 on the Audit Report: Form and Content of October 21, 1996, as amended October 28, 1999 – Circular 96/4 on Acceptance on a Professional Basis of Deposits from the Public by Nonbanks in the Meaning of the Federal Law on Banks and Savings Banks of August 22, 1996, as amended August 26, 1999 – Circular 96/5 on the Legal and Personal Separation of the Fund Manager from Custodian Bank, Delegation of Investment Decisions and Partial Duties of November 14, 1996, as amended October 1, 1997 – Circular 96/6 on the Maintenance of the Security Journal by Securities Dealers of October 21, 1996 – Circular 97/1 on Guidelines Governing Capital Adequacy Requirements to Support Market Risks of October 22, 1997, as amended October 1, 1999 – Circular 97/2 on the Applicability of the SFBC Circulars Concerning Banks to Securities Dealers of November 20, 1997 – Circular 98/1 on Guidelines for the Combating and Prevention of Money Laundering of March 26, 1998 – Circular 98/2 on Commentaries Regarding the Definition of Securities Dealer of July 1, 1998 – Circular 98/3 on Recognized Rating Agencies of July 1, 1998, as amended June 1, 2001 – Circular 99/1 on the Measurement, Management and Monitoring of Interest-Rate Risks of March 25, 1999 – Circular 99/2 on Outsourcing of Business Areas of August 26, 1999 – Circular 99/3 on Early Information Following the End of the Business Year October 28, 1999 – Circular 00/1 on Less Restricted Risk-Diversification Requirements for Claims with Residual Maturity of up to One Year from Banks of October 26, 2000 Self-Regulation – Guidelines of the SBA on the Handling of Domestic and Foreign Counterfeit Money of December 11, 1990 – Convention XIX on Notes of Foreign Debtors of May 1, 1987, as amended January 31, 1996 – Agreement on the Protection of Depositors in the Case of Compulsory Liquidation of a Bank, July 1, 1993 – Recommendations of the SBA on Trusteeships of June 22, 1993 – Guidelines of the SBA on the Settlement and the Assessment of Mortgage Loans (Direct and Indirect) of December 23, 1993 – Guidelines of the SBA for the Risk Management in Trading and in the Use of Financial Derivatives of January 31, 1996 – Practices in Foreign Exchange Trading of December 5, 1996 – Code of Conduct of the SBA for Securities Dealers of January 22, 1997 – Guidelines of the SBA for the Management of the Country Risk of September 4, 1997 – Agreement on the Swiss Banks Code of Conduct with Regard to the Exercise of Due Diligence of March 1, 1998 – Guidelines of the SBA for the Treatment of Dormant Assets of July 1, 2000 – Portfolio Management Agreement of July 24, 2000 – Code of Conduct of the Swiss Funds Association (SFA) for the Swiss Fund Business of August 30, 2000 – Guidelines on the calculation of net asset values and the handling of valuation errors in the case of securities funds as of 11 June 2001. In Switzerland, an entire set of reform projects is under discussion: – Financial Market Supervision: An Expert Commission instituted by the Swiss Finance Ministry issued a report and general recommendations regarding the reform of the framework for supervision of the financial sector. – Bank Insolvency and Deposit Protection: An Expert Commission instituted by the Swiss Finance Ministry put forward a proposal for an amendment to the Banking Act that includes provisions on the reorganization and liquidation of financial intermediaries, and mandatory deposit protection. – Anti-Money Laundering: The SFBC instituted a working group to review the Circular 98/1 on the Guidelines for the Combating and Prevention of Money Laundering of March 26, 1998 and the Agreement on the Swiss Banks Code of Conduct with Regard to the Exercise of Due Diligence of March 1, 1998. – Supervision of Financial Conglomerates: Proposal to codify the SFBC's practice regarding the supervision of financial groups and conglomerates in the Banking Act and SESTA (securities law). This may occur along with the amendment of the Act on the Supervision of Private Insurance. – Auditing: A working group mandated by the SFBC to review the legal framework for the auditing function presented a report with recommendations to further improve the system of bank auditing in Switzerland. Another working group is now in the process of drafting new regulations and amendments to existing regulations to implement the working group's recommendations. – Code of Market Conduct: The SFBC is currently in the process of drawing up a circular on a Code of Market Conduct, which further elaborates on terms such as market abuse and defines the legal concept of fair market conduct. – Dormant Accounts: Draft law awaits ratification by the Parliament. – Implementation of the new Basel Capital Accord: Steps of drafting appropriate instruments to transpose the new Accord into national law are taken. With regard to the additional criteria of the Core Principles Methodology, the findings are positive: The Banking Commission regularly reports to the Federal Council on its activities, at least on an annual basis. However, the Chairman and the senior management of the SFBC are not acting in plenary sessions of the parliament where all matters relating to supervision are presented by the Ministry of Finance. In general, the SFBC communicates with the Federal Council via the Federal Department of Finance. Under Art. 6 par. 1 of the Banking Act and title 7 of the Banking Ordinance, the SFBC has to ensure that all banks under its jurisdiction provide audited annual statements, including for their branches and representative offices. The Federal Council determines which banks are to prepare interim financial statements. Under Art. 6 par. 5 of the Banking Act the Federal Council sets forth the classification rules for a single company, consolidated and financial statements and lays down in which form and to which extent and within which deadlines they are to be published or made available to the public.
Assessment	Compliant.
Comments
Principle 1(2)	Each such agency should possess operational independence and adequate resources.
Description	The SFBC has statutory independence in accomplishing its supervisory tasks (Art. 23 Banking Act). As a result of the meetings with the SFBC, there is no visible evidence of any government or industry interference in the work of the SFBC. The SFBC has adequate independence to deploy its banking supervision resources on its own. As stipulated in Art. 3 of the Banking Act, the SFBC is independent of all governmental agencies. It reports only to the Federal Council; it is not subordinated to the Government nor to any other executive institution of the State, which rules out active and ongoing intervention by Parliament or governmental bodies in pending matters. The accountability of the SFBC is performed on a strictly ex post basis, which rules out active and ongoing intervention by Parliament (or government) in pending matters. However, minor restrictions on the independence could exist insofar as the Federal Council and the Federal Department of Finance have the power to ask for reports on specific supervisory matters from the SFBC, voice their own opinion on supervisory issues and may criticize the SFBC in private or in public, which is in practice very rare. In addition, the parliament or the government could instruct or influence the work of the SFBC in abstract by adopting new legislation, where the SFBC is materially involved but does not have to agree on draft legislation. It is just possible that pressure may arise if there are differing opinions, for example, in the leading of the commission. As a result, there is no urgent need to extend the appointment of the present commission because the Chairman and the members of the SFBC are appointed only for a four-year terms. The Federal Council has the power to remove the commission only in the event of disciplinary misdemeanours or serious abuse of their functions. The SFBC has no budgetary independence, because it is part of the expense calculation of the central governments budget (2002: SwF 25,7 million). According to Art. 23 par. 4 of the Banking Act and the guidelines on the cost of the SFBC, the expenses are covered entirely by fees which were charged to Institutions under the supervision of the SFBC and not by the taxpayer. The salary policy of the SFBC is based on the labor market situation only to a minor extent, because the level of remuneration is subject to the terms for staff of the Swiss Administration in general and to the salary framework in particular. While the SFBC has to compete, for example, with banks for highly qualified staff, its ability to hire outside experts is limited by its own budgetary process. This causes problems to the expansion of supervisory responsibilities according to the new Basel Capital Accord. Most of the banks and banking associations which were interviewed by the members of the FSAP team would like to apply the internal rating approach (including cantonal banks and Raiffeisen banks; regional banks were indecisive). As a result of the ongoing dialogue with the Department of Finance, several improvements related to budgetary and human resources independence have been achieved: – Freedom to fix the number of staff within the limits of its budget. – A budget item under the title “enlarged supervision” presently amounting to 15 percent of the budget of the SFBC gives substantially more flexibility as it may be used for salaries as well as for indirect cost. – The SFBC is not included in the IT centralization exercise of the Swiss central administration (creation of a tailor-made system for the SFBC). – For recruiting and retaining of “selected” staff, the SFBC may grant a “labor market allowance” up to 20 percent on top of normal salary bands. This allowance needs to be approved by the Federal Department of Finance. The SFBC is presently exploring this possibility. The SFBC banking supervision staff has credibility based on their professionalism and integrity. This is expressed, for example, through the evaluation of Value-at-Risk (VaR) Models where statisticians and mathematicians are employed. The present supervisory strength is around 105 staff, with a core of about 75 persons having supervisory functions. In light of the expected increase in on-site visits and implementation of Basel II, the current staff level will be stretched or possibly insufficient regarding a staff turnover level of 18 percent in the year 2000. In order to offer a competitive and attractive position in the SFBC for highly qualified staff, the management of the SFBC is investing substantial resources in developing and enhancing the SFBC's personnel management system. Its travel budget for on-site work allows appropriate supervision to be carried out on a consolidated basis. Improvement seems to be needed in the field of training, to maintain the high level of qualification of the staff. The system is based on the own initiative of employees.
Assessment	Largely compliant.
Comments	The SFBC has no budgetary independence, because it is part of the expense calculation of the central government's budget. With regard to the proposal of the expert commission to establish an integrated financial supervision, recommendations aim to solve the identified problems.
Principle 1(3)	A suitable legal framework for banking supervision is also necessary, including provisions relating to authorization of banking establishments and their ongoing supervision.
Description	Under Art. 3 of the Banking Act and Art. 23 of the Banking Act, the SFBC is responsible for granting and withdrawing banking licenses. In order to organize and exercise supervision, the SFBC has the right under the Banking Act to issue regulations, guidelines and resolutions and to provide recommendations and explanations. This instrument is used quite often because amendments of the law involve an extremely time-consuming process in Switzerland. Art. 23 of the Banking Act gives the SFBC the right to demand additional information upon receipt, especially from the credit institution and shareholders who have qualifying holdings and companies belonging to the consolidation group in the form and frequency it deems necessary. In addition, the SFBC has the statutory duty and power to supervise state-owned banks (only by the Canton) in the same way as privately owned commercial banks. This includes the power to withdraw the state-owned banks' license and to close its business. The Federal Government does not own any bank.
Assessment	Compliant.
Comments
Principle 1(4)	A suitable legal framework for banking supervision is also necessary, including powers to address compliance with laws, as well as safety and soundness concerns.
Description	Art. 23bis of the Banking Act enables the supervisor to address compliance with laws and the safety and soundness of the banks under its supervision. The Banking Act permits the supervisor to apply qualitative judgment in forming his opinion. The supervisor has unfettered access to banks' files in order to review compliance with internal rules and limits as well as external law and regulations. Based on this information, the SFBC is free to assess the evidence and to formulate its judgment with regard to compliance of the supervised institutions with law and regulations, and decides itself on whether and how to make use of its sanction powers. Art. 23 of the Banking Act enables the SFBC to take and/or require a bank to take remedial action. Furthermore, the SFBC can withdraw authorization if a credit institution violates the prudential rules established by or on the basis of the Banking Act/Banking Ordinance and, during the term specified, fails to return to compliance with those rules. The SFBC made use of this power about 30 times over the last 30 years. The most prominent closure of a bank concerned an insolvent mediumsized bank in 1991. However, the law does not specifically mandate when remedial action should occur. One reason is that the SFBC would like to react on a flexible basis, but such an authority is desirable for addressing problems at an early stage. The SFBC has the power and the duty to order a supervised institution to improve organizational shortcomings or correct breaches of prudential standards and it may also order specific changes. However, with regard to the depth of intervention, the SFBC applies restraint in order to avoid intervening in the business strategy of the supervised institution. It should be mentioned that, in conformity with continental Europe's system of administrative law, the SFBC itself has the power to issue formal enforceable decisions. It is possible to appeal these decisions to only one instance: the Swiss Federal Supreme Court, meaning only one level of appeal. The decisions of the SFBC may be challenged on the grounds of violations of law. However, the Federal Court does not review how the SFBC makes use of its discretionary powers if it did not abuse these powers in a qualified manner. The appeal has no suspension effect, but the court may grant a suspension. A formal decision issued and immediately executed by the SFBC may not be a ground for liability claims even if the decision has successfully been challenged in an appeal unless the SFBC has manifestly acted in bad faith.
Assessment	Compliant.
Comments
Principle 1(5)	A suitable legal framework for banking supervision is also necessary, including legal protection for supervisors.
Description	A protection process for the supervisory agency and its staff is in place. The staff of the SFBC may only be criminally prosecuted if the Federal Department of Justice and Police approves in conformity with Art. 15 of the State Responsibility Act 1958. The purpose of this provision is to protect civil servants against undue pressures exercised by unsubstantiated claims of alleged criminal acts. The approval is given based on an initial assessment of the evidence. If the Department of Justice and Police conclude that there is enough evidence to suspect a criminal offense it may deny approval only in cases of minor importance. At least for the last 25 years, there has been no criminal investigation against SFBC staff. No civil liability claim may be addressed directly against the members of the SFBC or its staff. Instead, claims have to be brought against the Swiss Confederation, which has to respond exclusively to all civil claims based on alleged breaches of statutory duties by the SFBC and its staff. In the last 20 years a handful of such lawsuits has been filed. All of them were dismissed by the Swiss Federal Supreme Court. If a civil servant has caused a loss intentionally or by gross negligence the Confederation has recourse against him. So far, no such recourse against a staff of the SFBC has ever been made.
Assessment	Compliant.
Comments
Principle 1(6)	Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.
Description	An extensive process for exchanging information is in place between the SFBC and the Federal Office of Private Insurance, the other main supervisory authority in Switzerland. For the time being, the authorities see no need for a formal agreement. The Banking Commission may request information and documents from foreign banks and financial market supervisory authorities and has the authority to undertake direct inspections in foreign establishments of banks. A shortcoming could be that the exchange of information and on-site visits are in general based only on informal arrangements, since a large part of the business of the two largest Swiss banks is established in the United States and the United Kingdom. However, such informal arrangements have not impaired the SFBC's ability to practice consolidated supervision, including on-site inspections if necessary. Several exchanges of letters on cooperation and information sharing have been agreed upon; for example, with the Netherlands. Under Art. 7 of the Banking Act the banks shall submit their annual financial statements to the Swiss National Bank (SNB). With regard to the cooperation with the SFBC, the Act on the Swiss National Bank is expected to be amended. The SFBC, according to Art. 23 sexies par. 2, may only transmit information and documents disclosing confidential information to foreign banks and financial market supervisory authorities if these entities: – will use information for direct supervision; – are bound by official or professional secrecy, and – “will not transmit this information to competent authorities or bodies which are entrusted with supervisory activities in the public interest without the prior consent of the Banking Commission or on the basis of a blanket permission contained in a treaty with a contracting state. The transmission of information to penal authorities is not permitted whenever legal assistance in penal matters would be excluded. The Banking Commission decides after consulting with the Federal Office of the Police.” Information on individual customers will not be transmitted by the SFBC without their approval.
Assessment	Compliant.
Comments	The exchange of information and on-site visits are generally based on informal arrangements. In light of the key importance of exchange of information among supervisors in the case of large and complex financial institutions, more formal arrangements should be considered.
Principle 2.	Permissible Activities The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined, and the use of the word “bank” in names should be controlled as far as possible.
Description	The term bank is clearly defined under Art. 1 of the Banking Act. Under Art. 2a of the Banking Ordinance a credit institution is a company whose principal and permanent activity is to receive cash deposits and to grant loans for its own account and provide other financing. Neither the Banking Act nor the Banking Ordinance lists in detail the transactions and actions that are permissible for credit institutions including those that are directly ancillary or supplemental to its principal activity. Other core banking activities such as payment systems are not identified as banking activities as they are, for example, in the EU. This type of business could especially be a cause of systemic risk to the financial system. Only credit institutions are allowed to use the term “bank” or “banker.” These terms, alone or in combination with other words, may only be used in the company name, designation of the business purpose or advertising if the institutions concerned have obtained a license from the SFBC. In general, credit institutions have the exclusive right to receive money from the public for the purpose of depositing or receiving repayable funds in any other manner, according to Art. 1 par. 2 of the Banking Act. However, this particular section of the law says that the Federal Council provides for exceptions as long as the protection of the depositors is assured (clarified through circular 96/4). As a result, monies of employees as well as retired employees with their employer (e.g., industrial companies) are not considered as deposits and not subject to licensing and supervision by the SFBC. Such an exception poses a systemic vulnerability since the bankruptcy of a commercial company could result in the loss of their employees and retirees deposits. A current example is the recent bankruptcy of Swiss Air and its deposit-taking entity which required rescuing in the amount of SwF 110 million. The SFBC does not know how many of these deposit-taking entities exist, or their size. This could be a cause of systemic vulnerability if there is an unknown segment of the financial sector that is unregulated.
Assessment	Largely compliant.
Comments	Credit institutions do not have the exclusive right to receive money from the public for the purpose of depositing or receiving repayable funds in any other manner. An exception in the Banking Act (Art. 1 par. 2) permits nonbank employer sponsored deposit-taking entities that are not licensed or regulated as financial institutions. This poses a risk to the system.
Principle 3.	Licensing Criteria The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the banking organization's ownership structure, directors and senior management, its operating plan and internal controls, and its projected financial condition, including its capital base; where the proposed owner or parent organization is a foreign bank, the prior consent of its home country supervisor should be obtained.
Description	Prior to engaging in banking activities in Switzerland, each institution must obtain a license from the SFBC (Art. 3 of the Banking Act), which is the sole and independent authority for granting banking licenses. A Swiss banking license is considered a universal bank license which is not limited to specialized business fields, such as commercial, investment, and private banking. The regulations governing the acquisition of an existing bank basically parallel those governing its initial establishment. The SFBC's licensing guidance and practice are consistent with those of the EU's Second Banking Directive on Licensing and Supervision of Credit Institutions. In its implementation, every credit institution is required to manage its business in accordance with sound administrative principles and to put in place and maintain internal controls and reporting arrangements and procedures to ensure that the business is so managed. Art. 3 of the Banking Act specified in title 2 and 3 of the Banking Ordinance provides the criteria for issuing licenses consistent with those applied in ongoing supervision. Art. 23 of the Banking Act gives the SFBC the right to reject applications if the criteria are not fulfilled or if the information provided is inadequate. The reasons for negative decisions regarding license applications have mainly been the lack of qualified banking skills and experienced staff and thus an organization or management not adequate or competent enough for the planned activities. The SFBC has published a Guideline for License Applications for Banks and Securities Dealer (21.9.1999), which is not legally binding. The Banking Act read in conjunction with the Banking Ordinance enables the SFBC to determine that the proposed legal and managerial structures of the bank will not hinder effective supervision. Art. 3 of the Banking Act in conjunction with title 2 and 3 of the Banking Ordinance helps the SFBC to determine the suitability of major shareholders, transparency of ownership structure and source of initial capital. Art. 3 par. 2c of the Banking Act / Art. 6 of the Banking Ordinance and the above-mentioned guideline set forth the evaluation criteria for the SFBC regarding the fitness and propriety (education, experience and professional qualification, and trustworthiness) of the proposed bank managers. Directors and managers of the bank must be competent and fit for the specific business of the new bank, that is, their personal integrity and professional skill as well as their experience must meet the demands of their new task. All license applications must include the curricula vitae of key personnel, extracts of the general registry of criminal records (where available), and references for all directors and senior management. This procedure applies also to shareholders who wish to acquire a qualifying holding. They have to guarantee that their influence will not have a negative impact on a prudent and solid business activity. The qualified shareholders and the banks have a legal duty to report the relevant shareholdings and their changes to the SFBC. The SFBC is entitled to enforce the “fit and proper” requirement by suspending the voting rights of non-complying shareholders up to revoking the banking license in severe cases. Apart from this qualitative requirement, the banking legislation applies no quantitative limitation on ownership in banks. Art. 4 par. 1 of the Banking Ordinance requires that the new bank must have a paid-in capital of at least SwF 10 million. In cases where, according to the business plan, the projected activity requires more funds—which is normally the case—the initial capital can go up to SwF 20 million or more. Title 2 of the Banking Act and title 2 of the Banking Ordinance require and provide for a detailed review of procedures on corporate governance, strategic and operating plans, structure and policies and procedures, internal control procedures and system for appropriate oversight of the credit institution's activities in the proposed credit institution. This means that the bank to be licensed has to set up an organization that is able to meet the demands of the projected business. In this regard, its by-laws and internal regulations have to clearly define the type and geographical limits of the planned banking activity and, accordingly, the internal organization for that activity. Furthermore, the bank's responsibilities and the internal control procedures have to be adequately described. The SFBC not only formally approves the by-laws and internal regulations on the occasion of the establishment of the bank, but also their subsequent changes and amendments. Within the organization of the new bank there must be a separation between the supervisory and policy-making functions of the board of directors and the executive function of the management (Art. 8 par. 2BO). The same individual must not serve on both bodies. The Banking Act and Banking Ordinance contain detailed guidelines concerning the documents to accompany the authorization application, that is, the pro forma financial statement and the financial information on the principal shareholders. The SFBC grants authorization if, in the opinion of the supervisors, the business plan of the credit institution being founded is feasible and the above-noted criteria are met. According to Art. 3bis of the Banking Act, the consent of the banking supervisory authority of the home country of the credit institution is required prior to the foundation or acquisition of a subsidiary credit institution or the foundation of a branch in Switzerland. If a financial conglomerate or banking group owns the foreign bank, a declaration of the home-country authority that it supervises the conglomerate/group on a consolidated basis is needed. The firms or bank name should not indicate or suggest a Swiss character. The reciprocity requirement, which is also mentioned in the law, has lost its importance due to Switzerland's adherence to GATS (General Agreement on Trade and Services), which requires Switzerland to apply the most-favored-nation-rule to all WTO members. Under Art. 23 quinquies of the Banking Act, the SFBC has the opportunity to revoke a license if it determines that the license was knowingly based on false information. Art. 46 par.1.i of the Banking Act gives the SFBC the power to discipline bank management if incorrect information has been furnished to the SFBC. From 1996 to 2000, the SFBC granted 70 banking licenses (branches of foreign banks included). Forty-five licenses concerned entities under foreign ownership (including 23 branches of foreign banks) and 25 entities were in Swiss hands. The 70 new institutions focus predominantly on private banking. In the period from 1991 to 2000, a total of 243 banking institutions ceased their banking activity. Three of those faced the withdrawal of their banking license from the SFBC, 182 surrendered their license in the course of mergers and 58 went into liquidation. The total assets of the mentioned 243 banking entities amount to SwF 140 billion.
Assessment	Compliant.
Comments	In granting 70 banking licenses (branches of foreign banks included) over the past five years, SFBC's main focus has been on private banking.
Principle 4.	Ownership Banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or controlling interests in existing banks to other parties.
Description	A direct or indirect holding in a bank which represents 10 per cent or more of the share capital or votes in the bank, or a significant influence in the bank's business activities in another manner, is deemed to be a qualifying holding (Art. 3 par. 2cbis13 14 of the Banking Act). Prior authorization is required for a person seeking to acquire a qualifying holding in a bank or to increase a qualifying holding so that the proportion of the share capital or votes in the bank held by that person exceeds 20, 33, 50 percent or a percentage that allowed the bank to become controlled by that individual. The Banking Act gives the SFBC the right to grant authorization for the acquisition and the right to require notification in the case of an increase of qualifying holding (Art. 3 par. 5 of the Banking Act). The SFBC is entitled to enforce the “fit and proper” requirement by suspending the voting rights of non-complying shareholders up to revoking the banking license in severe cases. The authorization can also be withdrawn if, for example, the activities of the shareholder cause a significant risk to the sound and prudent management of the credit institution (Art. 23 par.1ter and quinquies of the Banking Act). Apart from this qualitative requirement, the banking legislation applies no quantitative limitation on ownership in banks. According to Art. 3 par 6 of the Banking Act and Art. 6a of the Banking Ordinance, a credit institution has to submit to the SFBC a list of shareholders of which it has knowledge, at least annually. Changes of qualified holdings must be immediately reported to the SFBC.
Assessment	Compliant.
Comments
Principle 5.	Investment Criteria Banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments by a bank and ensuring that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision.
Description	Generally, Swiss banking law imposes no specific structural conditions or restrictions on banks engaging in securities activities, real estate or insurance business. According to Art. 4 par. 2bis of the Banking Act, a qualifying holding in any other company held by a credit institution or by a company belonging to the same consolidation group shall not exceed 15 percent of the net own funds of the credit institution or the consolidation group thereof, respectively. Furthermore, the total amount of investments in the financial fixed assets (shares, debt instruments and other securities, acquired for use on a continuing basis and for gaining profit during an extended period) of other companies shall not exceed 60 per cent of the net own funds of the credit institution or the consolidation group. Art. 4bis par. 1 of the Banking Act requires that investments in a single company should have an adequate relation to their own funds. The investments in industrial equity have to be covered by capital equal to 40 percent (500 percent risk weighting for capital adequacy requirements) of the investment. This is the reason why Swiss banks own comparatively small industrial equity portfolios.
Assessment	Compliant.
Comments
Principle 6.	Capital Adequacy Banking supervisors must set minimum capital adequacy requirements for banks that reflect the risks that the bank undertakes, and must define the components of capital, bearing in mind its ability to absorb losses. For internationally active banks, these requirements must not be less than those established in the Basel Capital Accord.
Description	The Banking Act and Banking Ordinance along with circulars: – EBK-RS 97/1 (market risk) – EBK-99/1 (interest rate risk) vested in it under that legislation, apply to all banks operating within Switzerland. The principles applicable to banks, together with capital requirements for banks lay down in Art. 4 of the Banking Act and title 4 of the Banking Ordinance. The provisions contained a specification of: – the components and structure of bank capital – the equity requirements – the deductions from required equity The regulation applied in Switzerland regarding the definition and structure of a bank's capital base and the regulation on capital adequacy is in line with the 1988 Capital Accord of the Basel Committee on Banking Supervision and is close to the EU directives on Own Funds and Solvency. The amendments to the above-mentioned Capital Accord are covered, especially on market risk. In general, each Swiss bank has to fulfill the same capital requirements. Branching within Switzerland is not subject to any legal additional capital requirements. Art. 4 of the Banking Ordinance Act stipulates that the paid-in share capital of a bank to be established shall be at least SwF 10 million. Initial disbursements of capital cannot be made, either with subordinated debt or with other funds borrowed by the bank itself. As far as the shareholders are concerned, the SFBC verifies their identity and sound financial standing as items of the license application in the authorization process. Art 4 par. 1 of the Banking Act requires that banks must provide for an adequate relationship between: – their equity and their total liabilities; – their liquid assets and their easily marketable assets on the one hand, and their short-term liabilities on the other. The Banking Ordinance establishes the directives to be observed in this respect under normal circumstances, taking into consideration the kind of business and the type of bank. It shall define the terms of the own funds, liquid assets, easily marketable assets and short-term liabilities (Art. 4 par. 2 of the Banking Act). The definition of capital is consistent with the Basel Capital Accord. Art. 11 of the Banking Ordinance define the components of capital. On the equity requirements Art. 12 of the Banking Ordinance requires all banks to calculate and to maintain a minimum capital adequacy ratio no less than 8 percent, reduced by existing value adjustments and provisions. The SFBC requires a higher rate of capital adequacy. Based on this, the capital adequacy ratio was raised to a minimum of 10 per cent. The SFBC sees higher capital as giving a competitive advantage and also fostering the good reputation of the Swiss financial market. The definition of capital, method of calculation, and the ratio required are more stringent than those established in the Basel Capital Accord. The resulting capital charge is a function of the structure of the risk-weighted assets, the calculation method used (standardized approach, internal risk aggregation model approach), and of the individual positions. In general the capital requirements reflecting market risks are consistent with the Basel Capital Accord. Minor differences exist for the following: – foreign exchange risk and gold positions, for which the capital charge is 10 percent (instead of 8 percent); – commodity risk, for which the capital charge is 20 percent (however, with a simpler approach); – equity risk, for which, for the purpose of calculating the general market risk, a net position per domestic equity market or per single currency zone can be calculated. Under Art. 13a of the Banking Ordinance capital adequacy ratios are to be calculated on both a consolidated and a solo basis for the banking entities within a banking group. Art. 12 a and b of the Banking Ordinance covers both on and off-balance-sheet items. According to Art. 13b of the Banking Ordinance banks must report their capital adequacy ratio on a solo basis quarterly and the capital adequacy ratio on a consolidated basis half yearly. As a result, the implementation of the Basel Capital Accord in Swiss banking legislation is more risk adequate because of more differentiated and tighter risk weightings. However, the risk weightings on receivables directly or indirectly secured by mortgages must be weighted with 75 percent (Basel: 100 percent). Art. 13b of the Banking Ordinance factors in the cantonal guarantees for liabilities provided for their banks and allows a capital discount of 12.5 percent of required equity for cantonal banks. This is the only significant remaining difference in prudential treatment between these banks and the other Swiss banks. The discount is no longer necessary and should be eliminated to provide a level playing field between the cantonal and other Swiss banks. The SFBC must be informed immediately whenever capital requirements are not met. Under Art. 23 of the Banking Act as a general provision, the SFBC has the right to enforce sanctions for violations of the provisions of the Banking Ordinance on capital adequacy. However there are no indicative benchmarks for triggering action on inadequate capital adequacy. As part of the licensing process the Banking Act requires that a credit institution and the companies belonging to a consolidation group have systems and strategies for risk monitoring, risk management and risk assessment, which are appropriate and sufficient for their activities. They must also have internal rules, which are subject to review and updating on a regular basis, that apply both to the credit institution and companies belonging to the same consolidation group. Capital adequacy rules are also applicable to all banking affiliates of Swiss banks whether domestic or foreign. The capital adequacy requirements are not applicable to Swiss branches of foreign banks. According to the current position of the SFBC, it is up to the bank supervisory authority of the home country to monitor the bank's consolidated equity position properly.
Assessment	Compliant.
Comments	Capital requirements are more conservative than the Basel Capital Accord. Nonetheless, for the large and systemically important financial institutions, frequent and close monitoring of the capital position is recommended due to their often complex activities and possibly rapid changes in risk profiles. The 12.5 percent capital reduction for cantonal banks should be eliminated.
Principle 7.	Credit Policies An essential part of any supervisory system is the independent evaluation of a bank's policies, practices, and procedures related to the granting of loans and making of investments and the ongoing management of the loan and investment portfolios.
Description	Art. 3, 2a of the Banking Act states that a license will be granted if: “the articles of association, bylaws, company contracts and business rules of the bank provide for a clear definition of the scope of business and establish an adequate organization corresponding to the proposed business activities; where the scope or the importance of the business activities is significant, the bank must create separate bodies for the management on the one hand and for the direction, supervision and control on the other. The authorities of these bodies must be segregated in a manner so as to ensure the effective supervision of the bank's management.” Subsequent audits confirm such prudential requirements continue to exist after the bank commences business. The large risks are risk-weighted and must be reported when attaining or exceeding 10 percent of the banks eligible equity resources. Reporting of the large risks to the external audit firm is required once every three months. The ten largest debtors (not risk-weighted) must be included once a year in the long-form report. Not included are receivables, which are secured by movable assets traded on a recognized stock exchange or a representative market as defined in Art. 14.d of the Banking Ordinance and which are customarily accepted by banks, fiduciary deposits or cash deposits as well as debtors that are public-law corporations in OECD countries or domestic and foreign banks and securities dealers. In general, the SFBC enjoys considerable discretion within the framework of the Banking Act when granting licenses. The Banking Ordinance details the prudential requirements applicable to bank lending in Art. 9, “The bank shall lay down in regulations or in internal guidelines the main principles underlying the management of risks and the competencies and procedures for the approval of risk transactions. It must in particular identify, limit and supervise market, credit, default, settlement, liquidity and image risks as well as operational and legal risks.” Each bank is required to have appropriate policies relating to the management and control of lending that include credit assessment, credit review, risk management, the monitoring and control of large exposures and prudent provisioning for loan losses. Limits of lending officers must be incorporated in a bank's internal regulations and any changes to the internal regulations require notification to and approval of the SFBC (Art. 9 of the Banking Ordinance and also Art. 3 par 3 of the Banking Act). Art. 19 par. 1 and Art. 21 par. 1 of the Banking Act and SFBC-Circular 96/3 cover the requirements for auditors (authorized by the SFBC) inspection/ verification activities for lending. External auditors are charged with assessing a bank's loan and investment portfolios within the context of their annual bank audit and must attest to compliance with all SFBC issued rules relating to granting loans and making investments and ongoing management of these assets. External auditors follow detailed audit procedures in approved audit manuals which also include sampling loans, including those noted on a bank's internal watch list and those included in internal loan classifications. A sample of recently granted credits is reviewed for adherence to internal bank policies and practices. The SFBC also identifies one “specialized” supervisory area each year for the external auditors to focus on during their audits and the credit area periodically receives special attention in this way. Regarding investment criteria: The SFBC requires, and authorized external auditors periodically verify, that prudent investment criteria, policies, practices and procedures are approved, implemented and periodically reviewed by bank management and boards of directors. The SFBC supervises banks' investment activities via oversight of the work of the external auditors both in the context of market and credit risk as detailed in the Banking Ordinance, Section 6 on Risk Diversification, Art. 21 and 22, SFBC-Circular 96/3 (Audit Report: Form and Contents) and SFBC-Circular 97/1 (Guidelines on Capital Adequacy Requirements to support market risks of Art. 12 par. l-12p of the Banking Ordinance). Debt securities and equity shares held as financial fixed assets are normally held for the purpose of “structural” balance sheet management, and positions are reviewed during on-site inspections by the external auditors. Such positions are part of a bank's investment and funding activities in the money market, capital market and derivatives markets. Investments, like loans, are extensions of credit involving risks that carry commensurate rewards. The SFBC expects risks in the investment portfolio to be minimized in order to maintain adequate liquidity and marketability. The associated risks (i.e., interest rate, liquidity and foreign exchange, if applicable) are usually monitored and controlled by a bank's Asset and Liability Committee (ALCO) or Risk Committee within established policy and limits approved by the Board of Directors. Such investments should be included within a bank's internal liquidity report for management. External auditors review such investments and how they are used by a bank using procedures in approved auditing manuals. The credit quality of investment securities is monitored through credit analysis, emphasizing a review of current financial information and the use of approved rating agencies. SFBC-Circular 98/3 contains a list of recognized rating agencies. In the larger banks counterparty risk is usually monitored and controlled by a bank's Credit Committee or loan officers within policy and limits approved by the Board of Directors. The external auditors check to see that both the ALCO and the Credit Committee operate independently of the business units taking the risk. Examiners (on an indirect basis) and external auditors (directly) determine that the performance and quality of investments are monitored frequently and subject to regular reporting to Senior Management and the Board of Directors. Compliance with policy guidelines, particularly valuation of investments, is assured through adequate internal controls, internal and external audit coverage and review. General: The credit risk environment is set via established policies and procedures required of banks by the SFBC in the initial licensing business plans. Such policies and procedures are checked annually by external auditors. The SFBC defines credits overdue 90 days or more as “impaired.” However, no data is collected by the SFBC regarding renegotiated, past due and internally classified credits. Such information, along with provisions, chargeoffs and recoveries, is considered useful in monitoring asset quality trends in the banking system. Although the SFBC has not specifically adopted an asset grading/classification system that all banks must adopt, the SFBC requires that credit institutions have an internal loan classification system in place and external auditors look at any classified, reclassified, or rescheduled loans during their annual audits. Auditors also sample denied loans. The SFBC defines impaired and non-accrual status credits for reporting purposes but leaves internal loan classifications up to management to decide and the external auditors to assess. SFBC-Circular 95/1 (Internal Audit) does not include specific reference to adequate controls over credit risk, per se, but broadly covers this area. In addition, a bank's investment policies, practices, and procedures are usually inspected as part of the external auditor's annual bank audit of credit risk and market risk. Specialized inspections by external auditors of investment activities may also be conducted if the SFBC determines a bank's investment activities are material and such inspection is warranted. All loans to bank insiders are required to be extended at an arm's length basis with no or minimal discounts below current market rates allowed. Specific limits in relation to credits granted to directors, significant shareholders and businesses where the bank is a shareholder are not set by the SFBC but rather determined by the individual banks and then checked by the external auditors during their on-site audit. While there are no statutory limits regarding loans to affiliates, “firewalls” are generally imposed regarding lending to affiliates of a bank, which are part of a commercial/industrial group (per Art. 4ter of the Banking Act). The external audit procedures cover reviewing loan policies to ensure they address loans to directors/major shareholders and connected entities. Detailed verification procedures regarding such credits broadly cover conflicts of interest arising in the conduct of different types of activity (such as credit) and require an institution to satisfy the external auditor regarding arrangements made to protect interests of a bank's clients. The SFBC requires that such arrangements should include arms-length transactions and credit granted based on sound underwriting criteria, free from outside pressures. Art. 9 par. 2 of the Banking Ordinance requires appropriate policies and procedures relating to management and control of lending. As part of the annual external audit process, SFBC staff determines adherence to policies and procedures. In order to comply with the policies and procedures for granting credit, the credit institution must ensure the policies are communicated to employees and that appropriate procedures are followed. SFBC circulars (cited above) address procedures used for assessing underwriting standards and credit granting criteria. Art. 3 of the Banking Act and Art. 9 of the Banking Ordinance requires credit institutions have in place such committees of directors and management as are necessary to ensure that the business of the credit institution is being managed, conducted and controlled in a prudent manner and in accordance with sound administrative principles. Thus, in order to comply with this requirement, a credit institution must have a loan or credit committee that is responsible for approving credits of significant monetary amount or above a certain risk level and appropriate policies relating to the management and control of lending. External auditors must assess and attest to the adequacy of an institution's written lending policies and procedures, including the duties and responsibilities of loan officers and loan committees and loan approval limits, during annual audits. Art. 9 of the Banking Ordinance requires that comprehensive risk management systems commensurate with the scope, size and complexity of all the credit institution's activities be in place, incorporating continuous measuring, monitoring and controlling of risk, accurate and reliable management information systems, and timely management reporting. Such management information systems (MIS) should provide essential details on the condition of the loan and investment portfolios if banks are to comply with the SFBC's Banking Ordinance. Compliance is checked during on-site audits by the external auditor. Art. 21 of the Banking Ordinance requires monitoring and control of large exposures. The Banking Ordinance is consistent with the EC Directive on Monitoring and Control of Large Exposures (92/121/EEC). The Banking Ordinance requires credit institutions to have administrative, accounting, and control mechanisms in place for identifying, and recording all large exposures and any changes to them. The SFBC monitors and the external auditors verify compliance with large exposures on a consolidated basis. There are credit reference agencies/credit bureaus that collect data on lending by different institutions to individual borrowers. In addition, external auditors review a sample of loans during their on-site audits. In order to monitor capital, loan loss provisions and impaired loans as required to be reported to the SFBC semi-annually for the majority of banks, bank management must monitor their credits on a regular basis.
Assessment	Compliant.
Comments	No data is collected by the SFBC regarding renegotiated, past due and internally classified credits. Such information, along with provisions, chargeoffs and recoveries, is considered useful in monitoring asset quality trends in the banking system.
Principle 8.	Loan Evaluation and Loan-Loss Provisioning Banking supervisors must be satisfied that banks establish and adhere to adequate policies, practices, and procedures for evaluating the quality of assets and the adequacy of loan-loss provisions and reserves.
Description	All banks are required to establish a risk management program and set forth the main principles of the program in approved policies. Such policies must pay particular attention to credit risks and define lending limits, credit assessment methods, large exposures, country risks, etc. The SFBC approves credit policies at the time of licensing and the external auditor reviews the policy annually for compliance (Art. 9 par. 2 of the Banking Ordinance). The bank's internal audit function audits compliance with the policies and procedures and submits reports on the credit risk area directly to the board of directors and to the SFBC if required to do so or material issues are detected. These reports are also made available to the external auditor. The external auditing firms have to assess compliance with the policies and procedures and provide comments in their audit reports to the SFBC (Art. 43-49 of the Banking Ordinance). The external auditors must also independently value the assets and liabilities based on the bank's documents and records (Art. 43 par. 3 of the Banking Ordinance). Identified risks must be fully provisioned. The risk evaluation has to be based on a complete and current documentation that allows an assessment of the present value of any collateral or demonstration of collateral deficiency. If the documentation is not complete or not available, the loan must be designated as totally impaired (and valued at “0”), which requires full provisioning. If the provisioning is insufficient, the auditor will instruct the bank to increase the amount of the provision. If the bank fails to increase the provision as directed by the auditor, the auditor must report this failure to the SFBC. The SFBC receives annually information from the external auditor on a bank's loan portfolio, internal rating system, provisioning amounts, etc. There is no legal requirement that specifies a particular credit classification category for non-accrual loans. According to the principle of safe and sound banking, banks must provide for specific provisioning for that part of a loan, which is or may become a loss, taking into consideration the existing collateral. A loan is classified as impaired after 90 days but placing a loan on non-accrual status is a management decision. Each bank uses its own rating system and the time criterion to assign a loan into a substandard class is not the sole basis for classification (collateralized loans may not be downgraded if there is adequate collateral to cover the interest and the principal). In case of inadequate collateral or unsecured loans, a loan 90 days past due is considered impaired. There are no minimal provisioning requirements for standard loans. Banks must transfer a least 5 percent of their yearly net profits into the general reserve as long as this reserve does not reach 20 percent of the paid-in capital (Art. 5 par. 1 and 1bis of the Banking Act). Off-balance sheet positions are valued and provided for in the same way as the on-balance sheet positions when defining the credit and default risks and required provisioning. The SFBC requires banks to submit their accounts according to the principles of orderly bookkeeping and in such a manner as to permit the most reliable possible assessment of the net assets (Art. 24 par. 1 of the Banking Ordinance). Banks must publish their annual financial statements (Art. 26 par. 1 and 2 of the Banking Ordinance) and ones with a balance sheet total over SwF100 million must establish interim accounts on a half-yearly basis (Art. 23b par. 1 of the Banking Ordinance). Copies of these statements must also be submitted to the SFBC (Art. 26 par. 4 of the Banking Ordinance). Asset quality must be reviewed at least on a yearly, if not a half-yearly, basis. As noted in the assessment of CP 7, additional asset quality data, on a more frequent basis (such as quarterly) should be obtained by the SFBC and used in monitoring any deteriorating trends in asset quality. Nonperforming loans are defined as loans to customers and mortgage loans the interest payments of which have become overdue. There is a presumption that interest and commissions more than 90 days overdue are a loss. In the case of current accounts, the presumption applies when the overdraft limit is exceeded for more than 90 days. If the recovery of the interest is also at risk, it is also considered a loss and should be written off, even if the credit is less than 90 days overdue. If a credit is 90 days overdue but remains on the bank's books, it will cease accruing interest and commissions. Interest and commissions are either credited to value adjustments and provisions, or cease to be accrued altogether. Interest and commissions already accounted for as income shall not be reversed, but shall be included in a bank's provision (see also Reporting Guidelines No. 106). Any accounting treatment that diverges from the above must be described in the notes to financial statements (pursuant to Art. 25c par. 1 ch. 2 of the Banking Ordinance, Guidelines of the Federal Banking Commission concerning the provisions governing financial statement reporting RRVSFBC “Reporting Guidelines,” No. 106). Accrued, though unpaid, interests are recorded as interest income as long as the loan is performing (full accrual accounting, Art. 24 par. 2 lit. h of the Banking Ordinance). The book value of nonperforming loans must be disclosed annually to the SNB and the SFBC (SFBC- Circular 99/3, and SNB Form “FI03/23”). The audit firm's review annually compliance with accounting and prudential requirements (Art. 19 par. 1 of the Banking Act) and report to the SFBC (Art. 21 par. 1 of the Banking Act, Art. 43ss of the Banking Ordinance). Based on information received from the audit firm or other sources indicating potential violations of valuation rules, the SFBC may take several actions: – request additional information from the bank, the audit firm, or both (Art. 23bis par. 2 of the Banking Act); – request an extraordinary review to be performed by an independent audit firm (Art. 23bis par. 2 of the Banking Act); – request the bank present draft financial statements in the future to the SFBC before publication; – demand corrections to the financial statements, including an increase of value adjustments and provisions, if the investigations confirm that they are substantially understated and republish if necessary (Art. 23ter par. 1 of the Banking Act); – require modification of inappropriate accounting policies or valuation criteria (Art. 23ter par. 1 of the Banking Act). The SFBC may also command reinforcement of capital requirements (see Art. 4 par. 3 of the Banking Act), effectively reducing the credit activity of the bank. Financial statements must be made available to the public (Art. 6 par. 4 of the Banking Act. Also see CP 21). Financial statements include information relevant to loan classification and provisioning including Segmentation of loans by counterparty (per Reporting Guidelines); Disclosure of loans to related parties (per Art. 25 par. 1 ch.1.13.2 and 25c par. 1 ch. 3.13 of the Banking Ordinance); Disclosure of off-balance sheet operations (per Art. 25 par. 1 ch. 3 of the Banking Ordinance, Reporting Guidelines No. 93 to 102); Further segmentations are to be disclosed in the notes to financial statements (Art. 25c par. 1 ch. 4 of the Banking Ordinance, Reporting Guidelines No. 191 to 198); Segmentation of loans by collateral at market value (per Art. 25c par. 1 ch. 3.1 of the Banking Ordinance, Reporting Guidelines No. 150 to 153); Disclosure of movements in provisions (Art. 25c par. 1 ch. 3.9 of the Banking Ordinance, Reporting Guidelines No. 169 to 173); Segmentation of assets by maturity, country, and currency (Art. 25c par. 1 ch. 3.12, 3.14, 3.15 and 3.16 of the Banking Ordinance, Reporting Guidelines No. 177 to 190). Prudential reporting covers reporting large risk exposures (per Art. 21 ss of the Banking Ordinance). Credit risk supervision (per SFBC-Circular 96/3 Cm 16) includes assessing, at least annually by the external auditor, the internal control system of the bank regarding credit risk. The assessment is included in the Long Form report (see CP 21) and must include, at a minimum: the credit granting and monitoring process; the treatment of loans to bank management and Board Members and important shareholders (per Art. 4ter of the Banking Act); the appropriateness of risk measurement methodologies; the appropriateness of value adjustments and provisions; and internal reporting to the management and the board of directors. Prudential reporting in the credit area also must address the tax impact of loan loss provisions (per Art. 57, Art. 63 par. 1 of the Federal Income Tax Act (LIFD, RS 642.11), Art. 24 par. 1 and 4, Art. 10 par. 1 of the Federal Income Tax Harmonization Act (LHID, RS 642.14)). Provisions that have ceased to be economically justified are part of the taxable income (Art. 63 par. 2 LIFD, Art. 24 (1) LHID), whether or not they were actually released to the income statement. The Banking Act, Banking Ordinance and SFBC Guidelines have established a clear, general reporting and credit classification framework. They require Swiss banks to formulate specific policies for identifying and dealing with problem credits including procedures to ensure that classifications, loan loss provisions and write-offs reflect realistic repayment expectations. The classification and provisioning policies of a bank and their implementation are regularly reviewed by the banks' internal and external auditors and the SFBC. The external auditors and the SFBC via review of the external audit reports determines that banks have appropriate procedures and organizational resources for the ongoing oversight of problem credits and for collecting past due loans. The SFBC also has the authority to require a bank to strengthen its lending practices, credit-granting standards, level of provisions and reserves, and overall financial strength if it deems the level of problem assets is too high. The SFBC is generally informed annually or semi-annually in reports filed by the banks concerning the classification of credits and assets and provision amounts. If a bank is a problem bank or one of the two large banks, more frequent reporting is received (i.e., monthly or quarterly).
Assessment	Compliant.
Comments
Principle 9.	Large Exposure Limits Banking supervisors must be satisfied that banks have management information systems that enable management to identify concentrations within the portfolio, and supervisors must set prudential limits to restrict bank exposures to single borrowers or groups of related borrowers.
Description	See CP 8. The Swiss risk diversification rules are modelled on those of the BIS as well as those prevailing within the European Union in the EC Directive on the Monitoring and Control of Large Exposures of Credit Institutions (92/121/EEC). Risk diversification rules are set forth in Art. 21 and 22 of the Banking Ordinance. With the exception of Swiss branches of foreign banks, all banks must comply with these rules on an individual company as well as on a consolidated basis if the equity capital requirements are to be complied with on a consolidated basis. The limitation of risk concentrations occurs on three levels: – The first limit of 10 percent of the institution's eligible capital turns a risk position into a risk concentration in so far as it is reached or exceeded (Art. 21 par. 1 of the Banking Ordinance). This risk concentration, although in principle is authorized in this size, must be reported to the bank's board of directors as well as to the external auditors on a quarterly basis and, at least, on an annual basis to the SFBC. – In addition, there is an upper limit of 25 percent of the institution's eligible capital, which the risk position of a counterparty may not exceed (Art. 21a par. 1 of the Banking Ordinance). – Subject to certain exceptions, the aggregate amount of all large exposures must not exceed 800 percent of the bank's eligible capital (Art. 21b par. 1 of the Banking Ordinance). A risk position may exceed these limits if the excess is covered by freely eligible capital (Art. 21a par. 5 of the Banking Ordinance). An allocation of this nature of freely eligible equity resources must be disclosed in the quarterly computation of required equity submitted to the Swiss National Bank (SNB). The risk position of each single counterparty or connected group of counterparties (according to Art. 21c par. 1 of the Banking Ordinance, related counterparties are considered as a unit) comprises all outstanding positions, off-balance sheet transactions and net long positions in securities which are risk weighted pursuant to the general rules on capital requirements (Art. 21d par. 1 of the Banking Ordinance). Off-balance sheet transactions are converted into their credit equivalent before being added to the risk position. Intra-group transactions may not be subject to the usual rules if the whole group and the group company concerned are supervised on a consolidated and individual basis that is considered to be appropriate (Art. 21a par. 2 of the Banking Ordinance). As far as market risks are concerned, each institution must provide for adequate internal limits. Other than the lending limits described beforehand, Swiss law imposes relatively few restrictions on lending activities of banks. There are no regulatory limits applied to lending to economic sectors or geographical areas, and there are no minimum lending requirements to certain economic sectors, social classes, or geographical areas. The basic rule governing lending activities is the standard of safe and sound banking, which includes a duty to properly establish and assess risk levels, including counterparty risk. In addition, the internal policies and procedures of banks must clearly define the type and geographical scope of the institution's business. Several banks have internal limits for industry sectors and in the case of the two largest banks, the SFBC receives quarterly, a breakdown of exposures by industry. The breakdown is based on the so-called NOGA-code (nomenclature generale des activities) and includes such industries as real estate, construction, oil and gas, telecoms, and automotive. Annually, all banks must report their 10 largest borrowers to the SFBC. Further, banks are under a duty to establish reporting lines, lending limits for each borrower and margin requirements. Finally, all loans must be properly documented in order to promote informed lending decisions and asset quality assessment by internal and external auditors. There are no fiscal arrangements for the lending business. However, a preferential regulatory arrangement exists for certain banks, where the upper limit of 25 percent of the eligible capital in the case of short-term claims (remaining duration of less than one year) on banks is reached very quickly as they must be weighted with a factor of 25 percent (Art. 12a par. 1 point 2.4 of the Banking Ordinance). In the area of risk diversification, the SFBC establishes a risk-weighting rate of 8 percent for short-term claims on large banks, cantonal banks with a cantonal guarantee and for claims on the RBA Central Bank held by banks of the RBA Group (group of more than 80 regional banks). In addition to that, a risk-weighting rate of 12 percent is established for short-term claims on foreign banks with a short-term rating “Prime 1” and a long-term rating “AA” or higher as well as a BIS capital of at least SwF 5 billion (per SFBC-Circular 00/1 of October 26, 2000 on less restricted risk diversification, Regulations for Claims with Residual Maturity of up to One Year on Certain Banks “short-term Interbank Claims “). All banks must comply with the lending limits described above. Moreover, since June 2000, banks must report the 10 largest claims on Swiss and foreign banks on a quarterly basis to the SNB where the data is collected, recorded and transmitted to the SFBC. The regular analysis of the data allows the SFBC to assess and to monitor a possible impact of financial difficulties of banks and systemic risks that might arise from them. The risk diversification rules are based on the general rules on capital requirements. For each position involving a counterparty, the risk weighting factor corresponding to this counterparty or to the collateral received pursuant to Art. 12a par. 1 of the Banking Ordinance should be applied. The risk weighting for certain counterparties (e.g., 25 percent for claims from other public sector entities in OECD countries) and for the collateral received (e.g., 50, 75, or 100 percent for claims directly or indirectly secured by mortgages on residential properties) allows banks a certain flexibility in their lending business within the current rules. In contrast to these general rules, for Lombard facilities which are secured by marketable assets which derive from a diversified portfolio and are traded on a recognized securities exchange or on a representative market (pursuant to Art. 12a par 1 point 4.3 of the Banking Ordinance), a risk weighting factor of 50 percent (instead of 75 percent) is applied. This kind of business has a very long tradition in Switzerland and the inherent credit risk is viewed as very low due to over-collateralization. In special cases the SFBC can allow an easing of the regulations of Art. 21–21m of the Banking Ordinance, or it can order a tightening of them (Art. 22 of the Banking Ordinance). In practice, the SFBC follows a very restrictive policy and exceptions have only been granted in very limited special cases. The Banking Act, Banking Ordinance, and SFBC Guidelines impose limits on large exposures to a single borrower or “closely related group” of borrowers. These limits reflect actual risk exposure and include all claims and transactions, on-balance sheet as well as off-balance sheet. 10 percent or more of a bank's capital is defined as a large exposure and 25 percent of a bank's capital is the limit for an individual large exposure to a private sector nonbank borrower or a closely related group of borrowers. In special cases, deviations from these limits may be acceptable, if approved by the SFBC. During their annual bank audits, the external auditors verify that banks have management information systems which enable them to identify and monitor concentrations on a timely basis (including large individual exposures) within the portfolio on a solo as well as a consolidated basis. The external auditors and the SFBC regularly obtain information that details concentrations within a bank's credit portfolio and can determine if limits have been exceeded.
Assessment	Compliant.
Comments
Principle 10.	Connected Lending In order to prevent abuses arising from connected lending, banking supervisors must have in place requirements that banks lend to related companies and individuals on an arm's-length basis, that such extensions of credit are effectively monitored, and that other appropriate steps are taken to control or mitigate the risks.
Description	The amount of loans to shareholders, officers and “other related parties” is detailed in Art. 4ter of the Banking Act, which states that such credits may be granted “only in conformance with generally accepted principles of the banking profession.” However, such principles are not defined in the Banking Act, Banking Ordinance or any of the guidance issuances of the SFBC or the SBA. Art. 21 paragraph 3, of the Banking Ordinance addresses risk diversification and concentrations and covers such risk positions involving a member of the bank's governing bodies or a person who holds a qualified participation in the bank (i.e., a shareholder) or any person or body corporate closely related to them. Article 25c, paragraph 1 item 3.13 and the SFBC's Guidelines on Financial Statement Reporting Requirements (paragraphs 67, 92, 182-184) require insider lending be disclosed. However, neither the Banking Act nor the Banking Ordinance prescribe limits on such loans outside of the general caveat that such loans should conform to generally accepted principles of the banking profession. Although no specific guidance or circular has been issued on this particular subject, the SFBC states that there is strict supervision over such loans by the internal auditors, external bank auditors and the SFBC. Per the SFBC, “insider” loans should be granted on similar terms and at similar rates as loans to unaffiliated parties. On a quarterly basis, the banks have to prepare the “notification of risk concentration” report and submit it to the external bank auditor. Should the risk position involve a member of the bank's governing bodies or a person who holds a qualified participation in the bank or any person or body corporate closely related to them, the risk concentration shall be designated accordingly in the list under the collective term “Transactions with Governing Bodies.” SFBC-Circ. 96/3 Appendix III requires banks detail their 10 largest borrowers annually; if an “insider” has a large exposure, that individual will be identified. Prudent practices would limit such credits to a specific amount that, as a percentage, would be covered separately by eligible equity. SFBC stated in their response to IMF's questionnaire that such loans shall not exceed 25 percent of eligible equity. This restriction is valid on an individual basis. On an aggregate basis, the amount of risk concentration for all such loans is the same as other concentrations and shall not exceed the percentage of 800 percent of the eligible equity. However, all loans to “insiders,” regardless of whether they meet the threshold of being a concentration, warrant review and scrutiny by the external auditors and the SFBC to ensure they are granted and monitored on an arm's-length basis without preferential terms granted. Pursuant to Art. 4ter of the Banking Act, commercially based lending and collection policies must be applied to loans to shareholders, officers and other related parties. The terms and conditions applied to loans to related parties must not be more favorable than credits extended to non-related borrowers under similar circumstances. During the annual external audit, related party loans are selected for review by the auditor to determine conformance with generally accepted principles of the banking profession. Any preferential treatment to such borrowers would be reported to the SFBC. Directors are expected to abstain from voting on their own or related party loans. The external auditor has discretion in making judgments about the existence of connections between a bank and other parties. The SFBC expectations are that generally accepted principles of the banking profession require that transactions with connected or related parties not pose undue risk to the bank and that such loans are addressed in a bank's loan policy with appropriate steps in place for underwriting, approval and monitoring repayment. The SFBC has set limits on loans to connected or related parties that are consistent with those associated with concentrations to any individual or related groups. Pursuant to circulars issued by the SFBC on the Long Form audit report the SFBC expects banks to have information systems to identify individual loans to connected and related parties as well as the total amount of such loans, and to monitor them through an independent credit administration process. The SFBC obtains and reviews information on aggregate lending to connected and related parties on a regular basis and external auditors check this area closely during their annual audit. Such loans are included in a bank's annual published report and the external auditor's Long Form report to the SFBC.
Assessment	Compliant.
Comments
Principle 11.	Country Risk Banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring, and controlling country risk and transfer risk in their international lending and investment activities, and for maintaining appropriate reserves against such risks.
Description	Art. 9 par. 2 of the Banking Ordinance requires banks to establish regulations or internal guidelines that address the main principles underlying the management of risks and the competencies and procedures for the approval of high-risk transactions. Specifically detailed in the Ordinance are market, credit, default, settlement, liquidity, and image risks as well as operational and legal risks, which must be identified, limited, and supervised. Although country risk and transfer risk are not specifically identified, they can be captured under any of the listed categories. The SBA issued qualitative guidelines for the Management of Country Risk dated September 4, 1997 and also has an issuance on Practices in Foreign Exchange Trading dated December 5, 1996 that are germane to transfer and country risks and the SFBC has concurred with the guidelines. Limits on all relevant risks a bank is exposed to are also a requirement stated in paragraph 1 of the Guidelines of the SBA for the Risk Management in Trading and in the Use of Financial Derivatives dated January 31, 1996. There are no explicit limits being imposed by the SFBC on open positions in individual foreign currencies but banks must have an adequate risk measurement system in place, which includes the setting of limits (paragraph 1 of the “Risk Management Guidelines for Trading and for the Use of Derivatives”). The size of these limits (e.g., EUR 200 million, US$500 million) and the limit type (e.g., intra-day or overnight, position limit or value-at-risk limit) are bank specific. Capital adequacy requirements are imposed on open foreign exchange positions. In 1983, the SFBC issued a circular requiring for the first time that internationally active banks allocate 20 percent of their general loan loss reserves to loans with a country risk. This percentage was retained until the end of 1988, when the rate was raised to 35 percent. Then beginning December 31, 1989, a distinction was made: the required general loan loss reserves for short-term trades with a maturity of at most one year was 10 percent, the one for other trades 50 percent. At the end of 1991 the required general loan loss reserves for the other loans was raised to 65 percent while requirements regarding general loan loss reserves were dropped. The regulation changed again in 1992 and every year the SFBC published a list of countries with the minimal rates for the general loan loss reserves (between 5 percent and 100 percent) for the individual countries and the types of business exempted from these specific provisions. The SBA issued Guidelines for the Management of Country Risk dated September 4, 1997, which impose on banks the obligation to introduce their own systems of identifying, controlling and measuring country risk. Under SFBC-Circular 92/4 (which was repealed as of January 1,1999), banks were to establish specific sovereign risk provisions with respect to all exposures in countries listed in an appendix to the circular. Provisioning rates were specified and subject to certain exemptions. The SFBC decided to repeal its circular because when considering the banks with the most significant country risks, the country risk reserves required, according to the circular, had decreased. The banks in this business asked the SFBC to exempt parts of their business from the general loan loss reserves. The guidelines of the SBA address more than provisions and include risk policy, recordation (identification and measurement), risk limitation and provisions, reporting and disclosure and audit. The SFBC felt these self-regulating guidelines, coupled with the banks' knowledge on specific countries, were more comprehensive than the SFBC circular. The banks' external auditors examine whether the guidelines have been adhered to, utilize rating agency information on particular sovereign risks, and record the audit results in the annual audit report and Long Form report that goes to bank and SFBC management. Banks are expected to review their provisioning for country risks at least semi-annually. The SFBC receives aggregate numbers on a country basis quarterly and further detailed information is incorporated in the annual external audit report. Under the Swiss tax code, bad debt reserves and country risk provisions are allowed as follows: – individual risks can be adjusted at the discretion of the bank, and these adjustments can be challenged at the discretion of the tax authorities. Provisions can be made before the debtor has been declared bankrupt. Write-offs of bad debts are made only when the debtor is adjudged bankrupt or it is highly unlikely that the debtor will ever be in a position to pay; – in addition, a general reserve can be made on the remaining outstanding receivables if the debtors are not banks in an OECD country. In general, 5 percent of the outstanding receivables from Swiss clients and up to 7 percent on the outstanding receivables from non-Swiss clients are allowed. All provisions must be reviewed annually and adopted. Failure to do so will lead to disallowance of excess bad debt reserves or of country risk provisions no longer being required. Only foreign banks and a few of the other Swiss banks, including the two large banks, are involved in cross-border or transfer risk activities. The SFBC does not receive monthly a Currency Report, broken down by country, from the applicable licensed institutions. However, the quarterly Large Exposures report also contains some country exposure information. The two largest Swiss banks report quarterly to the SFBC a breakdown of exposures for emerging market countries. Of the country/transfer risk exposure that exists, most of it is with/to large multinational corporate borrowers and OECD countries. Generally, the SFBC has not had much need to involve itself with cross-border and transfer risk given the limited number of banks involved. However, in those instances where a particular country is experiencing problems, the SFBC know which of its banks may have currency and large exposures in a particular region or country. The bank, its external auditor and the SFBC will review the data and the magnitude of the exposure and determine if any supervisory action is needed. In order to complete the SFBC's Large Exposures reports, banks must have policies, procedures and systems in place to identify, monitor and control country and transfer risks. As part of their on-site inspection, the external auditors review the banks' policies and procedures for adequacy. Lending policies should address the geographic spread of risk, including appropriate limits and then compare them to a bank's own internal country risk data. In addition, the Swiss Accounting Standards and the Tax Code address accounting for and disclosure of country and transfer risks. As previously noted, although not specifically required, banks are encouraged to apply the Swiss standards with respect to their financial statements, including adequate disclosure. Thus, banks involved in international lending must have the systems in place for identifying and monitoring country and transfer risks so that appropriate measures can be taken as/when needed. The SFBC, the Banking Act and Banking Ordinance all require credit institutions have in place appropriate policies relating to the management and control of the lending function. During the external auditor's on-site audit, auditors review an institution's loan administration, assess the internal controls, internal loan review function, problem loan policies and loans, review loan files against stated policies, review related management information systems and review management reports and any related actions taken. The SFBC no longer imposes blanket requirements regarding provisions on a country specific basis. The banks themselves determine the appropriate amount of provisioning, generally in accordance with standard accounting guidance. The appropriateness of a bank's provisions is reviewed annually by the external auditor in conjunction with the review of a bank's financial statements and also by the SFBC upon receipt of the audit report. Monthly prudential reports filed by the largest Swiss banks may provide details of provisions made and arrears statistics which allows the SFBC to monitor, off-site, any deterioration in banks' loan portfolios. The SFBC, in conjunction with information received from the banks and external auditors, determines that a bank's policies and procedures give due regard to the identification, monitoring and control of country risk and transfer risk with exposures identified and monitored on an individual country basis. Banks are required to monitor and evaluate developments in country and transfer risks, apply appropriate countermeasures and have information systems, risk management systems and internal control systems in place to comply with its policies. The SFBC permits the banks themselves to decide for each individual loan the appropriate provisioning in conjunction with the SBA's guidelines and in line with perceived and/or identified specific risks. The provisioning is judged by the external auditor and by the SBC for adequacy. The SFBC receives and reviews sufficient information annually via the external audit Long Form report on the country risk/transfer risk of individual banks.
Assessment	Compliant.
Comments
Principle 12.	Market Risks Banking supervisors must be satisfied that banks have in place systems that accurately measure, monitor, and adequately control market risks; supervisors should have powers to impose specific limits and/or a specific capital charge on market risk exposure, if warranted.
Description	The SFBC-Circular 97/1 “Guidelines governing capital adequacy requirements to support market risks” focuses on capital adequacy but also covers market risk. Financial intermediaries applying the model-based approach have to observe detailed qualitative standards with respect to their market risk management process. In particular, they have to ensure that the risk aggregation model is closely integrated into the daily risk control. Its results must be an integral part of the planning, monitoring and management of the market risk profile of the bank. There must exist a clear and permanent relationship between the internal trading limits and the value-at-risk as it is used to determine capital requirements for market risks. The computation of required equity is made according to the rules set out in Art. 12a through 12o of the Banking Ordinance. The requirements to support market risks are further regulated through Guidelines issued in SFBC-Circular 99/1. The market risks may be computed using the standard approach described in the Banking Ordinance and Guidelines or, with the consent of the SFBC, using a model-based approach. The use of the model-based approach is conditional upon the bank fulfilling specific SFBC requirements. Simplified rules apply for computing capital charges on trading book positions if a bank's trading book at no time exceeds 6 percent of all on- and off-balance-sheet positions and the absolute level of SwF 30 million (so-called “de minimis” rule). EC Directive 93/6/EEC issued in March 1993 and amended in 1998, addresses the capital adequacy of investments firms and credit institutions and contains requirements for credit institutions in the area of market risk. Information, risk management and internal control systems must be in place for all areas, not just the market risk area. Although Switzerland is not a member of the EU and not required to implement EU Directives, generally the Swiss banks adopt the significant aspects of the directives into their own system since they are major competitors to EU banks. Swiss credit institutions are required to determine a trading book policy statement that sets out the basis on which positions are allocated between the trading and the banking books. The SFBC requires banks to assess associated market related risks (position, interest rate, settlement and counterparty, foreign exchange and large exposures) and identify, measure, monitor and control them. External auditors perform on-site audits annually using established industry procedures regarding Treasury/Market activities. Part of the procedures requires the auditors to review the banks' policies during on-site audits to ensure adequacy and suitability. The EC Directive was amended in 1998 to permit the use of models in identifying, measuring, monitoring and controlling market risks. In order to carry out its supervisory duties in the area of market risk, the SFBC has established a separate risk management unit that has specialists who review bank models and keep abreast of the products offered by those institutions identified from prudential reports as being market players. The unit goes on-site to those larger banks that have developed internal models for tracking, assessing and monitoring their market risks. The SFBC experts validate/evaluate the models in use. The SFBC plans to add five additional staff to the unit in the next few years in anticipation of finalization of the revised Basel Capital Accord that is currently under review. It is important for the banks and the SFBC to know what types of products are being traded and when they are due. This is an item for discussion when the SFBC meets quarterly with the largest Swiss banks. The SFBC does not approve models subject to any conditions. The staff discuss with the banks what a representative model would be and what it might factor into the assumptions. Although the SFBC does not conduct stress tests of the banks or system, individual banks have set up their own modeling scenarios to stress test shocks to the markets. Both large Swiss banks stated that the September 11 terrorist attacks in the United States tested their system but results at both banks were reportedly within the stress test parameters. The risk management staff reviews internal bank limits and their appropriateness in regard to the models. They review the bank's trading book policy statements and discuss the limits set for their various market risks and the appropriateness of the levels. These limits are subject to ongoing monitoring by the SFBC Risk Management unit. In addition to the on-site inspections, the SFBC collects details of the market risk incurred by the banks through the monthly Prudential Return, which the large banks with models provide. Information submitted includes interest rate, equity, foreign exchange, settlement/counterparty and large exposure risks arising due to a bank's trading activity. The SFBC does not prescribe specific limits on market risk exposures. For market risk, capital requirements are determined in line with the Basel Accord and Swiss standards at appropriate levels for each institution. Details of the supervisory process used by the SFBC's examiners during their on-site model validation inspections include review of a bank's treasury and market risk activities. The Risk Management staff is supported in their on-site inspections by external auditors and staff from the Large Bank unit. An important part of the on-site inspection, as well as the quarterly meetings with bank management, is to ensure that the Board and management understand the various products the institution offers and their associated risks. Information, risk management and internal control systems must be in place for all areas, not just the market risk area. Institutions are checked to see that they capture transactions on a timely basis and that positions are revalued using reliable market data. Inspection procedures specifically verifying confirmations, settlement, and reconciliation activities are important for overall operational validation. As part of the process, SFBC examiners determine that an institution has an appropriate number of traders for the type and volume of activity conducted. Most banks involved in market risk management are international institutions using some type of internal Value at Risk (VaR) model. The SFBC staff looks to an institution's internal and external audit processes for support in ensuring banks conduct periodic validation/testing of the systems used to measure market risk. SFBC's risk experts review approaches used for identifying and measuring risks with the banks in great detail. Banks conduct “extreme” scenario calculations and stress- and back-testing are done in instances where models are used for validation purposes. Contingency planning, in case systems fail, is a required part of a bank's risk management process. Both UBS and the Credit Suisse Group (Switzerland's two largest banks) have requested, and received, the SFBC's formal review and approval of their models (required under the Capital Adequacy Directive of the EU). As previously noted, Switzerland is implementing the models approach of the Directive even though it is not an EU member. Institutions with an approved model perform stress testing, scenario analysis and contingency planning, as appropriate, in addition to periodic evaluation and system testing. For the level of activity and the number of institutions involved in market activities, the Risk Management unit is adequately staffed. However, once the revision to the Basel Accord is finalized, if many more Swiss banks adopt the internal rating method for determining capital adequacy, the additional five planned staff positions plus possibly several more will need to be provided to ensure the requisite expertise to monitor market activity and review/assess banks' models. Resources could be stretched should multiple banks request approval of their models at the same time. The Banking Act and Banking Ordinance require all bank directors and senior management to have the appropriate competence and experience to enable them to fulfill their fiduciary duties. A bank must have in place comprehensive risk management systems commensurate with the scope, size, and complexity of all of its activities, incorporating continuous measuring and monitoring of risk, accurate, and reliable management information systems and timely management reports. During the SFBC's quarterly meetings and its on-site inspections, and in conjunction with the external auditors, the SFBC assesses the direct involvement of senior management in the market risk activities of the bank to ensure that management is kept informed of the activities and that senior management are exercising their duties responsibly. The role of the risk management function within the bank is carefully reviewed and its independence assessed. SFBC Large Bank and Market Risk units get monthly data from the largest banks, which facilitate timely review. Management reports are reviewed for completeness, accuracy, and timeliness. Management is questioned regarding their use of such reports and their overall knowledge of the products being offered by the bank. Stress testing assumptions are reviewed in conjunction with a bank's overall business plan/strategy, its operating environment and current market conditions. Stress testing scenarios and contingency planning are also frequent topics for discussion during the SFBC's quarterly meetings with bank management. The SFBC determines in conjunction with a bank's external auditors, that banks have suitable policies and procedures related to the identification, measuring, monitoring and controlling of market risk. These policies and procedures include setting appropriate limits for various market risks, including foreign exchange business. The SFBC has the power to impose a specific capital charge and/or specific limits on market risk exposures, including foreign exchange business and ascertains independently or in conjunction with external auditors that banks have information systems, risk management systems and internal control systems in place to comply with those policies. The SFBC and external auditors verify that any limits are adhered to and that there are systems and controls in place to ensure that all transactions are captured on a timely basis and positions are revalued frequently, using reliable and prudent market data. The SFBC has requested banks perform scenario analysis, stress testing and contingency planning, as appropriate, and periodically validate or test the systems used to measure market risk. The SFBC reviews the assumptions management has used in their stress testing scenarios, and the banks' contingency plans for dealing with such conditions. The SFBC reviews management's understanding of the bank's products and the quality of management information.
Assessment	Compliant.
Comments
Principle 13.	Other Risks Banking supervisors must be satisfied that banks have in place a comprehensive risk management process (including appropriate board and senior management oversight) to identify, measure, monitor, and control all other material risks and, where appropriate, to hold capital against these risks.
Description	Within the scope of self-regulation, the Swiss Bankers' Association (SBA) has established guidelines for the management of country risks and guidelines concerning risk management in trading and the use of derivatives (“Risk Management Guidelines for Trading and for the Use of Derivatives” of January 1996 and “Guidelines for the Management of Country Risk” of November 1997). These two guidelines set out the professional rules concerning risk policy, risk identification, measurement and limitation, valuation, reporting and disclosure. The external auditors must describe and assess in their annual audit report the bank's risk management process, in particular the integrity of the input data, the measurement of risks, the monitoring of limits, the validation of models and procedures employed and their correct application and the reporting to management and the board. In addition, they must assess the independence and the integration of the risk management and risk control process into the bank's organization (SFBC-Circulars 96/3 “Audit Report,” par. 16). The external auditors have to give their opinion whether a bank is in compliance with the applicable SFBC-Circulars and SBA-Guidelines. It is the responsibility of each bank's board to establish the entity's risk appetite and set appropriate limits commensurate with that appetite. The SFBC intercedes when a bank's appetite for risk results in its involvement in new activities. Since all activities must be detailed in a bank's bylaws, which are approved by the SFBC at the time of licensing, any new activities must be added to the bank's bylaws and the SFBC must approve all bylaw changes. This provides the SFBC with the opportunity to determine if a bank can handle the risks associated with a particular new activity. Where the SFBC has doubts, staff contacts the bank and discuss the proposed change. Liquidity Risk. The applicable liquidity requirements are set out in Art. 4 of the Banking Act and in Art. 15 to 20 of the Banking Ordinance. Liquidity management addresses a bank's ability to meet its actual and contingent obligations, various liquidity scenarios (day-to-day, liquidity crisis, market/worst case crisis), foreign and domestic currency positions, measurement systems and their underlying assumptions, contingency plans, funding sources and requirements, and overall liquidity management. Banks are required to maintain an emergency buffer to ensure that there are sufficient liquid funds in the banking system to protect the interests of creditors against the impact of any unexpected drain of money from the banking system. Liquidity management should include developing measurement techniques (such as GAP reports, VaR models, duration, or simulation models), procedures, and identifying an appropriate mix of assets and liabilities. Trading positions should be either closed or reduced to minimal levels at the end of each business day; tactical positions require daily management; and strategic positions, while generally stable, should be reviewed periodically to determine if change is needed. Following discussions with SFBC staff, GAP reports are not filed as part of the prudential reporting process and the current supervisory system for monitoring liquidity as part of the off-site supervision is in the process of review. The SFBC has mandated a working group to overhaul the current system and align the present liquidity requirements more closely with the Basel Committee's paper on “Sound Practices for Managing Liquidity in Banking Organizations.” The working group hopes to develop a framework for liquidity analysis in the next year with implementation two to three years from now. Swiss banking law distinguishes between liquid (cash or first grade liquidity) and marketable assets (general or second grade liquidity). The cash liquidity serves to ensure that there are sufficient giro deposits with the SNB. The required liquidity is based on defined Swiss franc short-term liabilities. These liabilities include short-term deposits from banks and other creditors with a maturity not exceeding three months and 20 percent of savings, deposits and similar books or accounts, excluding pension fund liabilities. The base is computed as the average of outstanding balances at the end of the three months preceding the computation. The Federal Finance Department fixes an across-the-board cash-liquidity ratio for all banks based on recommendations of the SNB and the SFBC. Cash liquidity requirements may not exceed 4 percent of the above-mentioned average liabilities. Currently, the first grade liquidity ratio requirement is fixed at 2.5 percent (per the Ordinance of the Department of Finance of November 26, 1987). The required liquid assets must be held on average for the entire 30-day period from the 20th of the month following the calculation period to the 19th of the following month. The ratio is recalculated monthly based on the new average. Although one function of cash liquidity requirements is to allow banks to fulfill unexpected cash claims without recourse to credit facilities at other banks or the SNB, the main purpose of this across-the-board ratio is to enable the SNB to control monetary policy. For that reason, it was decided to transfer the cash or first grade liquidity regulation from the Banking Act and Banking Ordinance to the pending revised SNB Law. The total revision of the SNB Law is currently in consultation process. The across-the-board ratio will be set forth in Art. 17 (minimum reserve) of the revised SNB Law. The general or second grade liquidity is designed to ensure that a bank retains an emergency supply of liquidity to meet its own needs for a certain time. The short-term liabilities which form the basis for the computation include the excess of off-settable short-term liabilities (Art. 17a of the Banking Ordinance) over easily realizable off-settable assets (Art. 16a of the Banking Ordinance); 50 percent of short-term creditors and other accounts or books without withdrawal restrictions; and 15 percent of deposits in savings, deposits or similar books or accounts with withdrawal restrictions excluding amounts not available for distributions (e.g., pension fund liabilities). Based on this calculation, 33 percent of the total of these three components must be covered by liquid assets (Art. 15 of the Banking Ordinance) and easily realizable assets (Art. 16 of the Banking Ordinance). The levels of cash liquidity and general liquidity have to be maintained continuously. Banks must prepare monthly returns for cash liquidity and quarterly returns for the general liquidity. These returns are prepared on official forms and submitted to the SNB. If a bank does not meet the liquidity requirements the SNB must immediately give notice to the SFBC. Banks are also required to ensure that adequate levels of liquidity are maintained on a group-wide basis. Large Exposure Risk. Banks are required to notify their external bank auditors whenever their sight and other liabilities due within one month to a single customer or bank exceed 10 percent of their total (not netted) sight and other liabilities due within one month. The liabilities to a single customer include those to parties related to the customer when there are majority interlocking shareholdings. The auditors must include this information in their annual audit report. They must recommend corrective action if the funding appears to be inappropriately concentrated. One of the criteria for holding a banking license is the establishment of an adequate organization corresponding to the business activities (Art. 3 of the Banking Act). Art. 9 par. 2 of the Banking Ordinance states that financial intermediaries have to document the main principles for the management of risk and the competencies and procedures for the approval of taking risks in internal guidelines. They must in particular identify, limit, and supervise market, credit, default, settlement, liquidity risks as well as reputational, operational and legal risks. Market Risk. See CP 12 above. Interest-rate risk. SFBC-Circular 99/1 dated March 25, 1999 on “Measurement, Management and Monitoring of Interest-Rate Risks” sets out the minimum standards to be applied in the measurement, management and monitoring of interest-rate risks. The external auditors ensure that the banks' standards cover foreign and domestic currency positions and include reviewing measurement techniques used to assess interest rate risk and the underlying assumptions, reviewing MIS for timeliness and accuracy, and reviewing simulations of interest rate scenarios (increasing and decreasing). In addition, banks have to report to the SFBC their risk exposure on a cash flow basis. Based on this information the SFBC will be able to identify outlier banks, that is, banks with a significant risk exposure. The supervisory review process reveals whether such risk exposure is in line with the bank's implemented risk management policies and procedures. If the identified risk exposure is deemed to be too high, an additional capital charge will be levied on the bank by the SFBC. Foreign Exchange Risk. Sound banking practices require banks set overnight open position limits and intra-day limits. The largest banks conduct their business in this way and guidance is available in SFBC-Circular 97/1 dated October 22, 1997, as amended October 1, 1999. External auditors verify on behalf of the SFBC that limits for more volatile and less liquid currencies are lower than those for stable and liquid currencies, and that long positions in currencies susceptible to devaluation or that lack ready availability are strictly limited in conjunction with safe and sound practices. Operational Risk. Such risk crosses all business lines and can be more significant in the asset management investment lines than in the more traditional banking activities of lending. The SFBC requires every banking entity licensed to conduct business have an internal auditor and/or internal audit function to monitor the entire institution and in the process of such monitoring, reduce overall operational risk. The SFBC and sound banking practice supports a Board audit committee chaired by a non-management person with a direct reporting line for the internal auditor. If there is no Board committee in the licensed entity (which happens in branches and small subsidiaries of international institutions), then the auditor must have a direct reporting line to the entity's Chairman of the Board. As noted above, the SFBC is in the process of reviewing and possibly replacing the current liquidity ratio concept with a new approach. Incorporating stock and maturity mismatch (or gap-based) approach and including contingencies and off-balance sheet items should result in a more up-to-date measurement process. External audit procedures require auditors determine the appropriateness, adequacy and suitability of the processes in place during on-site inspections, including whether limits and procedures are operating effectively and appropriate responsibility is assigned to the relevant business units and personnel based on their operations. The SFBC's supervisory process includes regular collection and analysis of data; regular review meetings with senior bank management and external auditors; review of audited accounts and Long Form audit reports; approval of proposals for new business activities; and ad hoc meetings, correspondence, and phone calls with the banks as the need arises. On a monthly basis the SFBC receives prudential data, which permits it to verify a credit institution's compliance with the liquidity requirements. In addition, the SFBC is immediately notified should a bank have a shortfall of its capital requirements. SFBC's examiners review banks' internal audit reports which can indicate areas of potential concern and meet with banks' external auditors as deemed necessary to supplement qualitative assessment. During the external auditor's on-site inspections, the auditors verify the accuracy of the data submitted and determine whether risk management processes are operating effectively. The frequency of inspections depends on an institution's structure, quality of ownership, size, financial condition, risk profile, profitability (current and trend), activities, and the SFBC's perception of management. Institutions where the SFBC is the “home country” supervisor (Swiss owned banks) are required to receive an annual on-site audit performed by an audit firm approved/licensed by the SFBC. See CP 6 for details regarding capital adequacy requirements for banks based on a risk assessment. Swiss banks adhere to the current Basel Accord with more stringent standards imposed by the SFBC. Banks are encouraged to follow or be standard setters for best practices on corporate governance issues, including the disclosure of a statement on risk management policies and procedures in their published financial statements. Financial reporting standards, which apply to all banks and financial institutions, require that an explanation of the role financial instruments play in creating or changing the risks that the entity faces in its activities be disclosed in their public accounts. In addition, the institutions are required to explain the directors' approach to managing each of these risks, including a description of the objectives, policies and strategies for holding and issuing financial instruments. The SFBC requires individual banks to have in place appropriate board and senior management oversight of its comprehensive risk management processes that identifies, measures, monitors and controls material risks and are periodically adjusted in light of the changing risk profile of the bank and external market developments. The SFBC in conjunction with the banks' external auditors determines that the risk management process addresses liquidity risk, interest rate risk, and operational risk as well as all other risks, including credit and market risk. The external auditors address liquidity risk, interest rate risk, foreign exchange risk, and operational risk in their audit standards and on-site procedures. The SFBC sets liquidity guidelines for banks, and ensures external auditors determine that the risk management processes, capital requirements, liquidity guidelines, and qualitative standards are being adhered to in practice. The SFBC has the authority to require a bank to hold capital against risks in addition to credit and market risk.
Assessment	Compliant.
Comments	GAP reports are not filed as part of the prudential reporting process and the current supervisory system for monitoring liquidity as part of the off-site supervision is in the process of review. The SFBC should continue investigating ways to improve its current liquidity monitoring to align it more closely with the Basel Committee's paper on managing liquidity in banking organizations.
Principle 14.	Internal Control and Audit Banking supervisors must determine that banks have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls, as well as applicable laws and regulations.
Description	According to Art. 9 par. 4 of the Banking Ordinance banks must provide for an effective system of internal control. This includes an effective internal segregation of functions between trading, asset management and back office. The SFBC may grant an exemption in certain justified individual cases or require, in addition, the segregation of other functions (Art. 9 par. 1 of the Banking Ordinance). The management of the bank must assemble all documents concerning transactions with risks, which are necessary for taking decisions and monitoring such risks. These documents must also enable the auditors to form a reliable opinion on the business transactions (Art. 9 par. 3 of the Banking Ordinance). The SBA Guidelines concerning the concept and organization of internal audit in banks, dated from 1978, as amended in 1987, is currently under revision. The SFBC-Circular 95/1 dated December 14, 1995, provides guidance on Internal Audit and in their annual audit, external auditors are required by SFBC-Circular 96/3 dated October 21, 1996, to assess the appropriateness of internal control and the internal audit function. The EU's Second Banking Directive (89/646/EEC) issued in 1992 and adapted by the SFBC in several respects, also sets out requirements relating to internal controls. Swiss banks are required to have comprehensive risk management systems commensurate with the scope, size and complexity of all the bank's activities, and to continuously measure, monitor and control risk. Such systems must be accurate and reliable, and include timely management reporting and sound internal controls. Internal control systems and reporting arrangements should provide for the effective, prudent and efficient administration of (an institution's) assets and liabilities. It is the Board's and Management's responsibility to ensure that the business of the credit institution is being managed, conducted and controlled in a prudent manner. These are sound Corporate Governance requirements for Board and senior management involvement in the operations of credit institutions. (See CP 13 for discussion of Operational Risk management, which crosses over into all business units.) An internal audit function is required per the SFBC and good corporate governance standards. A good internal audit program is designed to include procedures to counter fraud. Management's strategic plans are reviewed to assess plans for (and the impact of) major system changes and how the bank is being positioned to deal with changes in their business environment. Management resumption plans were developed and reviewed in connection with planning for Y2K; the SFBC and external auditors should determine that such plans are kept up-to-date going forward, particularly in light of the September 11 terrorist attacks in the United States. According to Art. 9 par. 4 of the Banking Ordinance, a bank must appoint internal auditors independent from the management. The SFBC may, in certain justified individual cases, exempt a bank from the obligation of appointing internal auditors. The reports of the internal auditor must be submitted to the external auditor and in the case of the largest banks, the SFBC's large bank unit also reviews internal audit reports. The internal auditor has to communicate to the external auditors all information needed by them to fulfill their duties. The internal and the external auditors have to coordinate their activities to avoid duplication of auditing efforts as far as possible (per Art. 19 par. 3 of the Banking Act and Art. 40a of the Banking Ordinance). SFBC-Circular 95/1 of December 14, 1995 on Internal Audit further requires that the internal auditor be selected by the board of directors, report directly to it and execute the supervisory tasks, which have been transferred to it. In this connection, it is important to note that no member of the board of directors shall belong to the bank's management (per Art. 8 par. 2 of the Banking Ordinance). The Internal Audit circular details the rules for the organization, the personnel requirements and the field of activity of the internal audit function. The circular also states that the internal audit function can be transferred to the internal audit of the parent company or another group company or an auditing firm recognized by the SFBC but must be independent of the external auditors of the enterprise. Independent third parties who can demonstrate a thorough knowledge of banking and bank auditing are permitted to serve as internal auditors. The external auditors have to comment in the bank's annual audit report in connection with the assessment of the compliance with the licensing requirements on the appropriateness of the internal audit (SFBC-Circular 96/3 Audit Report, par. 14). The assessment of the internal audit area includes staff qualifications and numbers, independence, audit work plan, audit procedures, work papers, and reports. Internal manuals on credit, foreign exchange and other market activities are required as part of sound corporate governance and should correspond to the business activities of a bank. Such is necessary to obtain and retain a banking license. The external auditor is responsible for assessing global controls in those banks with foreign operations. Deficiencies in foreign operations should be identified first by internal auditors. External auditors, in addition to assessing the adequacy of controls and internal audit, must also assess the fitness and propriety of the board and management in carrying out their fiduciary responsibilities. Both internal and external auditors review systems as well as controls. The lead external auditor is required to change every seven years to avoid the auditors losing their objectivity in regard of any one bank. Corporate or banking laws identify the responsibilities of the board of directors with respect to corporate governance principles to ensure that there is effective control over every aspect of risk management. The SFBC requires that banks have in place internal controls that are adequate for the nature and scale of their business. To achieve a strong control environment, the SFBC requires that the board of directors and senior management of a bank understand the underlying risks in their business and are both committed to, and legally responsible for, the control environment. The SFBC has the legal authority to require changes in the composition of the board and management as well as in the external audit firm. The SFBC requires that banks have an appropriate audit function charged with (a) ensuring that policies and procedures are complied with and (b) reviewing whether the existing policies, practices and controls remain sufficient and appropriate for the bank's business.
Assessment	Compliant.
Comments
Principle 15.	Money Laundering Banking supervisors must determine that banks have adequate policies, practices, and procedures in place, including strict “know-your-customer” rules, that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements.
Description	Money laundering was made a crime by Art. 305bis of the Swiss Penal Code (Criminal Code) and all banks and other financial intermediaries are now required to comply with certain due diligence obligations with the passage of the Money Laundering Act (MLL) on October 10, 1997, effective April 1, 1998. Art. 305ter of the Criminal Code impose a general obligation to ascertain the identity of customers and beneficial owners of accounts. Violation is punishable with imprisonment of up to one year. In the financial sector, the SFBC issued its first circular on the subject in 1991 to all licensed banks and auditing firms containing guidelines for preventing and combating money laundering. This circular is presently being revised and the current version is SFBC Circular 98/1 dated March 26, 1998. The SFBC's circular complements the Swiss Banks' Code of Conduct and the MLL in that it sets out certain requirements regarding internal operating procedures, and refines the due diligence requirement with respect to cases where a heightened degree of diligence is necessary. Switzerland has implemented legislation for identifying, tracing, freezing, seizing and forfeiting narcotics-related assets. The Swiss banks self-regulation has been an essential part of the fight against money laundering. The Due Diligence Agreement has been in place since 1977, prior to the 1998 Anti-Money Laundering legislation and is deeply enshrined in the Swiss banking system. The Due Diligence Agreement is revised every five years and lists the following duties which banks must comply: – duty to ascertain the identity of customers – duty to ascertain the beneficial owner of assets – duty to verify specific aspects – duty to retain documentary records – duty to take appropriate organizational measures. In 2000, the two large Swiss banks joined with nine other internationally active banks to form the “Wolfsberg Anti-Money Laundering Principles,” These principles are based on the Due Diligence Agreement but do not set out any sanctions or penalties. Adoption of and compliance with the principles are voluntary by the banks but have been agreed to by UBS and the Credit Suisse Group. Switzerland is a member of the Financial Action Task Force (FATF) on money laundering and was accepted into the Egmont Group of financial intelligence units in 1998. Switzerland has ratified the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime of 1990. In December 2000, Switzerland signed the United Nations Convention Against Transnational Organized Crime. Switzerland also has a Mutual Legal Assistance Treaty in place with the United States to exchange records and provide information in connection with narcotics investigations and proceedings. The Swiss signed a declaration of intent with the Belgian reporting office laying out details of cooperation in 1999 and are also negotiating similar arrangements with France, Finland and the Czech Republic. On December 22, 1999, the Efficiency Bill was passed by Parliament. The purpose of this bill is to make the prosecution of organized crime, money laundering, corruption and other white-collar crime more effective, by increasing personnel and financing of the criminal police of the Federal Office of Police (FOP). The new law gives the FOP and Attorney General's Office the authority to handle cases with international scope, involve several cantons, and deal with money laundering, organized crime, corruption, and white-collar crime more effectively. The law modifies Art. 340bis of the Criminal Code and takes effect on January 1, 2002. The SFBC ensures that banks have adequate policies, practices and internal operating procedures in place that promote high ethical and professional standards and prevent the banks from being used, intentionally or unintentionally, by criminal elements. The prevention and combating of money laundering is to be given due weight in the training of personnel, in particular of the employees having customer contacts. Beginning at the licensing phase, the SFBC relies on the external bank audit process to confirm that banks take the appropriate steps to prevent and detect criminal activity or fraud and report any suspicious activities to the appropriate authorities. Such steps must continue to be in place once a bank commences business and are reconfirmed annually by the external auditor. Banks must provide for internal operating procedures and control mechanisms necessary for the prevention and combating of money laundering. They must ensure adequate training of their personnel, in particular of employees having contact with customers. Each bank has to designate one or more persons or a specialized body (e.g., legal or compliance department) which advises the management and all employees in developing and implementing the internal operating procedures, in training personnel, in spotting cases of suspicious customers and transactions, and in all other questions related to money laundering. Internal auditors have to review the measures taken. Procedures are checked annually by the external auditors and any deficiencies require corrective action. SFBC-licensed external auditors determine that banks have complied with the law, SFBC guidance and the Due Diligence Agreement. Such annual audit attestations are part of the Swiss anti-money laundering program. As noted above, clear rules and guidelines are in place regarding what records must be kept on customer identification and individual transactions. Documentation must be retained for a minimum of 10 years after the account relationship is closed. The banks must investigate the purpose and economic background of transactions or business relationships appearing unusual unless their legality is clear (Art. 6 lit. a MLL). The banks must conduct further investigations if a customer or third party, at the time of opening an account or business relationship with the bank, deposits, for the credit of an account or security deposit, bank notes, securities or precious metals in a value equal to more than SwF 100,000. If a customer or third party, during the period of the business relationship, deposits or withdraws bank notes, securities or precious metals for the credit or debit of his deposit account, and the amount of the individual transactions or the number of transactions appear unusually high in relation to the known business activity and the known financial circumstances of the customer, the same procedure applies. The banks must set forth the framework for these investigations in their internal operating procedures for action. If the bank becomes aware of indications that certain funds originate from a crime, or that a criminal organization has the power of attorney with respect to these funds, special investigations are required to assess satisfactorily the background of the transactions. The banks must require for this purpose either a written declaration of the contracting party or prepare a memorandum for the record in which they must set forth the result of the investigations. Depending on the circumstances of each case, in principle, particular information is required on: – the purpose and nature of a particular transaction; – the financial circumstances of the contracting partner or the beneficial owner; – the professional or business activity of the contracting partner or the beneficial owner; – the origin of the funds deposited or invested. The SFBC as the supervisory authority for banks, securities dealers, stock exchanges and investment funds is also responsible for the supervision of the anti money laundering implementation with regard to these institutions. The approved external auditing firms are required to verify the implementation and application of the anti-money laundering rule in the context of their regular auditing activities. Violations must be immediately reported to the SFBC. Art. 8 MLL requires banks to take all measures necessary to prevent money laundering. They must make sure that their personnel are adequately trained and instructed and that regular internal controls are developed and followed. If a bank knows or has a justified suspicion that funds are connected with money laundering, it must notify the Money Laundering Reporting Office (MROS) immediately. For the year 2000, 311 reports were filed in total of which 234 (75 percent) were filed by banks. The SFBC should also be notified when serious issues are evident or in the case of noncompliance. The obligation to notify is also triggered if a customer refuses to cooperate in investigations. If a bank continues with a business relationship despite having doubts about it but without a well-founded suspicion and without informing the relevant authorities, it must monitor the business relationship. If a bank breaks off the relationship without informing the relevant authorities, it must ensure that the assets are withdrawn in a form that allows the prosecution authorities to follow the “paper trail” if necessary. The bank must not pay out large sums of money in cash or physically issue securities or precious metals. These obligations also apply if the bank suspects corruption or misuse of public funds. The bank must not break off the business relationship or allow the withdrawal of large sums if there are concrete indications that the authorities are about to undertake seizure steps. Once notification has been made, banks must block the funds without delay and maintain the freeze until they receive a ruling from the criminal authorities but for no longer than five working days. Banks must neither inform the customer nor third parties about the notification and the freezing of the funds if not permitted by the criminal authorities. The banks must prepare files on their customers to document relationships, transactions and investigations sufficiently to permit a third-party professional, such as the external auditor, to reach a reliable opinion about the transactions and the compliance with the law and the implementing SFBC Circulars. The identification document as well as the documents concerning the transactions undertaken have to be retained for at least ten years after the cessation of the relationship or the transaction (Art. 7 MLL). Banks must designate one or more persons or a specialized body who can ensure compliance with internal procedures and policies and advise the management and train all employees in cases of suspicious transactions or customers. Internal auditors must review the measures taken by the bank to prevent and combat money laundering. The SFBC Guidelines apply to the consolidated bank and provide that banks must not misuse their foreign branches and financial companies to circumvent the money laundering guidelines. They must ensure that banking group companies and establishments in countries that are not members of the FATF, follow the FATF recommendations applicable. The SFBC may prohibit banks from establishing affiliates in countries where the regulatory environment, in particular the anti-money laundering regulation, is deemed inadequate. Swiss banks' foreign offices must abide by the Swiss standards of due diligence as set forth in the SFBC Circular and the Swiss Banks' Code of Conduct and external audits of offices in foreign jurisdictions are done by Swiss auditors familiar with the Swiss standards. The SFBC may also order a “special audit” to verify compliance with the anti-money laundering provision. The SFBC mandated a special audit after serious omissions and organizational shortcomings were disclosed in a number of banks in Switzerland following a high profile case. The audit covered several establishments of the banks both within and outside of Switzerland. In addition to the “special audit,” the SFBC may, within the context of regular consolidated supervision activities, require examination with a special focus on anti-money laundering procedures. In January 2001, the SFBC asked Swiss banks with significant activities outside of Switzerland to mandate that their auditing firms conduct in-depth examinations to verify the adequacy of their internal procedures, systems and controls governing anti-money laundering. These in-depth examinations place a particular focus on the adequacy and effectiveness of customer identification procedures, the functioning of internal control mechanisms and the communication and cooperation between internal audit and external audits. In addition, the auditors are required to report immediately to the SFBC any indications that the foreign establishments are used to circumvent Swiss legal requirements and professional rules. In the event of non-compliance, the SFBC shall impose administrative sanctions and may refer the violation to the criminal authorities. The SFBC has a range of sanctions available for banks in violation of the money laundering rules. Sanctions range from a reprimand to a special audit and/or dismissal of bank officials to the revocation of a bank's license if licensing criteria are no longer met or the bank is in serious breach of its legal obligations. Besides administrative measures, the SFBC may, in case of violation of the Banking Act, the MLL or the Criminal Code, bring criminal charges. Compliance with the Code of Conduct is enforced by an independent Supervisory Board set up by the Swiss Banker's Association (SBA). This Board may impose fines up to SwF 10 million. According to Art. 9 MLL, a bank who knows or has a justified suspicion that the funds in a business transaction are related to a criminal act as defined in Art. 305bis of the Criminal Code, must notify without delay the MROS. Banks cannot invoke banking secrecy provisions with regard to criminal or administrative authorities conducting investigations. They must provide all information requested by these authorities and allow access to all their files. Banking secrecy or confidentiality provisions therefore cannot hamper anti-money laundering investigations. The Criminal Code allows bank employees to report suspicious transactions without fear of violating the bank secrecy regulations. The SFBC and the SBA are in the process of updating the Due Diligence guidelines to clarify foreign corruption (currently addressed under the old law) and the duty for top bank management to know the big/high profile customers and to frequently check such accounts. These efforts are not limited to foreign corruption but also include a working group to revise the current SFBC money laundering circular. The working group consists of representatives of the Money Laundering Control Authority, the Money Laundering Reporting Office, and cantonal enforcement agencies. The objective is to also formulate recommendations for a review of the SBA's Code of Conduct on Customer Due Diligence. The revised SFBC guidelines will address: – Formulation of a more differentiated approach to customer identification; – Rules for non-face-to-face customer relationships, in particular internet-only banks; – Rules regarding identification of customers by third parties and independent asset managers; – More detailed rules on the verification of the beneficial owner; – Use of client profiles; – Heightened due diligence requirements in special cases, for example, Politically Exposed Persons (PEPs); – Adaptation of the existing rules to the criminal code provisions regarding foreign corruption and criminal liability of corporations. On March 29, 2001, the SFBC addressed a letter to all banks stating the minimum standards for account openings and the monitoring of accounts with “Internet only” banks. The letter currently imposes the same due diligence standards on such “virtual” bank account openings as on “brick and mortar” banks. These minimum standards will be subject to review and incorporated into the revised SFBC Anti-Money Laundering Circular. The minimum standards of March 29, 2001, will remain in force until their inclusion into and the issuance of the revised SFBC Anti-Money Laundering Circular. The SFBC requires, and periodically verifies via the dualistic supervisory process with external auditors, that banks have in place adequate policies, practices and procedures that promote high ethical and professional standards and prevent the bank from being used, intentionally or unintentionally, by criminal elements. Such policies, practices and procedures include the prevention and detection of criminal activity or fraud, and reporting of such suspected activities to the appropriate authorities. The SFBC requires banks to appoint a senior officer or committee with explicit responsibility for ensuring that bank policies and procedures are, at a minimum, in accordance with local statutory and regulatory anti-money laundering requirements. Laws, ordinances and guidelines and/or banks' policies protect staff who report suspicious transactions in good faith. The SFBC has adequate regulatory enforcement powers but has no criminal enforcement powers. It can impose administrative sanctions and, if criminal violations are found, the SFBC must inform the competent criminal enforcement authorities to take action against a bank that does not comply with its anti-money laundering obligations. The SFBC is able, directly or indirectly, to share with domestic and foreign financial sector supervisory authorities information related to suspected or actual criminal activities. However, one area where the SFBC would appreciate, and should have, clear legal enforcement authority is in their right to publish the identities of banks and individuals involved in money laundering activities and to impose monetary penalties for noncompliance with the MLL. The SFBC currently has established the practice of naming offenders in money laundering cases and providing a clear legal basis for the practice in law is desirable. Any new legal enforcement authority should not limit the SFBC to violations of the Money Laundering Act but rather apply more generally to all kinds of violations of a certain degree of seriousness, including violations of prudential rules and regulations in addition to violations of due-diligence and the anti-money laundering rules. The SFBC via the external audit process determines that banks have a policy statement on ethics and professional behavior that is clearly communicated to all staff. The Swiss laws and/or regulations embody international sound practices, such as compliance with the relevant forty Financial Action Task Force Recommendations issued in 1990 (revised 1996) and a 1998 FATF evaluation concluded that Switzerland has a comprehensive and solid legislative scheme in place to combat money laundering. Switzerland has been vigilant in developing anti-money laundering policies, and allocating resources to prevent money laundering. Information related to suspected or actual criminal activities is shared by way of various international agreements.
Assessment	Compliant.
Comments	Although the banking sector is compliant and diligent in complying with Switzerland's Money Laundering Act, the mission was not in a position to assess the effectiveness of measures introduced outside the financial sector.
Principle 16.	On-Site and Off-Site Supervision An effective banking supervisory system should consist of some form of both on-site and off-site supervision.
Description	Bank supervision for the vast majority of Swiss banks can be viewed as a three-pillar approach: The indirect supervision of the SFBC, the direct supervision of the external auditor, and the ongoing on-site supervision of the internal auditor. In addition, a fourth pillar, the Swiss Bankers Association (SBA) acts as a self-regulatory body and adds to the Swiss system of supervisory checks and balances. The internal audit function of the banks has been previously discussed in the assessment of CP 14. Also see CP 19. The Swiss system, also referred to as a “dualistic system,” relies traditionally on the banks' external auditors, which perform an official supervisory function with respect to the financial intermediaries subject to SFBC supervision. The external auditors are part of the supervisory system. They are licensed and supervised by the SFBC. The external auditors carry out official duties and can be subject to sanctions imposed by the SFBC, that is, withdrawal of their license and replacement of the external auditor. In case of an external auditor violating the banking law, the SFBC must inform the Swiss Federal Department of Finance, which is the competent authority for the imposition of fines. The appointment of the external auditor by the bank is effected under private law, however the scope of the audit is laid down under public law in the Banking Act, the Banking Ordinance and the guidelines of the SFBC. The SBA is a very influential body in Swiss banking. It consults and cooperates with the SFBC on the development of new banking legislative proposals as well as draft ordinances and SFBC guidance circulars. The SBA also has initiated and established rules and conventions in consultation with the SFBC which SBA members are obliged to follow. Frequently such self-regulating guidelines are endorsed by the SFBC and then become of the same legal weight as SFBC issued guidelines and become applicable to all Swiss banks. Recent examples include legislation against insider trading and money laundering. The SBA is also very active in maintaining a code of ethics for the Swiss banking community. The Agreement on Swiss Banks Code of Conduct with Regard to the Exercise of Due Diligence of Banks is an example of such industry setting standards and procedures. External auditors are obligated to verify compliance with the professional rules of the SBA in the annual audits of the banks. The SFBC has a supervision staff of about 100 of which approximately 13 are in the large bank program. As part of its ongoing supervision of credit institutions, the SFBC performs primarily off-site assessments using a combination of quantitative and qualitative supervisory techniques, including external auditors. On-site supervision by the SFBC is limited to the market risk unit and the large bank unit. The principle quantitative measures require key ratios relating to minimum capital and liquidity levels, large exposures, lending to connected parties, and to individual economic sectors, concentration of deposits and acquisitions by banks in other entities and by other entities in banks. The supervisory process is interactive in nature and often entails dialogue between the SFBC, the auditors and the banks. The process draws its strengths from the principle of cooperation by the management of the institutions with the SFBC. The SFBC's supervision incorporates: regular collection and analysis of data; regular review meetings with bank management and external auditors; dealing with new issues as they arise; and the on-site inspections provided by the external auditors. However, data of detailed asset quality information (e.g., classified assets, past due loans, renegotiated credits and impaired loans) is limited and consideration should be given obtaining this type of information from all banks on a quarterly basis. Once obtained such information along with balance sheet growth and the profit and loss statement could form the basis for development of an early warning system. Regarding this disclosure see also CP 21. Of particular note is the shift in the last few years toward more direct supervision by the SFBC for its largest two banks. The SFBC created the large bank unit in 1998 to provide more direct supervision of these entities due to their significance to the Swiss market and economy and their extensive global operations. The large bank unit changed considerably the Swiss supervisory strategy for these banks, which had been based primarily on reporting by the external auditors. The new supervisory approach still comprises the traditional instruments of the indirect supervision (Long Form audit report in accordance with the Banking Act, meetings with external and internal audit), but also applies the customary tools associated with direct supervision, such as regular quarterly meetings with the bank management, supervisory visits, on-site reviews, regulatory attendance, standardized additional information requirements, and regular meetings with host regulators. The SFBC also has assumed a direct role in the area of evaluating and validating VaR models developed by the large banks and other major market banks for determining capital requirements for market risks in their trading books. Both the large bank and risk management units of the SFBC have been well received and accepted by the institutions. The main tool used by the SFBC for the supervision of all Swiss banks is the annual Long Form report (audit and inspection report) prepared by the external auditors on each bank in the system. The SFBC receives a copy of the report, reviews it and then meets with the external auditors to discuss any issues and the scope of activities for the applicable banks for the next supervisory cycle. If problems are noted, the SFBC may also schedule a meeting with bank management to discuss the results of the report. Other than the two largest banks, the SFBC meets with bank management in the remaining institutions once every three years unless problems surface requiring more frequent meetings. Art. 47 of the Banking Ordinance states that the audit report must be remitted within one year after the date of the financial statements or a shorter time period stipulated by the SFBC. The SFBC states that the reports are generally received within four months. The four-month period appears reasonable given that the report is one of the SFBC's most important off-site supervisory tools. If a Swiss bank is a part of a banking group which is supervised on a consolidated basis by the SFBC, the annual Long Form report will contain the auditor's opinion on a consolidated basis on the bank's organization, management, capital adequacy, large exposures, liquidity, internal audit, internal controls, and financial and risk profiles. External auditors also include in the Long Form report a detailed list of all engagements entrusted to them by the bank in order to address any matters that could impair their independence. The annual Long Form reports are reviewed by the SFBC and discussed with the auditor regarding content and quality. In addition, annual meetings between the SFBC and each licensed audit firm are held, where general issues as well as all audited banks are discussed. The audit firms have to hand in to the SFBC a report on their activities covering organizational, management, human resources, independence and audit procedure issues on an annual basis. If the SFCB has reasonable doubts on the performance of the audit in an individual case, it carries out a procedure to clarify if the audit is performed in compliance with SFBC guidelines. The SFBC may request another properly qualified auditor to review the institution and if the doubts are proven the SFCB can impose sanctions on the initial audit firm and lead auditor such as withdrawal of the license, replacement of the external auditor and fines. The annual Long Form reports are analyzed by the Banks / Securities Firms Supervision Department, which employs 23 people. In addition, the department processes notifications and inquiries of the supervised institutions and deals with questions of interpretation and of principle that are of importance for the supervision of licensed institutions. The department is responsible for the continuous supervision of all banks and securities firms that do not belong to one of the two large Swiss banking groups. In the last few years, supervision has become more risk-focused with the SFBC creating the large bank unit. In the case of the large banking groups, the supervision and analysis of the annual Long Form reports is carried out by the Large Banking Groups department. Members of this department also carry out supervisory visits or attend on-site inspections conducted by the banks' external auditors (“regulatory attendance”). SFBC management and staff appear well apprised of the condition of their portfolio of banks, and the conditions and composition of the business activities do not seem to change on a monthly or even quarterly basis. Usually prudential reports are used as a supplement to the annual Long Form report. The large bank group prepares a formal financial and risk profile, which is submitted to the SFBC management on a quarterly basis. The profile includes: – information from the regular quarterly meetings with Executive Boards and Group Executive Boards; – information from the regular quarterly meetings with the external auditors; – information from the regular annual activity reports and audit plans of internal audit; – the SFBC's assessment of the consolidated risk reports prepared by the two financial conglomerates; and – the SFBC's assessment of quarterly global credit and market risk reports provided by the two investment banking business units UBS Warburg and CSFB. Consideration should be given to formalizing the process of regular meetings, on-site exams, etc. for the large banks by adding to the annual risk profile of each credit institution. The profile should utilize off-site data as well as information obtained from trilateral meetings with foreign supervisors, insurance supervisors, management, and external auditors. When developing an institution's risk profile, the SFBC should specifically focus on any gaps in its supervisory process to determine an appropriate mix of on- and off-site supervision. In those instances where the SFBC perceives an institution exhibits a higher risk profile (in individual and/or systemic risk), greater emphasis should be on conducting an on-site inspection or analyzing information from the primary (in the case of insurance activities) or host (in the case of foreign operations) supervisors. Banks and securities firms are required to report to the SNB and SFBC their annual figures within 60 days of year-end (“early-information,” see SFBC-Circular 99/3 Early Information). Based on this data, the SFBC carries out a peer group analysis and decides on measures where necessary. The SFBC is a member of various international financial working groups that monitor trends and developments and establish new principles on issues of concern to the banking industry on a global basis (e.g., the Basel Committee on Banking Supervision, the Joint Forum on Financial Conglomerates, FATF, and others). Participation in such groups has allowed the SFBC to keep in the forefront of emerging banking trends/issues. One example is in Internet only banks. The SFBC has licensed five such banks. Staff required E-Bank specific information and addressed a letter to all banks on March 29, 2001 on opening accounts in Internet exclusive banks and know-your-customer rules. SFBC staff monitor compliance with prudential ratios off-site through the monthly and quarterly returns received from the banks; staff take follow-up action where appropriate. In addition, the on-site inspection process includes checks for compliance with prudential reports and regulations. The SFBC has an internal rating system (A, B, C) for the Swiss banks. The SFBC management receive a complete list of “C” (i.e., problem banks) annually and is immediately informed on an individual basis of any significant event concerning these problem banks. Management is also kept informed of any earnings, organizational or operational problems at any of the banks. The goal of SFBC management oversight of the on-site and off-site inspection processes is to ensure the effectiveness of the on-site and off-site processes. Regarding on-site inspections, the external auditors are viewed by SFBC as doing a thorough job. They produce an inspection report that is provided to bank management and the SFBC. Where appropriate, issues are brought to the attention of the Board of the bank and senior management at the SFBC. Although the process of report review and meetings with the external auditors generally works, a more formal quality control or quality assurance program for overseeing and verifying the work of the external auditors is needed. There is no routine process in place to verify the information in the Long Form audit report. Since the SFBC authorizes the firms, continual oversight of the firms is necessary in order for the SFBC to ensure its supervisory role, outsourced to the auditors, is being properly discharged. This has also been recommended by one of the expert groups reviewing the Swiss supervisory system. Regarding off-site work, more could be done in compiling and using the data for supervisory purposes. However such reports can't take the place of regular meetings and contact with bank management. Any issues arising regarding prudential ratios and/or supervision requirements are identified by SFBC staff as well as changes to an institution's business profile/management structure. Although the SFBC does not have a specific legal mandate to share banking information with the Swiss insurance supervisor in financial conglomerate groups (such as CS Group), the lack of a legal mandate has not prevented sharing information useful to the assessment of the conglomerate. Even in the absence of a clear legal basis, the two supervisory agencies share information necessary for the supervision of the banking conglomerates. This includes customer data to the extent that this information is necessary for the purpose of consolidated supervision and is kept confidential. However, a clear legal basis for such information sharing is desirable. SFBC staff may not disclose any information concerning the business of any of the institutions under the SFBC's supervision unless such disclosure is permitted by law. Generally, non-disclosure requirements are waived if information is needed by and communicated to another domestic or foreign supervisor involved in financial institution supervision and such information disclosed will be held confidential by those other supervisors. The SFBC's supervision of credit institutions includes an in-depth understanding, periodic analysis and evaluation of individual banks, focusing on safety and soundness, based on meetings with management and a combination of both on-site and off-site supervision. The SFBC, through the external auditors on-site inspections, verifies that adequate corporate governance (including risk management and internal control systems) exists at individual banks; determines that information provided by banks to the SFBC and the public is reliable; obtains additional information needed to assess the condition of the bank and uses off-site work to review and analyze the financial condition of individual banks using prudential reports, statistical returns and other appropriate information, including publicly available information; and monitors trends and developments for the banking sector as a whole. Off-site and on-site work is prioritized based on the results of an assessment of the nature, importance and scope of the risks to which individual banks are exposed, including the business focus, the risk profile and the internal control environment.
Assessment	Compliant.
Comments	The Swiss authorities need to take the following actions: (1) formalize a quality assurance process for supervision of the external auditors to ensure the SFBC's mandates are being followed; (2) obtain sufficient additional detailed data, for example, asset quality, and develop an early warning system; (3) consider a more detailed large bank risk profile that would utilize off-site data as well as information obtained from trilateral meetings with foreign supervisors, insurance supervisors, management and external auditors; and (4) step up on-site supervision.
Principle 17.	Bank Management Contact Banking supervisors must have regular contact with bank management and a thorough understanding of the institution's operations.
Description	Also see CP 16. The supervisory function is effected through a combination of both off-site surveillance and on-site inspections. Off-site surveillance involves the examination of detailed prudential/statistical returns received from the credit institutions on a monthly, quarterly, semi-annual and annual basis. On-site exams are done by external auditors within the scope developed jointly between the SFBC and the external auditor and focuses on asset quality, large exposures, capital, liquidity, corporate governance and internal controls and compliance with laws, etc. External audits are complemented by regular review meetings with senior management of the credit institutions (quarterly or monthly if necessary with the two large bank groups and on a rotating basis for the other banks (about 1/3 per year have a general meeting with the SFBC staff to discuss their individual bank)). Particularly in regard to the large banks, the interaction between the SFBC and bank management is excellent. Consideration should be given to implementing a process with the other Swiss banks whereby SFBC staff meets with management annually, possibly in conjunction with completion of the annual external audit and receipt of the Long Form report. The SFBC has a supervisory program in place that includes regular meetings with bank management, external and internal auditors and foreign country supervisors where appropriate. Quarterly meetings at the large banks address operational matters including strategy, group structure, corporate governance, performance, capital adequacy, liquidity, asset quality and risk management systems. The SFBC staff and management are very familiar with their institutions, including corporate structure, condition, and business activities. Staff remains current through review of the Long Form audit report, prudential report analysis, meetings with management and external auditors. The SFBC must be notified immediately by the banks and the external auditors, per the Banking Act and Banking Ordinance, of any violations or noncompliance with the approved business plans of the bank's license. Moreover, all changes to business activities must be incorporated into a bank's bylaws which require the approval of the SFBC. The fitness and propriety of bank management is always considered in granting a license and in supervising the bank once it commences business.
Assessment	Compliant.
Comments	Consideration should be given to implementing a process with the all Swiss banks whereby SFBC staff meet with management annually, possibly in conjunction with completion of the annual external audit and receipt of the Long Form report. Contacts with management of the two large banks should be more frequent.
Principle 18.	Off-Site Supervision Banking supervisors must have a means of collecting, reviewing, and analyzing prudential reports and statistical returns from banks on a solo and consolidated basis.
Description	See CP 16. Banks are subject to periodic reporting requirements (see also SFBC-Circular 92/1 of September 24, 1992, Matters Requiring Approval and Notification for Stock Exchanges, Financial intermediaries, Securities Dealers and Bank Auditors). A number of these reports encompass a range of financial data that are required for statistical and monetary policy purposes and thus must be submitted to the Swiss National Bank on a monthly, quarterly or annual basis. Other data is necessary for prudential purposes and is prepared on a solo and consolidated basis depending on the bank. The Banking Act and Banking Ordinance provide the legal authority for the SFBC to request information on a periodic basis from the banks. The reports vary in frequency but include own funds information, BIS equity statements, liquidity statements, large exposures, risk diversification information, annual reports and interim financial statements, early information following year end of income statement analysis, own funds data and supplementary data on a solo and a consolidated basis. Banks are also required to notify the SFBC of changes in controlling owners and business activities and bylaws. The annual Long Form external audit report provides detailed financial statement information that addresses all asset and liability categories in addition to other data. The Banking Act and Banking Ordinance provide the authority for the SFBC to implement additional rules/guidelines regarding the consolidation of accounts as well as accounting techniques. (See CP 21 for the assessment on accounting.) International Accounting Standards (IAS) and U.S. Generally Accepted Accounting Principles (USGAAP) are considered to be equivalent to Swiss Financial Statement Reporting Provisions for banks. Banks organized in accordance with Swiss law which are under the controlling influence of persons with residence or registered office in an European Economic Area (EEA) member country may prepare their annual financial statements in accordance with the applicable provisions in their country of origin. Material deviations from the provisions of the Banking Ordinance and SFBC Guidelines of those international standards of financial statement reporting applied must be disclosed and detailed in the Appendix to the financial statements (see SFBC Guidelines concerning the provisions governing the preparation of financial statements, 29a-c). The SFBC has the power and the legal authority to enforce compliance with the requirements that information be submitted on a timely and accurate basis. In the event of material misreporting, the SFBC can require republication and pre-clearance of future filings until such time as they are confident that the filing bank will not misrepresent the financial data again. The SFBC and the SNB have standardized reports that must be filed by all banks. Details of the contents of the reports are either contained in the blank copy of the reports or in RRV-SFBC guidelines on Financial Statement Reporting dated December 14, 1994. Asset quality information is provided annually in the Long Form report for the general population of banks. Balance sheet information is provided monthly. The SFBC has the authority (per the Banking Act and Banking Ordinance) to request and receive all information deemed necessary to properly supervise the banks in Switzerland. The SFBC has staff responsible for reviewing and analyzing the prudential data filed and using it to supplement the annual Long Form external audit report. Using the information to establish peer group data to compare similar institutions would be an additional off-site tool for the SFBC and contribute to an early warning system. Prudential reports are collected from all banks and provided on a comparable basis. The prudential reports for the large banks are obtained on a monthly or quarterly basis, which is appropriate based on the higher risk profiles of these two institutions. Reports from smaller less complex banks are collected quarterly, semi-annually or annually depending on the type of information being collected.
Assessment	Compliant.
Comments
Principle 19.	Validation of Supervisory Information Banking supervisors must have a means of independent validation of supervisory information either through on-site examinations or use of external auditors.
Description	See CP 16 regarding the use of licensed external auditors. While the SFBC is authorized by law to conduct on-site inspections, it does not generally perform such examinations itself. The staff of the SFBC holds meetings with senior bank management to discuss prudential issues or issues of supervisory concern. On-site inspections, including unscheduled audits, are carried out by the banks' external auditors on a regular basis. The costs incurred for such audits are paid for by the banks. In Switzerland, the use of independent though non-governmental external auditors is a primary tool for bank supervision. The responsibility of external auditors not only encompasses an audit of annual accounts but also entails a review of the bank's compliance with all prudential requirements, including due diligence rules (see SFBC Circular 96/3 Audit Report Form and Content). Thus, external audit firms can be seen as performing a quasi-governmental function, since they are required by law to inform supervisory institutions, and specifically the SFBC, of any violations or practices that have the potential of placing depositors' funds at risk. In 1999 external auditors charged 228,441 hours for the audit of the large financial intermediaries and 360,714 hours for all other financial intermediaries. While the appointment of external auditors is the responsibility of the directors of each bank, an audit firm must be selected from a list approved by the SFBC. By the end of 2000 eleven audit firms were approved and licensed. Approval criteria include the overall reputation and professional competence of the firm and its independent status. To be deemed independent, an approved audit firm must regularly audit at least five banks, and the firm's compensation from any one mandate must not exceed 10 percent of the firm's total fee income. The replacement of an audit firm by a bank is subject to approval by the SFBC. The bank has to indicate the reasons for the replacement. The SFBC also has the authority to require additional audits. For instance, in January 2001, the SFBC asked that banks with establishments in foreign financial centers commission their external auditors to perform an in-depth examination of the adequacy of their procedures, systems and controls governing anti-money laundering in meeting the requirements of the SFBC Guidelines. The scope of these examinations covered the adequacy and effectiveness of customer identification procedures, the functioning of internal control mechanisms and the communication and cooperation between internal audit and external audits. In addition, the auditors were required to report any indications that the foreign establishments may be used to circumvent Swiss legal requirements and professional rules. The in-depth exam was to be conducted by Swiss auditors familiar with the SFBC's and SBA's due diligence agreement and guidelines for such activities. Besides the in-depth examinations which fall within the scope of regular consolidated supervision activities required by Swiss law, the SFBC itself may mandate special audits to further investigate suspected shortcomings or irregularities or to verify the implementation of corrective measures or organizational improvements in particular banks. In the past year, the SFBC had comprehensive investigations conducted in several banks, which entered into business relations with the entourage of the former president of a foreign country and found serious omissions and organizational shortcomings in some. In order to establish whether these banks had corrected the identified irregularities and verify compliance with know-your-customer rules and policies regarding business relationships with politically exposed persons (“PEP rules”), the SFBC in August 2000 ordered a special audit to be carried out by an independent auditing firm, which included establishments of Swiss banks both within and outside of Switzerland. The auditors' specific tasks will consist primarily of reviewing the organizational structure and policies regarding the acceptance of clients, the account-opening procedures and the monitoring of accounts and testing of adherence to relevant internal control procedures, including a sampling of individual client files to assess compliance with due diligence requirements. The responsibility of external auditors not only encompasses an audit of annual financial statements but also entails the review of the banks' compliance with all prudential requirements (compliance with licensing requirements, due diligence rules, and the like). The assignment of the external auditor is not limited to the reporting of audit findings to the bank and the SFBC. In the event that the audit reveals either the violation of a legal provision or any other irregularity, the external auditor has to set an appropriate deadline for the bank to take corrective action. The external auditor must inform the SFBC if the correction is not carried out within the prescribed deadline (Art. 41 of the Banking Ordinance). Where the setting of a time limit appears of no use, or where the external auditor discovers a criminal offense, serious violations, or losses reducing the capital funds by 50 percent, or other irregularities jeopardizing the creditors' interests, or where it can no longer be affirmed that all creditors claims are still covered by the assets, the SFBC must be informed immediately (Art. 21 of the Banking Act). The role of the external auditor in the Swiss supervisory system is more comprehensive than the role of a bank's external auditor as described in §§ 15-28 of a joint paper issued by the Basel Committee on Banking Supervision and the International Federation of Accountants (IFAC) on “The relationship between banking supervisors and banks' external auditors.” However, the criteria regarding additional requests for the auditor to contribute to the supervisory process laid down in the mentioned paper of the Basel Committee and the IFAC (§§ 57–68) are respected in the Swiss system. The Banking Act requires that, as part of their annual examination, auditors perform one or several interim examinations on a surprise basis to ascertain the existence of the bank's assets and the reliability of its records. Art. 40 of the Banking Act requires that the external auditors also perform unannounced interim examinations. Each year, in addition to the ordinary audit, the external auditors perform an in-depth examination of at least one area that is significant to the activities and risks of the bank. The SFBC supervises licensed audit firms and issues guidelines for conducting the annual bank audits and the form and content of the resulting audit report (frequently referred to as the “Long Form” report) (see RRV-SFBC dated December 14, 1994 and SFBC-Circular 96/3 dated October 21, 1996). SFBC staff maintains regular contact with the banks' external auditors and participates in bilateral and trilateral meetings with the auditors and the banks following completion of the annual Long Form report and at other times when setting the scope for special, follow-up or the next year's on-site exam. SFBC officials may meet with external auditors to discuss the audit report, even without the presence of bank officials and without the approval of the bank. Pursuant to Art. 46 of the Banking Act, a recognized bank auditor who intentionally violates the duties assigned to him/her by the Banking Act or the Banking Ordinance, for instance, who makes untrue statements in the audit report or omits essential facts, fails to request pertinent information from the client or fails to report all findings to the SFBC, can be punished by a prison term not exceeding six months or a fine. Moreover, the SFBC will withdraw the lead auditor's and firm's license preventing them from conducting further bank audits in Switzerland. Whenever major irregularities are found in an institution, the SFBC will initiate a procedure against the bank in order to establish whether any breaches were committed. In addition, the SFBC will initiate a procedure against the bank's external auditing firm to establish whether or not it has violated the requirement to perform the audit with the “care of a properly qualified auditor” (Art. 20 par. 4 of the Banking Act). As such, in the year 2000 the SFBC conducted a procedure with respect to the application of proper care in the audit of the global compliance function of an internationally active banking group (see SFBC's Annual Report 2000, pp. 47- 49). Following significant losses of the UBS business unit, Global Equity Derivatives Business (GEDE), in 1997/98, the SFBC also examined whether or not the external audit had carried out its audit mandate with the proper care. The SFBC found structural and organizational shortcomings in the exercise of the audit by the external auditor (SFBC's Annual Report 1999, p. 55). In another case the SFBC found that the external auditor failed to report certain violations of competence rules and insufficient credit documentation. The SFBC filed charges against two of the responsible chief auditors. (SFBC's Annual Report 1996, pp. 39-42). In another case, the SFBC initiated a procedure because the external auditors had reported irregularities to the bank management, but failed to report them to the SFBC as required (SFBC's Annual Report 1995, pp. 37-38). The most severe sanction the SFBC can take against an external auditing firm is the withdrawal of its recognition and license pursuant to the Banking Act. There are cases where the SFBC withdrew the recognition for non-fulfillment of recognition requirements as laid down in Arts. 35 and 36 of the Banking Ordinance (see, e.g., SFBC's Annual Report 1997, p. 55). In one case upon threatening to withdraw the recognition due to shortcomings in the audit performance, the auditing firm itself surrendered its recognition. The SFBC has sufficient legal authority to have bank information verified and to use external auditors to perform that function. The only possible exception to the process is the lack of a formal quality assurance program for supervising the work of the external auditors. Such a program is necessary given the key reliance placed on the external auditors.
Assessment	Compliant.
Comments	A formal quality assurance program for supervising and verifying the work of the external auditors is should be developed and implemented. Such a program seems necessary given the reliance placed on the external auditors.
Principle 20.	Consolidated Supervision An essential element of banking supervision is the ability of the supervisors to supervise the banking group on a consolidated basis.
Description	Due to increased concerns by the SFBC on the growing size and complexity of the two big Swiss banking groups, a new department was created in 1998 to strengthen supervision of these banks. The separate Large Bank Supervision unit is responsible for the ongoing monitoring of the two large banks, both at a group level and the single subsidiary level. The new program includes regular periodic visits of the two banks foreign branches and subsidiaries, on-site reviews domestically and abroad, and trilateral discussions with host country supervisors and with group management, external auditors and recently with staff from the Swiss Federal Office of Private Insurance (FOPI). The SFBC's authority is contained in the Banking Act and implementing Banking Ordinance. In 2001, the SFBC supervised 84 groups of banks on a consolidated basis, among these UBS and the Credit Suisse Group. The SFBC has an established practice for supervising banking groups, although the legal provisions for this consolidated supervisory task imposed on banking groups can be inferred from the general authority contained in the Banking Act and the Banking Ordinance, the current practice could be more clearly codified. Supervision of banking groups and financial conglomerates has become increasingly important and a more coherent set of rules should be put in place. Currently, a draft proposal for an amendment of the Banking Act and the SESTA (securities law) provides for a more comprehensive set of legal rules for the supervision of groups of banks and/or securities dealers as well as financial conglomerates are being brought before the Federal Council. If these amendments should pass Parliament, this would clarify the existing practice of the SFBC and provide it with a clear basis to coordinate its action with other regulators in the case of internationally active market players. Since there is no legal definition of a banking group in the Banking Act or the Banking Ordinance, whether or not to force groups to submit to supervision by the SFBC on a consolidated basis is not totally clear. Where the parent company holds a banking license, the requirement and scope of consolidated supervision is clearly circumscribed in the law (see provisions relative to consolidated capital requirements, Art. 13a Banking Act, 14 Securities Act, risk diversification rules on consolidated basis, Art. 21m Banking Ordinance, and consolidated financial statements, Art. 25e ff Banking Ordinance and SFBC-Circular 31ff). A loophole exists in the case of a financial group or conglomerate where the parent institution does not hold a banking license. This shortcoming is being addressed by a proposal for an amendment to the Banking Act and Securities Act, which was finalized in November 2001. The proposal establishes the supervisory competence of the SFBC relative to a financial group/ conglomerate that controls a Swiss bank or is being directed from Switzerland. The proposal lays down principles for the coordination of oversight functions in case of overlapping cross-sectoral and/or cross-border competencies. The proposal further sets forth, among other things, requirements regarding the “fitness and propriety” at group management level, adequate organization and risk management, accounting, auditing and reporting to the SFBC. The SFBC has the power to define specific requirements, for example, regarding capital and risk diversification. The SFBC imposes a regime of consolidated supervision on banking groups if their activity apart from that of its licensed bank(s) in the financial sector is of certain importance for the whole group and if it is impossible to have a fair view of the relevant financial risks by looking solely at the licensed bank(s). In a decision of February 26, 1998, concerning the Credit Suisse Group, the SFBC established formal duties of a financial conglomerate, which do not formally fall within the scope of the Banking Act. Credit Suisse Group was, among other things, required to comply as a group with capital and large exposure requirements, ensure adequate levels of liquidity of all members of the group and group-wide compliance with all the SFBC reporting requirements, the fitness and propriety and adequacy of the management of all group companies. In addition, the SFBC applies the requirement of fitness and propriety to persons in charge of the administration and management of banking groups in accordance with Art. 3 par. 2 lit. The Banking Act not only applies to banks but also to banking groups as well. This is the case even if the structure on top of a banking group is a not a licensed bank. However there appears to be a gap in the overall consolidated supervision of Credit Suisse Group relating to its insurance activities. These activities account for almost 25 percent of group earnings and yet the Swiss insurance supervisor purportedly is restricted by law from sharing confidential supervisory insurance relevant information with the SFBC absent a written agreement. As a result, the SFBC has persuaded both Credit Suisse Group and Winterthur insurance sub-group that it needs risk related information directly from its insurance activities. While the practice has worked successfully for the last two years, a clear legal basis for information sharing across financial sectors should be pursued. The host country bank supervisors in the United States and the United Kingdom acknowledged their review of the insurance activities of the group was very limited and that coordination in the United States with multiple state insurance regulators was in the early phases. Insurance supervisors have only recently begun looking at their supervised entities from a consolidated supervision perspective. With respect to the Credit Suisse Group conglomerate, SFBC large bank staff should evaluate the extent of the risk from the insurance activities of the group and immediately commence implementing better coordination efforts with insurance supervisors in major markets where Credit Suisse Group operates. Foreign entities are subject to the same prudential standards and audit requirements as their domestic parents. Therefore, a foreign affiliate of a Swiss bank may not decline to disclose information to Swiss supervisory authorities on the grounds that such disclosure is barred by local secrecy laws. In 1982, the Swiss Federal Court held that a Swiss bank with foreign-incorporated affiliates must be capable of providing the SFBC with all information that it deems necessary for supervisory purposes (BCE 108 II 519). A Swiss bank must neither circumvent Swiss due diligence rules (including the money laundering guidelines of the SFBC ), nor place managers who fail the competence and fitness tests into key positions with affiliates aboard. Consolidated supervision, capital adequacy, and large exposure rules apply to all financial affiliates of Swiss banks whether domestic or foreign. Consolidated supervision and capital adequacy rules are applicable only to affiliated financial institutions and real estate firms. In general, a bank's ownership interest in a non-financial/non-real estate-related company does not involve the application of consolidated supervision or capital adequacy to the affiliated company. Large loan exposure limits are governed by provisions contained in Art. 21 of the Banking Ordinance. The new provisions on risk diversification became effective on December 31, 1997. The provisions on risk diversification are to be complied with both on a single-company and consolidated basis. Under specific circumstances, the SFBC may allow a certain relaxation—as defined in Art. 22 of the Banking Ordinance—or apply even stricter limitations. The SFBC requires the banks which it supervises as home-country regulator to report on a group-wide consolidated basis. If foreign regulations do not allow direct reporting to the Swiss based parent bank by the affiliate or branch, the SFBC requests information on affiliates and branches from the foreign host-country regulator (Art. 23sexies of the Banking Act). If a complex financial group is not a financial conglomerate, that is, it only includes banks, securities firms, real-estate subsidiaries and financial companies but not insurance companies, capital adequacy is still measured on a consolidated basis and all subsidiaries are fully consolidated if they are majority owned or dominated and conduct financial activities. The Banking Act has a very broad interpretation of financial activities, which includes leasing, factoring, consumer credit, and asset management. Such activities qualify as “financial” and must be fully consolidated. The only exception to financial consolidation is historically the insurance business, which is not “financial” in the sense of the Banking Act and the Banking Ordinance. However, the investment in the company is risk weighted at 500 percent (5 times the Basel Capital Accord Minimum). Other non-financial activities, which are in the form of a participation, also require a 500 percent risk weighting. A banking supervisor is deemed to supervise on a consolidated basis if it receives sufficient information on the bank's worldwide operations, including relationships of a bank to any affiliate, to assess the overall financial condition of the bank and its compliance with laws and regulations. The SFBC ensures its banks have adequate procedures for monitoring and controlling worldwide activities through statutory and regulatory standards for operations that each Swiss bank must meet. Among these standards are requirements for adequate internal controls, oversight, administration and financial resources. The SFBC reviews compliance with these limitations on operations and with internal control requirements through an annual audit performed by an authorized/licensed external auditor. The SFBC may take supervisory actions that include requiring divestiture of a subsidiary in response to supervisory concerns. The SFBC obtains information on the condition of its globally active banks, their foreign offices and subsidiaries by requiring submission of periodic, consolidated financial reports and through the mandatory annual report by the external auditor. Generally, Swiss banks must consolidate for accounting purposes all foreign offices on a line-byline basis and must include any majority-owned banking, finance or real estate subsidiary on a prorata or proportional accounting basis. The Banking Act requires Swiss banks to submit annual and semi-annual balance sheets and income statements to the SFBC. The SFBC also receives information regarding capital adequacy, country risk exposure and foreign exchange exposures from its banks annually. Information on risks (such as IRR) and inter-company transactions is received through large exposure reports that must be submitted both when such loans occur and annually. The SFBC evaluates prudential standards with respect to capital adequacy that effectively follows the risk-based capital standards of the Basel Accord. The Banking Act and Banking Ordinance prescribe the content of the mandatory annual report produced by a bank's external auditor. The auditor must review and report on a range of prudential issues and must express an opinion regarding compliance on a global consolidated basis with the conditions for licensing, accounting accuracy, risks, adjustments, undisclosed reserves, treatment of classified assets, fiduciary operations, exposures to single borrowers, insider lending, capital, liquidity, reserve allocation, foreign assets, internal controls and organization, and compliance with monetary controls. The Banking Act contains penalties to ensure correct reporting to the SFBC and external auditors face penalties for violations of their audit duties. Based on these facts, the SFBC is deemed to subject its banks to comprehensive supervision and regulation on a consolidated basis.
Assessment	Compliant.
Comments	A draft proposal for an amendment of the Banking Act and the SESTA provides for a more comprehensive set of legal rules for the supervision of groups of banks and/or securities dealers as well as financial conglomerates are being brought before the Federal Council. Passage of these amendments is recommended in order to clarify the existing practice of the SFBC and provide for a clear basis for the SFBC to coordinate its action with other regulators in the case of internationally active market players. SFBC supervises its banks on a consolidated basis but a potential gap was noted in its efforts to supervise the CS Group on a consolidated basis in light of the group's conglomerate status due to its significant insurance activities. The mission team recommends the large bank unit detail its risk profile for the group to account for the insurance activities. Efforts should begin as soon as possible to develop a strategy for ensuring insurance activities in major markets are adequately supervised.
Principle 21.	Accounting Standards Banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business, and that the bank publishes on a regular basis financial statements that fairly reflect its condition.
Description	Refer also to CP 20. Accounting practices, valuations and the preparation of balance sheet data are governed by the relevant provisions of the Swiss Code of Obligations, the Banking Act and its implementing Banking Ordinance, the guidelines of the SFBC. The accounting practices are meant to give a true and fair view of the financial position and the results of operations and cash flows. The listed nonbanking companies are required to disclose true and fair financial statements based on the Swiss-GAAP, the IAS or the U.S.-GAAP. The banking companies' financial statements are considered equivalent to these standards and are recognized by the Swiss exchange. All Swiss bank reporting is based upon the legal principles set out in the Code of Obligations which require that the financial statements be prepared according to Swiss GAAP and expressed in Swiss currency. The code, however, is modified and complemented by the Swiss banking regulations standards (RRV-SFBC issued December 14, 1994 and amended October 28, 1999, on Financial Statement Reporting Requirements) and means banks can, in a number of circumstances, report in adherence to IAS or U.S. GAAP. The SFBC may allow financial reporting to deviate from the guidelines if it is in conformity with recognized international standards (Art. 28 of the Banking Ordinance). The RRV-SFBC guidelines, influenced by EU accounting practices, now make Swiss financial statements more transparent and useful for investors and regulators as they clarify certain issues not dealt with in the Code of Obligations. The method for providing allowances is not specifically regulated; however, specific and general allowances are customary and disclosed in the notes to financial statements. Swiss accounting has changed significantly in the 1990s and bank reporting is now seen as closer to international standards. As a result, three different accounting standards are used in the published financial statements of banks. While most institutions use Swiss accounting standards, other international firms have adopted IAS, and other firms the U.S. Generally Accepted Accounting Principles (US GAAP). In other cases, institutions have maintained Swiss standards and reconciled them to US GAAP, for example, in order to facilitate listing on U.S. stock exchanges. But Swiss standards are less sufficient in the level of disclosure, particularly on asset quality. The SFBC is provided with additional non-public information in this area through the annual audit reports and the reporting (prudential returns) of the banks. However, it would be helpful in light of the growing internationalization of the Swiss financial system on the one hand and the progress toward a global set of accounting standards on the other, if the Swiss authorities were to encourage more detailed disclosure in their banks' financial statements. Prior to implementation, most of the SFBC's circular letters, rules and amendments to the Bank Act and Banking Ordinances are submitted to the Swiss Institute of Certified Accountants and Tax Consultants (an independent body for the country's external auditing firms) and the Swiss Bankers Association (SBA) for consultation. Once agreed upon, the changes to the Banking Act and Banking Ordinance will be officially promulgated. The SFBC publishes new or amended circulars. The Banking Act states that all banks must be audited annually by an independent audit corporation that is recognized by the SFBC. In order to be recognized by the SFBC as a bank auditor, the auditor must fulfill a number of requirements outlined in Articles 34-38 of the Banking Ordinance. The requirements pertain to a required capital structure of the audit firm, the integrity of the auditor's operations and professional certification. Both the audit firm and lead team auditor must be recognized in order to perform bank audits. An exception is made for the 537 Raiffeisen banks provided they have their own qualified audit department. They comprise 11 percent of the Swiss banking market with total group assets of SwF77.2 billion and equity of SwF3.5 billion. Pursuant to the Banking Act, all banks must prepare annual financial statements consisting of a balance sheet, income statement and an appendix. These statements are supplemented by an annual business report which details material events that occurred subsequent to the balance sheet date. Banks with total assets of at least SwF 100 million and whose off-balance sheet operations represent a significant portion of their business must also prepare a statement of cash flows as part of the annual financial statements. They must also prepare semi-annual interim financial statements consisting of a balance sheet and a profit and loss account. If a Swiss bank exercises control over one or more companies, it must prepare consolidated financial statements provided the activities of the companies are material. Swiss banks are required to disclose their annual reports in printed form within four months of the end of the business year. Banks are also required to publish their interim financial statements in the Swiss Official Gazette or other Swiss newspaper within two months of the end of the reporting period. The business reports must be made available to the press and any person requesting them. Auditing practices can vary from accounting firm to accounting firm. The Swiss Institute of Accounting Firms and Qualified Accountants provides considerable guidance. Standards applicable to the profession are incorporated in the Swiss Handbook of Auditing, which provides practical guidance. Regarding asset and liability valuation, the following items are noteworthy: – Loan classification: According to the guidelines of the SFBC, loans with interests that are more than 90 days overdue are considered as being at risk and thus non performing. The amount of the nonperforming loans is part of the direct reporting of the banks to the SFBC. The amount (and variation) of the allowances concerning impaired loans is part of the abovementioned direct reporting and is indicated in the public annual financial statements. Depending on the accounting standards used, some banks may disclose nonperforming loans while others may not. – Swiss banks may not include interest past due more than 90 days in interest income. For loans more than 90 days past due, interest income recognition ceases and previous unearned interest income is reversed against current earnings. – Swiss banks may create both specific and general reserves for nonperforming loans subject to management discretion within limits set by law. – Pursuant to Swiss law, banks are permitted to consolidate the activities of insurance companies. The equity method of accounting is required for Swiss banks that exert significant influence over other companies and the bank maintains 20 percent or more of the voting capital of the subject entity. – Swiss banks are permitted to invest in non-financial companies up to a certain limit (a qualified participation may not exceed the equivalent of 15 percent of its equity and the total of such participations may not exceed 60 percent of equity). The material holdings are disclosed in the appendix of the public annual financial statements. Annual financial statements consist of the balance sheet, the statements of earnings and the appendix as detailed in Art. 23ss of the Banking Ordinance. Banks must issue annual financial statements and prudential reports on a stand alone and on a consolidated basis. International Accounting Standards (IAS) and U.S. Generally Accepted Accounting Principles (US GAAP) are considered to be equivalent to Swiss Financial Statement Reporting Provisions for banks. Banks organized in accordance with Swiss law which are under the controlling influence of persons with residence or registered office in an EEA member country may prepare their annual financial statements in accordance with the applicable provisions in their country of origin. Material deviations from the provisions of the Banking Ordinance and SFBC Guidelines of the international standards of financial statement reporting must be mentioned and quantified in the Appendix to the financial statements (see SFBC Guidelines concerning the provisions governing the preparation of financial statements, 29a-c). An external audit of banks' annual financial statements is mandatory. The responsibility of external bank auditors in Switzerland exceeds the audit of annual financial accounts. External bank auditors also must review a bank's compliance with all prudential requirements (compliance with licensing requirements, due diligence rules, etc.) in light of the Swiss dualistic bank supervision system. In order for an auditing firm and its lead auditor to perform a bank audit, both must be authorized and licensed by the SFBC. A bank must obtain the approval of the SFBC prior to changing its auditing firm or appointing one for the first time. The external auditor must prepare a report, commonly called the “Long Form,” that contains the details required by the SFBC pursuant to SFBC Circular 96/3 dated October 21, 1996 with Amendments of August 26, 1999 and of October 28, 1999: Audit Report: Form and Content (”Audit Report”). Not only does the Long Form contain annual certification of a bank's financial statements, but it also contains detailed information on a bank's compliance with all requirements of the Banking Act, the Banking Ordinance, SFBC Circulars and Guidelines of the SBA. The Long Form is comprehensive and must be submitted to the SFBC. The annual Long Form plus any special audit reports requested from special exams are important tools for supervision by the SFBC. See CP 16 and 19 for further information regarding the role of the external auditor in the Swiss supervisory process, verification of records and on-site audits. The SFBC may hold bank management and the external auditors responsible for ensuring the accuracy and adequacy of the financial record keeping systems and timely filing of required reports. Annual reports likewise receive similar scrutiny for those banks required to file (non- deposit taking Private Banks, which are General Partnerships, are not required to produce or publish annual reports).
Assessment	Compliant.
Comments
Principle 22.	Remedial Measures Banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective action when banks fail to meet prudential requirements (such as minimum capital adequacy ratios), when there are regulatory violations, or where depositors are threatened in any other way. In extreme circumstances, this should include the ability to revoke the banking license or recommend its revocation.
Description	Art. 23ter par. 1 of the Banking Act provides the required powers to the SFBC for taking an appropriate range of remedial actions against banks depending on the severity of a situation. These remedial actions are used to address such problems as failure to meet prudential requirements and violations of regulations. They range from informal oral or written communication with bank management to actions that involve the revocation of the banking license (Art. 23quinquies par. 1 of the Banking Act). In addition to the powers mentioned above, under the Banking Act the SFBC has a broad range of possible actions, including: – suspending voting rights (Art. 23ter par. 1 of the Banking Act) and issuing an instruction to suspend dividend payments, – freezing the current activities of the bank, and – withholding approval of new activities or acquisitions. The SFBC is required to ensure that remedial actions are taken in a timely manner (Art. 23ter par. 2 of the Banking Act). However, the SFBC does not have the authority to publish enforcement activities, which have been imposed by them. The SFBC can order temporary measures, such as the suspension of bank directors and managers, which take effect immediately. However, there is no mechanism for the automatic imposition of administrative or penal sanctions. Under Swiss law, this requires the conduct of legal proceedings with the respect of all procedural guarantees. These penalties and sanctions may not only be applied to the bank, but, when and if necessary, also to management and/or the supervisory board. SFBC should have the authority to impose direct civil monetary penalties on banks or directors or managers on its own. In addition, Art. 23quater of the Banking Act empowers the SFBC to delegate an expert to act as its observer in a bank if, because of misdemeanors, the claims of the creditors appear seriously jeopardized. The draft proposal on the amendment to the Banking Act delegate to this expert limited supervisory functions to act in a flexible way. The SFBC has no legal power to force a credit institution with material problems to merge with a healthier institution. However, the SFBC supports any solution more favorable than a piecemeal liquidation, such as initiating an acquisition or a merger. The proposed amendment to the Banking Act will streamline the existing regulation and codify the SFBC's current practices. In addition, the proposed amendment will explicitly empower the SFBC, for example, to bar, suspend or dismiss managers or directors, alter, reduce or terminate any activity that poses excessive risk, restrict an institution's business activities, or to impose temporary management along with reorganization measures. The draft law explicitly provides that a reorganization measure, such as a purchase and assumption transaction, does not require the approval of the shareholders assembly and thus may be imposed on unwilling shareholders.
Assessment	Compliant.
Comments	SFBC should have the authority to impose direct civil monetary penalties on banks or directors or managers on its own. In addition, the SFBC does not have the authority to publish enforcement activities that have been imposed by them. The proposed amendment to the Banking Act should cover both. Improvements are under way. An additional area where the SFBC would appreciate, and should have, clear legal enforcement authority is in their right to publish the identities of banks and individuals involved in money laundering activities and to impose monetary penalties for non-compliance with the money laundering law.
Principle 23.	Globally Consolidated Supervision Banking supervisors must practice global consolidated supervision over their internationally active banking organizations, adequately monitoring and applying appropriate prudential norms to all aspects of the business conducted by these banking organizations worldwide, primarily at their foreign branches, joint ventures, and subsidiaries.
Description	According to Art. 3 par. 7 of the Banking Act, banks organized under Swiss law shall notify the SFBC before they establish a subsidiary, branch, agency or representation abroad. Under Art. 23septies99 par. 1 of the Banking Act, the SFBC has the authority to supervise the overseas activities of locally incorporated banks. In this regard, Art. 7 par. 3, the scope of the bank's operations and their geographic terms shall correspond to its financial resources and administrative organization. In terms of the oversight of foreign entities and “fit and proper” bank management, these have to meet the same oversight requirement as is applicable to the head office of credit institutions. The SFBC has a policy for assessing whether it needs to conduct on-site examinations (through SFBC or external auditors) or require additional reporting, and it has the legal authority and resources to take such steps as and when appropriate. As mentioned above, under Art. 6b of the Banking Ordinance the SFBC can prohibit the foundation of new banking entities and can demand the closing of existing ones. The following describes the process by which consolidated supervision of international active banks is carried out in Switzerland: – The large banking group department regularly visits the local bank management (so far, mainly in the United Kingdom and the United States, exceptionally in other jurisdictions). The objectives are to be in touch with local management, make them realize there is a home regulator/supervisor, and for the Secretariat's staff to get to know the major businesses abroad. – On-site reviews consist of an audit-like visit in order to assess a previously well-defined area within one or both of the large banks. The review team is a joint legal and large banking department team. Such visits require a close coordination with the work of the internal and external audit. – Staff of the large banking groups department attends audits of external auditors. This is meant to improve the information level of the staff and to get an idea about the quality and the procedure of the external audit firm. Their attendance is mainly passive, thus not interrupting the work of the external audit. – The aim of meetings with foreign regulators is to share the same information and to achieve a common risk assessment. Moreover, the supervisory action plans are coordinated. The meetings have taken place so far three times a year in the three financial centers of Zurich, New York, and London. The meetings can also consist in the participation of a specific audit/inspection work of a foreign regulator. Beginning in the fall of 2001, the meetings have also been held on a less frequent basis in places like Singapore, Hong Kong, and Tokyo.
Assessment	Compliant.
Comments
Principle 24.	Host Country Supervision A key component of consolidated supervision is establishing contact and information exchange with the various other supervisors involved, primarily host country supervisory authorities.
Description	The proper supervision of the foreign bank branches and subsidiaries in Switzerland, and Swiss banks' overseas branches and subsidiaries requires close international cooperation, ideally based on MoUs or letters of exchange. The SFBC has not signed any MoUs. Letters of exchange (compliance with rules and regulation of the respective country) have been signed with Denmark, the Netherlands, Sweden, and the United Kingdom. The exchange of information, cooperation and on-site visits are, in general, based only on informal arrangements. This could cause problems in conducting on-site visits in foreign countries with a higher frequency, as expected in the future, and after the implementation of the new Basel Capital Accord. A higher frequency of on-site inspections carried out by the SFBC makes it necessary, in the opinion of the assessors, to formalize this process through the conclusion of MoUs. However, such informal arrangements have not impaired the SFBC's ability to practice consolidated supervision in the past, including on-site inspections if necessary. As an outcome of the meetings with the Federal Reserve Bank of New York (FRB NY) and the Financial Services Authority (FSA) in the United Kingdom, the SFBC does not have direct contact with the U.S. SEC, which oversees the bulk of CSFB's U.S. operations. Instead, they deal with the FRB NY as the so-called umbrella supervisor. It is important that the SFBC establish a relationship with the primary supervisor of CSFB's U.S. operations. Neither the Fed nor the SFBC are closely monitoring the insurance activities of the Credit Swiss Group in the United States. The FSA acknowledges they are re-examining their insurance supervision Credit Suisse Group (24 percent of its income is from insurance). The FSA has recently started bilateral meetings with the Swiss insurance supervisor, but consolidated supervision is a relatively new concept for insurance supervisors. Under Art. 23sexies of the Banking Act, the SFBC is empowered to provide information to host country supervisors, insofar as these authorities: – will use such information exclusively for direct supervision of banks; – are bound by official professional secrecy law; and – will not transmit this information to competent authorities or bodies which are entrusted with supervisory activities in the public interest without the prior consent of the SFBC or on the basis of a blanket permission contained in a treaty with a contracting state. As the establishment of operation in foreign countries requires approval by the SFBC, the Banking Commission has the power to reject any application where consolidated supervision would be hindered.
Assessment	Compliant.
Comments	Informal arrangements have not impaired the SFBC's ability to practice consolidated supervision in the past, including on-site inspections if necessary. The expected higher frequency of on-site inspections to be carried out by the SFBC would be facilitated if this process were formalized through the conclusion of MoUs.
Principle 25.	Supervision Over Foreign Banks' Establishments Banking supervisors must require the local operations of foreign banks to be conducted with the same high standards as are required of domestic institutions and must have powers to share information needed by the home country supervisors of those banks for the purpose of carrying out consolidated supervision.
Description	For branches and subsidiaries of foreign banks, the SFBC requires a license. These institutions are subject to similar regulatory requirements applicable to all other Swiss banks. Under Art. 3bis par. 1bis, the SFBC requires that no objection or, preferably, the approval of the home country supervisor is received. In addition, the Banking Act provides some special requirements for foreign-owned banks that are similar to those for branches of foreign banks: – The country or countries where controlling shareholders are incorporated (or if the shareholders are individuals, the countries where they reside) must grant reciprocity to Swiss banks.3 – If the Swiss bank is controlled by a foreign bank or other foreign financial institution, the parent must be subject to adequate supervision. Where no consolidated supervision exists by home-country authorities, the SFBC may impose specific reporting requirements for the Swiss entity in order to assure consolidated supervision. – The supervisory agencies of the parent's home-country must not object to the establishment of the subsidiary in Switzerland. – The bank must select a name that does not imply Swiss control. The SFBC requires all banks subject to its supervision as a lead home-country regulator to report on a group-wide consolidated basis. Conversely, Art. 4quiquies of the Banking Act authorizes the Swiss-based affiliates (and branches) of foreign financial institutions to furnish information required for the parent institution's internal control purposes or for consolidated supervision by their home-country regulator to their parent institution. The authorization is subject to three conditions: – the information may only be used for group-internal control purposes or for the direct regulatory supervision of the financial institution; – the parent company and the supervisory authority must be bound by official or professional secrecy; and – the information so obtained must not be forwarded to third parties without prior authorization by the Swiss affiliate unless generally agreed upon in a treaty (Art. 4quinquies of the Banking Act). That information may also include customer-related information provided it is used exclusively for internal control and consolidated supervision purposes. Under Art. 23septies par. 2 of the Banking Act, the SFBC may permit foreign financial supervisory authorities to carry out direct inspections at Swiss establishments of foreign banks. Since the law was amended, foreign supervisors have conducted on-site examinations of foreign banks Swiss affiliates. Art. 23sexies of the Banking Act give the SFBC the power to advise the home country supervisor on any material remedial action it takes.
Assessment	Compliant.
Comments

View Table

Table 1.

Detailed Assessment of Compliance with the Basel Core Principles

Principle 1.	Objectives, Autonomy, Powers, and Resources An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to the authorization of banking establishments and their ongoing supervision; powers to address compliance with laws, as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.
Principle 1(1)	An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks.
Description	The Swiss regulatory policies are formulated on three levels. The first two, as mentioned above, are issued by Parliament (all acts such as the Banking Act) and by the Swiss Federal Council (ordinances based on parliamentary acts). The SFBC has substantial influence on the drafting process of regulatory statutes, but agreement by the SFBC is not intended. On more technical policies, the SFBC has powers to issue prudential regulations. The Banking Act is regularly supplemented by amendments, circulars issued by the SFBC, and, as an outcome of the supplementary self regulation system, the Swiss Banking Association issues guidelines with the approval of the SFBC to meet the regulatory needs arising out of the changing industry conditions. The SFBC makes extensive use of this power. The Federal Law on Banks and Savings Banks (Banking Act), based on the Federal Confederation, entered into force on November 8, 1934 (as amended April 22, 1999) and the Banking Ordinance entered into force on May 17, 1972 (as amended October 4, 1999) providing the statutory and legal framework for banking and the agencies involved in banking supervision. In addition, various other ordinances serve as extensions of the Banking Act: – Ordinance of the SFBC on Foreign Banks in Switzerland of October 21, 1996; – Ordinance of the SFBC on Foreign Banks in Switzerland of October 21, 1996;–Ordinance of the Swiss Federal Department of Finance on the Percentage for the Cash Liquidity of November 26, 1987; – Implementing Ordinance on the Federal Law on Banks and Savings Banks of August 30, 1961, as amended May 17, 1972; and – Ordinance of the Swiss Federal Court on Arrangements with Creditors of Banks and Savings Banks of April 11, 1935, as amended June 5, 1996. The various provisions of these acts cover monitoring the activities of banks regarding conformity with laws, compulsory prudential ratios and regulations and, within its jurisdiction, enabling the SFBC to take measures necessary to ensuring adherence to laws, norms and regulations. The Banking Act and the Banking Ordinance lay down the framework of minimum prudential standards that banks must meet. Under Art. 23, the Swiss Federal Banking Commission (SFBC) is the sole agency carrying out banking supervision in Switzerland for all banks. Art. 23 of the Banking Act enables the SFBC to take steps to achieve the orderly resolution of problem banks including restructuring or closure. There is no legal basis for forcing a problem bank to merge with another institution. But indirectly, the SFBC is searching for such a solution. Presently 21 circulars are issued and published by the SFBC. In certain fields the SFBC officially backs (but does not formally approve) self-regulatory guidelines issued by the banking industry (e.g., codes of conduct in securities dealing). Whenever the SFBC gives this type of official backing it may also exert substantial influence in the issuing process. If the SFBC is not satisfied with the outcome of self-regulation it may prefer to issue an official regulation: SFBC Circulars – Circular 72/1 on Public Solicitation of Deposits of September 14, 1972 – Circular 81/1 on Recording of Precious Metals of April 30, 1981, as amended February 1, 1995 – Circular 86/1 on Monies from Blocked Pension Arrangements of May 6, 1986, as amended February 1, 1995 – Circular 90/3 on Cash Liquidity of December 17, 1990 – Circular 92/1 on Approval and Notification Requirements for Stock Exchanges, Banks, in Securities Dealers and Banking Auditors of September 24, 1992, as amended July 1, 1999 – Circular 93/1 on the Interrelationship between Banking Law and Revised Company Law of August 25, 1993, as amended February 1, 1995 – Guidelines of the SFBC on Financial-Statement Reporting Requirements set out by Arts. 23 to 27 of the Ordinance on Banks and Savings Banks of December 14, 1994, as amended October 28, 1999 – Circular 95/1 on the Internal Audit of December 14, 1995 – Circular 96/3 on the Audit Report: Form and Content of October 21, 1996, as amended October 28, 1999 – Circular 96/4 on Acceptance on a Professional Basis of Deposits from the Public by Nonbanks in the Meaning of the Federal Law on Banks and Savings Banks of August 22, 1996, as amended August 26, 1999 – Circular 96/5 on the Legal and Personal Separation of the Fund Manager from Custodian Bank, Delegation of Investment Decisions and Partial Duties of November 14, 1996, as amended October 1, 1997 – Circular 96/6 on the Maintenance of the Security Journal by Securities Dealers of October 21, 1996 – Circular 97/1 on Guidelines Governing Capital Adequacy Requirements to Support Market Risks of October 22, 1997, as amended October 1, 1999 – Circular 97/2 on the Applicability of the SFBC Circulars Concerning Banks to Securities Dealers of November 20, 1997 – Circular 98/1 on Guidelines for the Combating and Prevention of Money Laundering of March 26, 1998 – Circular 98/2 on Commentaries Regarding the Definition of Securities Dealer of July 1, 1998 – Circular 98/3 on Recognized Rating Agencies of July 1, 1998, as amended June 1, 2001 – Circular 99/1 on the Measurement, Management and Monitoring of Interest-Rate Risks of March 25, 1999 – Circular 99/2 on Outsourcing of Business Areas of August 26, 1999 – Circular 99/3 on Early Information Following the End of the Business Year October 28, 1999 – Circular 00/1 on Less Restricted Risk-Diversification Requirements for Claims with Residual Maturity of up to One Year from Banks of October 26, 2000 Self-Regulation – Guidelines of the SBA on the Handling of Domestic and Foreign Counterfeit Money of December 11, 1990 – Convention XIX on Notes of Foreign Debtors of May 1, 1987, as amended January 31, 1996 – Agreement on the Protection of Depositors in the Case of Compulsory Liquidation of a Bank, July 1, 1993 – Recommendations of the SBA on Trusteeships of June 22, 1993 – Guidelines of the SBA on the Settlement and the Assessment of Mortgage Loans (Direct and Indirect) of December 23, 1993 – Guidelines of the SBA for the Risk Management in Trading and in the Use of Financial Derivatives of January 31, 1996 – Practices in Foreign Exchange Trading of December 5, 1996 – Code of Conduct of the SBA for Securities Dealers of January 22, 1997 – Guidelines of the SBA for the Management of the Country Risk of September 4, 1997 – Agreement on the Swiss Banks Code of Conduct with Regard to the Exercise of Due Diligence of March 1, 1998 – Guidelines of the SBA for the Treatment of Dormant Assets of July 1, 2000 – Portfolio Management Agreement of July 24, 2000 – Code of Conduct of the Swiss Funds Association (SFA) for the Swiss Fund Business of August 30, 2000 – Guidelines on the calculation of net asset values and the handling of valuation errors in the case of securities funds as of 11 June 2001. In Switzerland, an entire set of reform projects is under discussion: – Financial Market Supervision: An Expert Commission instituted by the Swiss Finance Ministry issued a report and general recommendations regarding the reform of the framework for supervision of the financial sector. – Bank Insolvency and Deposit Protection: An Expert Commission instituted by the Swiss Finance Ministry put forward a proposal for an amendment to the Banking Act that includes provisions on the reorganization and liquidation of financial intermediaries, and mandatory deposit protection. – Anti-Money Laundering: The SFBC instituted a working group to review the Circular 98/1 on the Guidelines for the Combating and Prevention of Money Laundering of March 26, 1998 and the Agreement on the Swiss Banks Code of Conduct with Regard to the Exercise of Due Diligence of March 1, 1998. – Supervision of Financial Conglomerates: Proposal to codify the SFBC's practice regarding the supervision of financial groups and conglomerates in the Banking Act and SESTA (securities law). This may occur along with the amendment of the Act on the Supervision of Private Insurance. – Auditing: A working group mandated by the SFBC to review the legal framework for the auditing function presented a report with recommendations to further improve the system of bank auditing in Switzerland. Another working group is now in the process of drafting new regulations and amendments to existing regulations to implement the working group's recommendations. – Code of Market Conduct: The SFBC is currently in the process of drawing up a circular on a Code of Market Conduct, which further elaborates on terms such as market abuse and defines the legal concept of fair market conduct. – Dormant Accounts: Draft law awaits ratification by the Parliament. – Implementation of the new Basel Capital Accord: Steps of drafting appropriate instruments to transpose the new Accord into national law are taken. With regard to the additional criteria of the Core Principles Methodology, the findings are positive: The Banking Commission regularly reports to the Federal Council on its activities, at least on an annual basis. However, the Chairman and the senior management of the SFBC are not acting in plenary sessions of the parliament where all matters relating to supervision are presented by the Ministry of Finance. In general, the SFBC communicates with the Federal Council via the Federal Department of Finance. Under Art. 6 par. 1 of the Banking Act and title 7 of the Banking Ordinance, the SFBC has to ensure that all banks under its jurisdiction provide audited annual statements, including for their branches and representative offices. The Federal Council determines which banks are to prepare interim financial statements. Under Art. 6 par. 5 of the Banking Act the Federal Council sets forth the classification rules for a single company, consolidated and financial statements and lays down in which form and to which extent and within which deadlines they are to be published or made available to the public.
Assessment	Compliant.
Comments
Principle 1(2)	Each such agency should possess operational independence and adequate resources.
Description	The SFBC has statutory independence in accomplishing its supervisory tasks (Art. 23 Banking Act). As a result of the meetings with the SFBC, there is no visible evidence of any government or industry interference in the work of the SFBC. The SFBC has adequate independence to deploy its banking supervision resources on its own. As stipulated in Art. 3 of the Banking Act, the SFBC is independent of all governmental agencies. It reports only to the Federal Council; it is not subordinated to the Government nor to any other executive institution of the State, which rules out active and ongoing intervention by Parliament or governmental bodies in pending matters. The accountability of the SFBC is performed on a strictly ex post basis, which rules out active and ongoing intervention by Parliament (or government) in pending matters. However, minor restrictions on the independence could exist insofar as the Federal Council and the Federal Department of Finance have the power to ask for reports on specific supervisory matters from the SFBC, voice their own opinion on supervisory issues and may criticize the SFBC in private or in public, which is in practice very rare. In addition, the parliament or the government could instruct or influence the work of the SFBC in abstract by adopting new legislation, where the SFBC is materially involved but does not have to agree on draft legislation. It is just possible that pressure may arise if there are differing opinions, for example, in the leading of the commission. As a result, there is no urgent need to extend the appointment of the present commission because the Chairman and the members of the SFBC are appointed only for a four-year terms. The Federal Council has the power to remove the commission only in the event of disciplinary misdemeanours or serious abuse of their functions. The SFBC has no budgetary independence, because it is part of the expense calculation of the central governments budget (2002: SwF 25,7 million). According to Art. 23 par. 4 of the Banking Act and the guidelines on the cost of the SFBC, the expenses are covered entirely by fees which were charged to Institutions under the supervision of the SFBC and not by the taxpayer. The salary policy of the SFBC is based on the labor market situation only to a minor extent, because the level of remuneration is subject to the terms for staff of the Swiss Administration in general and to the salary framework in particular. While the SFBC has to compete, for example, with banks for highly qualified staff, its ability to hire outside experts is limited by its own budgetary process. This causes problems to the expansion of supervisory responsibilities according to the new Basel Capital Accord. Most of the banks and banking associations which were interviewed by the members of the FSAP team would like to apply the internal rating approach (including cantonal banks and Raiffeisen banks; regional banks were indecisive). As a result of the ongoing dialogue with the Department of Finance, several improvements related to budgetary and human resources independence have been achieved: – Freedom to fix the number of staff within the limits of its budget. – A budget item under the title “enlarged supervision” presently amounting to 15 percent of the budget of the SFBC gives substantially more flexibility as it may be used for salaries as well as for indirect cost. – The SFBC is not included in the IT centralization exercise of the Swiss central administration (creation of a tailor-made system for the SFBC). – For recruiting and retaining of “selected” staff, the SFBC may grant a “labor market allowance” up to 20 percent on top of normal salary bands. This allowance needs to be approved by the Federal Department of Finance. The SFBC is presently exploring this possibility. The SFBC banking supervision staff has credibility based on their professionalism and integrity. This is expressed, for example, through the evaluation of Value-at-Risk (VaR) Models where statisticians and mathematicians are employed. The present supervisory strength is around 105 staff, with a core of about 75 persons having supervisory functions. In light of the expected increase in on-site visits and implementation of Basel II, the current staff level will be stretched or possibly insufficient regarding a staff turnover level of 18 percent in the year 2000. In order to offer a competitive and attractive position in the SFBC for highly qualified staff, the management of the SFBC is investing substantial resources in developing and enhancing the SFBC's personnel management system. Its travel budget for on-site work allows appropriate supervision to be carried out on a consolidated basis. Improvement seems to be needed in the field of training, to maintain the high level of qualification of the staff. The system is based on the own initiative of employees.
Assessment	Largely compliant.
Comments	The SFBC has no budgetary independence, because it is part of the expense calculation of the central government's budget. With regard to the proposal of the expert commission to establish an integrated financial supervision, recommendations aim to solve the identified problems.
Principle 1(3)	A suitable legal framework for banking supervision is also necessary, including provisions relating to authorization of banking establishments and their ongoing supervision.
Description	Under Art. 3 of the Banking Act and Art. 23 of the Banking Act, the SFBC is responsible for granting and withdrawing banking licenses. In order to organize and exercise supervision, the SFBC has the right under the Banking Act to issue regulations, guidelines and resolutions and to provide recommendations and explanations. This instrument is used quite often because amendments of the law involve an extremely time-consuming process in Switzerland. Art. 23 of the Banking Act gives the SFBC the right to demand additional information upon receipt, especially from the credit institution and shareholders who have qualifying holdings and companies belonging to the consolidation group in the form and frequency it deems necessary. In addition, the SFBC has the statutory duty and power to supervise state-owned banks (only by the Canton) in the same way as privately owned commercial banks. This includes the power to withdraw the state-owned banks' license and to close its business. The Federal Government does not own any bank.
Assessment	Compliant.
Comments
Principle 1(4)	A suitable legal framework for banking supervision is also necessary, including powers to address compliance with laws, as well as safety and soundness concerns.
Description	Art. 23bis of the Banking Act enables the supervisor to address compliance with laws and the safety and soundness of the banks under its supervision. The Banking Act permits the supervisor to apply qualitative judgment in forming his opinion. The supervisor has unfettered access to banks' files in order to review compliance with internal rules and limits as well as external law and regulations. Based on this information, the SFBC is free to assess the evidence and to formulate its judgment with regard to compliance of the supervised institutions with law and regulations, and decides itself on whether and how to make use of its sanction powers. Art. 23 of the Banking Act enables the SFBC to take and/or require a bank to take remedial action. Furthermore, the SFBC can withdraw authorization if a credit institution violates the prudential rules established by or on the basis of the Banking Act/Banking Ordinance and, during the term specified, fails to return to compliance with those rules. The SFBC made use of this power about 30 times over the last 30 years. The most prominent closure of a bank concerned an insolvent mediumsized bank in 1991. However, the law does not specifically mandate when remedial action should occur. One reason is that the SFBC would like to react on a flexible basis, but such an authority is desirable for addressing problems at an early stage. The SFBC has the power and the duty to order a supervised institution to improve organizational shortcomings or correct breaches of prudential standards and it may also order specific changes. However, with regard to the depth of intervention, the SFBC applies restraint in order to avoid intervening in the business strategy of the supervised institution. It should be mentioned that, in conformity with continental Europe's system of administrative law, the SFBC itself has the power to issue formal enforceable decisions. It is possible to appeal these decisions to only one instance: the Swiss Federal Supreme Court, meaning only one level of appeal. The decisions of the SFBC may be challenged on the grounds of violations of law. However, the Federal Court does not review how the SFBC makes use of its discretionary powers if it did not abuse these powers in a qualified manner. The appeal has no suspension effect, but the court may grant a suspension. A formal decision issued and immediately executed by the SFBC may not be a ground for liability claims even if the decision has successfully been challenged in an appeal unless the SFBC has manifestly acted in bad faith.
Assessment	Compliant.
Comments
Principle 1(5)	A suitable legal framework for banking supervision is also necessary, including legal protection for supervisors.
Description	A protection process for the supervisory agency and its staff is in place. The staff of the SFBC may only be criminally prosecuted if the Federal Department of Justice and Police approves in conformity with Art. 15 of the State Responsibility Act 1958. The purpose of this provision is to protect civil servants against undue pressures exercised by unsubstantiated claims of alleged criminal acts. The approval is given based on an initial assessment of the evidence. If the Department of Justice and Police conclude that there is enough evidence to suspect a criminal offense it may deny approval only in cases of minor importance. At least for the last 25 years, there has been no criminal investigation against SFBC staff. No civil liability claim may be addressed directly against the members of the SFBC or its staff. Instead, claims have to be brought against the Swiss Confederation, which has to respond exclusively to all civil claims based on alleged breaches of statutory duties by the SFBC and its staff. In the last 20 years a handful of such lawsuits has been filed. All of them were dismissed by the Swiss Federal Supreme Court. If a civil servant has caused a loss intentionally or by gross negligence the Confederation has recourse against him. So far, no such recourse against a staff of the SFBC has ever been made.
Assessment	Compliant.
Comments
Principle 1(6)	Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.
Description	An extensive process for exchanging information is in place between the SFBC and the Federal Office of Private Insurance, the other main supervisory authority in Switzerland. For the time being, the authorities see no need for a formal agreement. The Banking Commission may request information and documents from foreign banks and financial market supervisory authorities and has the authority to undertake direct inspections in foreign establishments of banks. A shortcoming could be that the exchange of information and on-site visits are in general based only on informal arrangements, since a large part of the business of the two largest Swiss banks is established in the United States and the United Kingdom. However, such informal arrangements have not impaired the SFBC's ability to practice consolidated supervision, including on-site inspections if necessary. Several exchanges of letters on cooperation and information sharing have been agreed upon; for example, with the Netherlands. Under Art. 7 of the Banking Act the banks shall submit their annual financial statements to the Swiss National Bank (SNB). With regard to the cooperation with the SFBC, the Act on the Swiss National Bank is expected to be amended. The SFBC, according to Art. 23 sexies par. 2, may only transmit information and documents disclosing confidential information to foreign banks and financial market supervisory authorities if these entities: – will use information for direct supervision; – are bound by official or professional secrecy, and – “will not transmit this information to competent authorities or bodies which are entrusted with supervisory activities in the public interest without the prior consent of the Banking Commission or on the basis of a blanket permission contained in a treaty with a contracting state. The transmission of information to penal authorities is not permitted whenever legal assistance in penal matters would be excluded. The Banking Commission decides after consulting with the Federal Office of the Police.” Information on individual customers will not be transmitted by the SFBC without their approval.
Assessment	Compliant.
Comments	The exchange of information and on-site visits are generally based on informal arrangements. In light of the key importance of exchange of information among supervisors in the case of large and complex financial institutions, more formal arrangements should be considered.
Principle 2.	Permissible Activities The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined, and the use of the word “bank” in names should be controlled as far as possible.
Description	The term bank is clearly defined under Art. 1 of the Banking Act. Under Art. 2a of the Banking Ordinance a credit institution is a company whose principal and permanent activity is to receive cash deposits and to grant loans for its own account and provide other financing. Neither the Banking Act nor the Banking Ordinance lists in detail the transactions and actions that are permissible for credit institutions including those that are directly ancillary or supplemental to its principal activity. Other core banking activities such as payment systems are not identified as banking activities as they are, for example, in the EU. This type of business could especially be a cause of systemic risk to the financial system. Only credit institutions are allowed to use the term “bank” or “banker.” These terms, alone or in combination with other words, may only be used in the company name, designation of the business purpose or advertising if the institutions concerned have obtained a license from the SFBC. In general, credit institutions have the exclusive right to receive money from the public for the purpose of depositing or receiving repayable funds in any other manner, according to Art. 1 par. 2 of the Banking Act. However, this particular section of the law says that the Federal Council provides for exceptions as long as the protection of the depositors is assured (clarified through circular 96/4). As a result, monies of employees as well as retired employees with their employer (e.g., industrial companies) are not considered as deposits and not subject to licensing and supervision by the SFBC. Such an exception poses a systemic vulnerability since the bankruptcy of a commercial company could result in the loss of their employees and retirees deposits. A current example is the recent bankruptcy of Swiss Air and its deposit-taking entity which required rescuing in the amount of SwF 110 million. The SFBC does not know how many of these deposit-taking entities exist, or their size. This could be a cause of systemic vulnerability if there is an unknown segment of the financial sector that is unregulated.
Assessment	Largely compliant.
Comments	Credit institutions do not have the exclusive right to receive money from the public for the purpose of depositing or receiving repayable funds in any other manner. An exception in the Banking Act (Art. 1 par. 2) permits nonbank employer sponsored deposit-taking entities that are not licensed or regulated as financial institutions. This poses a risk to the system.
Principle 3.	Licensing Criteria The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the banking organization's ownership structure, directors and senior management, its operating plan and internal controls, and its projected financial condition, including its capital base; where the proposed owner or parent organization is a foreign bank, the prior consent of its home country supervisor should be obtained.
Description	Prior to engaging in banking activities in Switzerland, each institution must obtain a license from the SFBC (Art. 3 of the Banking Act), which is the sole and independent authority for granting banking licenses. A Swiss banking license is considered a universal bank license which is not limited to specialized business fields, such as commercial, investment, and private banking. The regulations governing the acquisition of an existing bank basically parallel those governing its initial establishment. The SFBC's licensing guidance and practice are consistent with those of the EU's Second Banking Directive on Licensing and Supervision of Credit Institutions. In its implementation, every credit institution is required to manage its business in accordance with sound administrative principles and to put in place and maintain internal controls and reporting arrangements and procedures to ensure that the business is so managed. Art. 3 of the Banking Act specified in title 2 and 3 of the Banking Ordinance provides the criteria for issuing licenses consistent with those applied in ongoing supervision. Art. 23 of the Banking Act gives the SFBC the right to reject applications if the criteria are not fulfilled or if the information provided is inadequate. The reasons for negative decisions regarding license applications have mainly been the lack of qualified banking skills and experienced staff and thus an organization or management not adequate or competent enough for the planned activities. The SFBC has published a Guideline for License Applications for Banks and Securities Dealer (21.9.1999), which is not legally binding. The Banking Act read in conjunction with the Banking Ordinance enables the SFBC to determine that the proposed legal and managerial structures of the bank will not hinder effective supervision. Art. 3 of the Banking Act in conjunction with title 2 and 3 of the Banking Ordinance helps the SFBC to determine the suitability of major shareholders, transparency of ownership structure and source of initial capital. Art. 3 par. 2c of the Banking Act / Art. 6 of the Banking Ordinance and the above-mentioned guideline set forth the evaluation criteria for the SFBC regarding the fitness and propriety (education, experience and professional qualification, and trustworthiness) of the proposed bank managers. Directors and managers of the bank must be competent and fit for the specific business of the new bank, that is, their personal integrity and professional skill as well as their experience must meet the demands of their new task. All license applications must include the curricula vitae of key personnel, extracts of the general registry of criminal records (where available), and references for all directors and senior management. This procedure applies also to shareholders who wish to acquire a qualifying holding. They have to guarantee that their influence will not have a negative impact on a prudent and solid business activity. The qualified shareholders and the banks have a legal duty to report the relevant shareholdings and their changes to the SFBC. The SFBC is entitled to enforce the “fit and proper” requirement by suspending the voting rights of non-complying shareholders up to revoking the banking license in severe cases. Apart from this qualitative requirement, the banking legislation applies no quantitative limitation on ownership in banks. Art. 4 par. 1 of the Banking Ordinance requires that the new bank must have a paid-in capital of at least SwF 10 million. In cases where, according to the business plan, the projected activity requires more funds—which is normally the case—the initial capital can go up to SwF 20 million or more. Title 2 of the Banking Act and title 2 of the Banking Ordinance require and provide for a detailed review of procedures on corporate governance, strategic and operating plans, structure and policies and procedures, internal control procedures and system for appropriate oversight of the credit institution's activities in the proposed credit institution. This means that the bank to be licensed has to set up an organization that is able to meet the demands of the projected business. In this regard, its by-laws and internal regulations have to clearly define the type and geographical limits of the planned banking activity and, accordingly, the internal organization for that activity. Furthermore, the bank's responsibilities and the internal control procedures have to be adequately described. The SFBC not only formally approves the by-laws and internal regulations on the occasion of the establishment of the bank, but also their subsequent changes and amendments. Within the organization of the new bank there must be a separation between the supervisory and policy-making functions of the board of directors and the executive function of the management (Art. 8 par. 2BO). The same individual must not serve on both bodies. The Banking Act and Banking Ordinance contain detailed guidelines concerning the documents to accompany the authorization application, that is, the pro forma financial statement and the financial information on the principal shareholders. The SFBC grants authorization if, in the opinion of the supervisors, the business plan of the credit institution being founded is feasible and the above-noted criteria are met. According to Art. 3bis of the Banking Act, the consent of the banking supervisory authority of the home country of the credit institution is required prior to the foundation or acquisition of a subsidiary credit institution or the foundation of a branch in Switzerland. If a financial conglomerate or banking group owns the foreign bank, a declaration of the home-country authority that it supervises the conglomerate/group on a consolidated basis is needed. The firms or bank name should not indicate or suggest a Swiss character. The reciprocity requirement, which is also mentioned in the law, has lost its importance due to Switzerland's adherence to GATS (General Agreement on Trade and Services), which requires Switzerland to apply the most-favored-nation-rule to all WTO members. Under Art. 23 quinquies of the Banking Act, the SFBC has the opportunity to revoke a license if it determines that the license was knowingly based on false information. Art. 46 par.1.i of the Banking Act gives the SFBC the power to discipline bank management if incorrect information has been furnished to the SFBC. From 1996 to 2000, the SFBC granted 70 banking licenses (branches of foreign banks included). Forty-five licenses concerned entities under foreign ownership (including 23 branches of foreign banks) and 25 entities were in Swiss hands. The 70 new institutions focus predominantly on private banking. In the period from 1991 to 2000, a total of 243 banking institutions ceased their banking activity. Three of those faced the withdrawal of their banking license from the SFBC, 182 surrendered their license in the course of mergers and 58 went into liquidation. The total assets of the mentioned 243 banking entities amount to SwF 140 billion.
Assessment	Compliant.
Comments	In granting 70 banking licenses (branches of foreign banks included) over the past five years, SFBC's main focus has been on private banking.
Principle 4.	Ownership Banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or controlling interests in existing banks to other parties.
Description	A direct or indirect holding in a bank which represents 10 per cent or more of the share capital or votes in the bank, or a significant influence in the bank's business activities in another manner, is deemed to be a qualifying holding (Art. 3 par. 2cbis13 14 of the Banking Act). Prior authorization is required for a person seeking to acquire a qualifying holding in a bank or to increase a qualifying holding so that the proportion of the share capital or votes in the bank held by that person exceeds 20, 33, 50 percent or a percentage that allowed the bank to become controlled by that individual. The Banking Act gives the SFBC the right to grant authorization for the acquisition and the right to require notification in the case of an increase of qualifying holding (Art. 3 par. 5 of the Banking Act). The SFBC is entitled to enforce the “fit and proper” requirement by suspending the voting rights of non-complying shareholders up to revoking the banking license in severe cases. The authorization can also be withdrawn if, for example, the activities of the shareholder cause a significant risk to the sound and prudent management of the credit institution (Art. 23 par.1ter and quinquies of the Banking Act). Apart from this qualitative requirement, the banking legislation applies no quantitative limitation on ownership in banks. According to Art. 3 par 6 of the Banking Act and Art. 6a of the Banking Ordinance, a credit institution has to submit to the SFBC a list of shareholders of which it has knowledge, at least annually. Changes of qualified holdings must be immediately reported to the SFBC.
Assessment	Compliant.
Comments
Principle 5.	Investment Criteria Banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments by a bank and ensuring that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision.
Description	Generally, Swiss banking law imposes no specific structural conditions or restrictions on banks engaging in securities activities, real estate or insurance business. According to Art. 4 par. 2bis of the Banking Act, a qualifying holding in any other company held by a credit institution or by a company belonging to the same consolidation group shall not exceed 15 percent of the net own funds of the credit institution or the consolidation group thereof, respectively. Furthermore, the total amount of investments in the financial fixed assets (shares, debt instruments and other securities, acquired for use on a continuing basis and for gaining profit during an extended period) of other companies shall not exceed 60 per cent of the net own funds of the credit institution or the consolidation group. Art. 4bis par. 1 of the Banking Act requires that investments in a single company should have an adequate relation to their own funds. The investments in industrial equity have to be covered by capital equal to 40 percent (500 percent risk weighting for capital adequacy requirements) of the investment. This is the reason why Swiss banks own comparatively small industrial equity portfolios.
Assessment	Compliant.
Comments
Principle 6.	Capital Adequacy Banking supervisors must set minimum capital adequacy requirements for banks that reflect the risks that the bank undertakes, and must define the components of capital, bearing in mind its ability to absorb losses. For internationally active banks, these requirements must not be less than those established in the Basel Capital Accord.
Description	The Banking Act and Banking Ordinance along with circulars: – EBK-RS 97/1 (market risk) – EBK-99/1 (interest rate risk) vested in it under that legislation, apply to all banks operating within Switzerland. The principles applicable to banks, together with capital requirements for banks lay down in Art. 4 of the Banking Act and title 4 of the Banking Ordinance. The provisions contained a specification of: – the components and structure of bank capital – the equity requirements – the deductions from required equity The regulation applied in Switzerland regarding the definition and structure of a bank's capital base and the regulation on capital adequacy is in line with the 1988 Capital Accord of the Basel Committee on Banking Supervision and is close to the EU directives on Own Funds and Solvency. The amendments to the above-mentioned Capital Accord are covered, especially on market risk. In general, each Swiss bank has to fulfill the same capital requirements. Branching within Switzerland is not subject to any legal additional capital requirements. Art. 4 of the Banking Ordinance Act stipulates that the paid-in share capital of a bank to be established shall be at least SwF 10 million. Initial disbursements of capital cannot be made, either with subordinated debt or with other funds borrowed by the bank itself. As far as the shareholders are concerned, the SFBC verifies their identity and sound financial standing as items of the license application in the authorization process. Art 4 par. 1 of the Banking Act requires that banks must provide for an adequate relationship between: – their equity and their total liabilities; – their liquid assets and their easily marketable assets on the one hand, and their short-term liabilities on the other. The Banking Ordinance establishes the directives to be observed in this respect under normal circumstances, taking into consideration the kind of business and the type of bank. It shall define the terms of the own funds, liquid assets, easily marketable assets and short-term liabilities (Art. 4 par. 2 of the Banking Act). The definition of capital is consistent with the Basel Capital Accord. Art. 11 of the Banking Ordinance define the components of capital. On the equity requirements Art. 12 of the Banking Ordinance requires all banks to calculate and to maintain a minimum capital adequacy ratio no less than 8 percent, reduced by existing value adjustments and provisions. The SFBC requires a higher rate of capital adequacy. Based on this, the capital adequacy ratio was raised to a minimum of 10 per cent. The SFBC sees higher capital as giving a competitive advantage and also fostering the good reputation of the Swiss financial market. The definition of capital, method of calculation, and the ratio required are more stringent than those established in the Basel Capital Accord. The resulting capital charge is a function of the structure of the risk-weighted assets, the calculation method used (standardized approach, internal risk aggregation model approach), and of the individual positions. In general the capital requirements reflecting market risks are consistent with the Basel Capital Accord. Minor differences exist for the following: – foreign exchange risk and gold positions, for which the capital charge is 10 percent (instead of 8 percent); – commodity risk, for which the capital charge is 20 percent (however, with a simpler approach); – equity risk, for which, for the purpose of calculating the general market risk, a net position per domestic equity market or per single currency zone can be calculated. Under Art. 13a of the Banking Ordinance capital adequacy ratios are to be calculated on both a consolidated and a solo basis for the banking entities within a banking group. Art. 12 a and b of the Banking Ordinance covers both on and off-balance-sheet items. According to Art. 13b of the Banking Ordinance banks must report their capital adequacy ratio on a solo basis quarterly and the capital adequacy ratio on a consolidated basis half yearly. As a result, the implementation of the Basel Capital Accord in Swiss banking legislation is more risk adequate because of more differentiated and tighter risk weightings. However, the risk weightings on receivables directly or indirectly secured by mortgages must be weighted with 75 percent (Basel: 100 percent). Art. 13b of the Banking Ordinance factors in the cantonal guarantees for liabilities provided for their banks and allows a capital discount of 12.5 percent of required equity for cantonal banks. This is the only significant remaining difference in prudential treatment between these banks and the other Swiss banks. The discount is no longer necessary and should be eliminated to provide a level playing field between the cantonal and other Swiss banks. The SFBC must be informed immediately whenever capital requirements are not met. Under Art. 23 of the Banking Act as a general provision, the SFBC has the right to enforce sanctions for violations of the provisions of the Banking Ordinance on capital adequacy. However there are no indicative benchmarks for triggering action on inadequate capital adequacy. As part of the licensing process the Banking Act requires that a credit institution and the companies belonging to a consolidation group have systems and strategies for risk monitoring, risk management and risk assessment, which are appropriate and sufficient for their activities. They must also have internal rules, which are subject to review and updating on a regular basis, that apply both to the credit institution and companies belonging to the same consolidation group. Capital adequacy rules are also applicable to all banking affiliates of Swiss banks whether domestic or foreign. The capital adequacy requirements are not applicable to Swiss branches of foreign banks. According to the current position of the SFBC, it is up to the bank supervisory authority of the home country to monitor the bank's consolidated equity position properly.
Assessment	Compliant.
Comments	Capital requirements are more conservative than the Basel Capital Accord. Nonetheless, for the large and systemically important financial institutions, frequent and close monitoring of the capital position is recommended due to their often complex activities and possibly rapid changes in risk profiles. The 12.5 percent capital reduction for cantonal banks should be eliminated.
Principle 7.	Credit Policies An essential part of any supervisory system is the independent evaluation of a bank's policies, practices, and procedures related to the granting of loans and making of investments and the ongoing management of the loan and investment portfolios.
Description	Art. 3, 2a of the Banking Act states that a license will be granted if: “the articles of association, bylaws, company contracts and business rules of the bank provide for a clear definition of the scope of business and establish an adequate organization corresponding to the proposed business activities; where the scope or the importance of the business activities is significant, the bank must create separate bodies for the management on the one hand and for the direction, supervision and control on the other. The authorities of these bodies must be segregated in a manner so as to ensure the effective supervision of the bank's management.” Subsequent audits confirm such prudential requirements continue to exist after the bank commences business. The large risks are risk-weighted and must be reported when attaining or exceeding 10 percent of the banks eligible equity resources. Reporting of the large risks to the external audit firm is required once every three months. The ten largest debtors (not risk-weighted) must be included once a year in the long-form report. Not included are receivables, which are secured by movable assets traded on a recognized stock exchange or a representative market as defined in Art. 14.d of the Banking Ordinance and which are customarily accepted by banks, fiduciary deposits or cash deposits as well as debtors that are public-law corporations in OECD countries or domestic and foreign banks and securities dealers. In general, the SFBC enjoys considerable discretion within the framework of the Banking Act when granting licenses. The Banking Ordinance details the prudential requirements applicable to bank lending in Art. 9, “The bank shall lay down in regulations or in internal guidelines the main principles underlying the management of risks and the competencies and procedures for the approval of risk transactions. It must in particular identify, limit and supervise market, credit, default, settlement, liquidity and image risks as well as operational and legal risks.” Each bank is required to have appropriate policies relating to the management and control of lending that include credit assessment, credit review, risk management, the monitoring and control of large exposures and prudent provisioning for loan losses. Limits of lending officers must be incorporated in a bank's internal regulations and any changes to the internal regulations require notification to and approval of the SFBC (Art. 9 of the Banking Ordinance and also Art. 3 par 3 of the Banking Act). Art. 19 par. 1 and Art. 21 par. 1 of the Banking Act and SFBC-Circular 96/3 cover the requirements for auditors (authorized by the SFBC) inspection/ verification activities for lending. External auditors are charged with assessing a bank's loan and investment portfolios within the context of their annual bank audit and must attest to compliance with all SFBC issued rules relating to granting loans and making investments and ongoing management of these assets. External auditors follow detailed audit procedures in approved audit manuals which also include sampling loans, including those noted on a bank's internal watch list and those included in internal loan classifications. A sample of recently granted credits is reviewed for adherence to internal bank policies and practices. The SFBC also identifies one “specialized” supervisory area each year for the external auditors to focus on during their audits and the credit area periodically receives special attention in this way. Regarding investment criteria: The SFBC requires, and authorized external auditors periodically verify, that prudent investment criteria, policies, practices and procedures are approved, implemented and periodically reviewed by bank management and boards of directors. The SFBC supervises banks' investment activities via oversight of the work of the external auditors both in the context of market and credit risk as detailed in the Banking Ordinance, Section 6 on Risk Diversification, Art. 21 and 22, SFBC-Circular 96/3 (Audit Report: Form and Contents) and SFBC-Circular 97/1 (Guidelines on Capital Adequacy Requirements to support market risks of Art. 12 par. l-12p of the Banking Ordinance). Debt securities and equity shares held as financial fixed assets are normally held for the purpose of “structural” balance sheet management, and positions are reviewed during on-site inspections by the external auditors. Such positions are part of a bank's investment and funding activities in the money market, capital market and derivatives markets. Investments, like loans, are extensions of credit involving risks that carry commensurate rewards. The SFBC expects risks in the investment portfolio to be minimized in order to maintain adequate liquidity and marketability. The associated risks (i.e., interest rate, liquidity and foreign exchange, if applicable) are usually monitored and controlled by a bank's Asset and Liability Committee (ALCO) or Risk Committee within established policy and limits approved by the Board of Directors. Such investments should be included within a bank's internal liquidity report for management. External auditors review such investments and how they are used by a bank using procedures in approved auditing manuals. The credit quality of investment securities is monitored through credit analysis, emphasizing a review of current financial information and the use of approved rating agencies. SFBC-Circular 98/3 contains a list of recognized rating agencies. In the larger banks counterparty risk is usually monitored and controlled by a bank's Credit Committee or loan officers within policy and limits approved by the Board of Directors. The external auditors check to see that both the ALCO and the Credit Committee operate independently of the business units taking the risk. Examiners (on an indirect basis) and external auditors (directly) determine that the performance and quality of investments are monitored frequently and subject to regular reporting to Senior Management and the Board of Directors. Compliance with policy guidelines, particularly valuation of investments, is assured through adequate internal controls, internal and external audit coverage and review. General: The credit risk environment is set via established policies and procedures required of banks by the SFBC in the initial licensing business plans. Such policies and procedures are checked annually by external auditors. The SFBC defines credits overdue 90 days or more as “impaired.” However, no data is collected by the SFBC regarding renegotiated, past due and internally classified credits. Such information, along with provisions, chargeoffs and recoveries, is considered useful in monitoring asset quality trends in the banking system. Although the SFBC has not specifically adopted an asset grading/classification system that all banks must adopt, the SFBC requires that credit institutions have an internal loan classification system in place and external auditors look at any classified, reclassified, or rescheduled loans during their annual audits. Auditors also sample denied loans. The SFBC defines impaired and non-accrual status credits for reporting purposes but leaves internal loan classifications up to management to decide and the external auditors to assess. SFBC-Circular 95/1 (Internal Audit) does not include specific reference to adequate controls over credit risk, per se, but broadly covers this area. In addition, a bank's investment policies, practices, and procedures are usually inspected as part of the external auditor's annual bank audit of credit risk and market risk. Specialized inspections by external auditors of investment activities may also be conducted if the SFBC determines a bank's investment activities are material and such inspection is warranted. All loans to bank insiders are required to be extended at an arm's length basis with no or minimal discounts below current market rates allowed. Specific limits in relation to credits granted to directors, significant shareholders and businesses where the bank is a shareholder are not set by the SFBC but rather determined by the individual banks and then checked by the external auditors during their on-site audit. While there are no statutory limits regarding loans to affiliates, “firewalls” are generally imposed regarding lending to affiliates of a bank, which are part of a commercial/industrial group (per Art. 4ter of the Banking Act). The external audit procedures cover reviewing loan policies to ensure they address loans to directors/major shareholders and connected entities. Detailed verification procedures regarding such credits broadly cover conflicts of interest arising in the conduct of different types of activity (such as credit) and require an institution to satisfy the external auditor regarding arrangements made to protect interests of a bank's clients. The SFBC requires that such arrangements should include arms-length transactions and credit granted based on sound underwriting criteria, free from outside pressures. Art. 9 par. 2 of the Banking Ordinance requires appropriate policies and procedures relating to management and control of lending. As part of the annual external audit process, SFBC staff determines adherence to policies and procedures. In order to comply with the policies and procedures for granting credit, the credit institution must ensure the policies are communicated to employees and that appropriate procedures are followed. SFBC circulars (cited above) address procedures used for assessing underwriting standards and credit granting criteria. Art. 3 of the Banking Act and Art. 9 of the Banking Ordinance requires credit institutions have in place such committees of directors and management as are necessary to ensure that the business of the credit institution is being managed, conducted and controlled in a prudent manner and in accordance with sound administrative principles. Thus, in order to comply with this requirement, a credit institution must have a loan or credit committee that is responsible for approving credits of significant monetary amount or above a certain risk level and appropriate policies relating to the management and control of lending. External auditors must assess and attest to the adequacy of an institution's written lending policies and procedures, including the duties and responsibilities of loan officers and loan committees and loan approval limits, during annual audits. Art. 9 of the Banking Ordinance requires that comprehensive risk management systems commensurate with the scope, size and complexity of all the credit institution's activities be in place, incorporating continuous measuring, monitoring and controlling of risk, accurate and reliable management information systems, and timely management reporting. Such management information systems (MIS) should provide essential details on the condition of the loan and investment portfolios if banks are to comply with the SFBC's Banking Ordinance. Compliance is checked during on-site audits by the external auditor. Art. 21 of the Banking Ordinance requires monitoring and control of large exposures. The Banking Ordinance is consistent with the EC Directive on Monitoring and Control of Large Exposures (92/121/EEC). The Banking Ordinance requires credit institutions to have administrative, accounting, and control mechanisms in place for identifying, and recording all large exposures and any changes to them. The SFBC monitors and the external auditors verify compliance with large exposures on a consolidated basis. There are credit reference agencies/credit bureaus that collect data on lending by different institutions to individual borrowers. In addition, external auditors review a sample of loans during their on-site audits. In order to monitor capital, loan loss provisions and impaired loans as required to be reported to the SFBC semi-annually for the majority of banks, bank management must monitor their credits on a regular basis.
Assessment	Compliant.
Comments	No data is collected by the SFBC regarding renegotiated, past due and internally classified credits. Such information, along with provisions, chargeoffs and recoveries, is considered useful in monitoring asset quality trends in the banking system.
Principle 8.	Loan Evaluation and Loan-Loss Provisioning Banking supervisors must be satisfied that banks establish and adhere to adequate policies, practices, and procedures for evaluating the quality of assets and the adequacy of loan-loss provisions and reserves.
Description	All banks are required to establish a risk management program and set forth the main principles of the program in approved policies. Such policies must pay particular attention to credit risks and define lending limits, credit assessment methods, large exposures, country risks, etc. The SFBC approves credit policies at the time of licensing and the external auditor reviews the policy annually for compliance (Art. 9 par. 2 of the Banking Ordinance). The bank's internal audit function audits compliance with the policies and procedures and submits reports on the credit risk area directly to the board of directors and to the SFBC if required to do so or material issues are detected. These reports are also made available to the external auditor. The external auditing firms have to assess compliance with the policies and procedures and provide comments in their audit reports to the SFBC (Art. 43-49 of the Banking Ordinance). The external auditors must also independently value the assets and liabilities based on the bank's documents and records (Art. 43 par. 3 of the Banking Ordinance). Identified risks must be fully provisioned. The risk evaluation has to be based on a complete and current documentation that allows an assessment of the present value of any collateral or demonstration of collateral deficiency. If the documentation is not complete or not available, the loan must be designated as totally impaired (and valued at “0”), which requires full provisioning. If the provisioning is insufficient, the auditor will instruct the bank to increase the amount of the provision. If the bank fails to increase the provision as directed by the auditor, the auditor must report this failure to the SFBC. The SFBC receives annually information from the external auditor on a bank's loan portfolio, internal rating system, provisioning amounts, etc. There is no legal requirement that specifies a particular credit classification category for non-accrual loans. According to the principle of safe and sound banking, banks must provide for specific provisioning for that part of a loan, which is or may become a loss, taking into consideration the existing collateral. A loan is classified as impaired after 90 days but placing a loan on non-accrual status is a management decision. Each bank uses its own rating system and the time criterion to assign a loan into a substandard class is not the sole basis for classification (collateralized loans may not be downgraded if there is adequate collateral to cover the interest and the principal). In case of inadequate collateral or unsecured loans, a loan 90 days past due is considered impaired. There are no minimal provisioning requirements for standard loans. Banks must transfer a least 5 percent of their yearly net profits into the general reserve as long as this reserve does not reach 20 percent of the paid-in capital (Art. 5 par. 1 and 1bis of the Banking Act). Off-balance sheet positions are valued and provided for in the same way as the on-balance sheet positions when defining the credit and default risks and required provisioning. The SFBC requires banks to submit their accounts according to the principles of orderly bookkeeping and in such a manner as to permit the most reliable possible assessment of the net assets (Art. 24 par. 1 of the Banking Ordinance). Banks must publish their annual financial statements (Art. 26 par. 1 and 2 of the Banking Ordinance) and ones with a balance sheet total over SwF100 million must establish interim accounts on a half-yearly basis (Art. 23b par. 1 of the Banking Ordinance). Copies of these statements must also be submitted to the SFBC (Art. 26 par. 4 of the Banking Ordinance). Asset quality must be reviewed at least on a yearly, if not a half-yearly, basis. As noted in the assessment of CP 7, additional asset quality data, on a more frequent basis (such as quarterly) should be obtained by the SFBC and used in monitoring any deteriorating trends in asset quality. Nonperforming loans are defined as loans to customers and mortgage loans the interest payments of which have become overdue. There is a presumption that interest and commissions more than 90 days overdue are a loss. In the case of current accounts, the presumption applies when the overdraft limit is exceeded for more than 90 days. If the recovery of the interest is also at risk, it is also considered a loss and should be written off, even if the credit is less than 90 days overdue. If a credit is 90 days overdue but remains on the bank's books, it will cease accruing interest and commissions. Interest and commissions are either credited to value adjustments and provisions, or cease to be accrued altogether. Interest and commissions already accounted for as income shall not be reversed, but shall be included in a bank's provision (see also Reporting Guidelines No. 106). Any accounting treatment that diverges from the above must be described in the notes to financial statements (pursuant to Art. 25c par. 1 ch. 2 of the Banking Ordinance, Guidelines of the Federal Banking Commission concerning the provisions governing financial statement reporting RRVSFBC “Reporting Guidelines,” No. 106). Accrued, though unpaid, interests are recorded as interest income as long as the loan is performing (full accrual accounting, Art. 24 par. 2 lit. h of the Banking Ordinance). The book value of nonperforming loans must be disclosed annually to the SNB and the SFBC (SFBC- Circular 99/3, and SNB Form “FI03/23”). The audit firm's review annually compliance with accounting and prudential requirements (Art. 19 par. 1 of the Banking Act) and report to the SFBC (Art. 21 par. 1 of the Banking Act, Art. 43ss of the Banking Ordinance). Based on information received from the audit firm or other sources indicating potential violations of valuation rules, the SFBC may take several actions: – request additional information from the bank, the audit firm, or both (Art. 23bis par. 2 of the Banking Act); – request an extraordinary review to be performed by an independent audit firm (Art. 23bis par. 2 of the Banking Act); – request the bank present draft financial statements in the future to the SFBC before publication; – demand corrections to the financial statements, including an increase of value adjustments and provisions, if the investigations confirm that they are substantially understated and republish if necessary (Art. 23ter par. 1 of the Banking Act); – require modification of inappropriate accounting policies or valuation criteria (Art. 23ter par. 1 of the Banking Act). The SFBC may also command reinforcement of capital requirements (see Art. 4 par. 3 of the Banking Act), effectively reducing the credit activity of the bank. Financial statements must be made available to the public (Art. 6 par. 4 of the Banking Act. Also see CP 21). Financial statements include information relevant to loan classification and provisioning including Segmentation of loans by counterparty (per Reporting Guidelines); Disclosure of loans to related parties (per Art. 25 par. 1 ch.1.13.2 and 25c par. 1 ch. 3.13 of the Banking Ordinance); Disclosure of off-balance sheet operations (per Art. 25 par. 1 ch. 3 of the Banking Ordinance, Reporting Guidelines No. 93 to 102); Further segmentations are to be disclosed in the notes to financial statements (Art. 25c par. 1 ch. 4 of the Banking Ordinance, Reporting Guidelines No. 191 to 198); Segmentation of loans by collateral at market value (per Art. 25c par. 1 ch. 3.1 of the Banking Ordinance, Reporting Guidelines No. 150 to 153); Disclosure of movements in provisions (Art. 25c par. 1 ch. 3.9 of the Banking Ordinance, Reporting Guidelines No. 169 to 173); Segmentation of assets by maturity, country, and currency (Art. 25c par. 1 ch. 3.12, 3.14, 3.15 and 3.16 of the Banking Ordinance, Reporting Guidelines No. 177 to 190). Prudential reporting covers reporting large risk exposures (per Art. 21 ss of the Banking Ordinance). Credit risk supervision (per SFBC-Circular 96/3 Cm 16) includes assessing, at least annually by the external auditor, the internal control system of the bank regarding credit risk. The assessment is included in the Long Form report (see CP 21) and must include, at a minimum: the credit granting and monitoring process; the treatment of loans to bank management and Board Members and important shareholders (per Art. 4ter of the Banking Act); the appropriateness of risk measurement methodologies; the appropriateness of value adjustments and provisions; and internal reporting to the management and the board of directors. Prudential reporting in the credit area also must address the tax impact of loan loss provisions (per Art. 57, Art. 63 par. 1 of the Federal Income Tax Act (LIFD, RS 642.11), Art. 24 par. 1 and 4, Art. 10 par. 1 of the Federal Income Tax Harmonization Act (LHID, RS 642.14)). Provisions that have ceased to be economically justified are part of the taxable income (Art. 63 par. 2 LIFD, Art. 24 (1) LHID), whether or not they were actually released to the income statement. The Banking Act, Banking Ordinance and SFBC Guidelines have established a clear, general reporting and credit classification framework. They require Swiss banks to formulate specific policies for identifying and dealing with problem credits including procedures to ensure that classifications, loan loss provisions and write-offs reflect realistic repayment expectations. The classification and provisioning policies of a bank and their implementation are regularly reviewed by the banks' internal and external auditors and the SFBC. The external auditors and the SFBC via review of the external audit reports determines that banks have appropriate procedures and organizational resources for the ongoing oversight of problem credits and for collecting past due loans. The SFBC also has the authority to require a bank to strengthen its lending practices, credit-granting standards, level of provisions and reserves, and overall financial strength if it deems the level of problem assets is too high. The SFBC is generally informed annually or semi-annually in reports filed by the banks concerning the classification of credits and assets and provision amounts. If a bank is a problem bank or one of the two large banks, more frequent reporting is received (i.e., monthly or quarterly).
Assessment	Compliant.
Comments
Principle 9.	Large Exposure Limits Banking supervisors must be satisfied that banks have management information systems that enable management to identify concentrations within the portfolio, and supervisors must set prudential limits to restrict bank exposures to single borrowers or groups of related borrowers.
Description	See CP 8. The Swiss risk diversification rules are modelled on those of the BIS as well as those prevailing within the European Union in the EC Directive on the Monitoring and Control of Large Exposures of Credit Institutions (92/121/EEC). Risk diversification rules are set forth in Art. 21 and 22 of the Banking Ordinance. With the exception of Swiss branches of foreign banks, all banks must comply with these rules on an individual company as well as on a consolidated basis if the equity capital requirements are to be complied with on a consolidated basis. The limitation of risk concentrations occurs on three levels: – The first limit of 10 percent of the institution's eligible capital turns a risk position into a risk concentration in so far as it is reached or exceeded (Art. 21 par. 1 of the Banking Ordinance). This risk concentration, although in principle is authorized in this size, must be reported to the bank's board of directors as well as to the external auditors on a quarterly basis and, at least, on an annual basis to the SFBC. – In addition, there is an upper limit of 25 percent of the institution's eligible capital, which the risk position of a counterparty may not exceed (Art. 21a par. 1 of the Banking Ordinance). – Subject to certain exceptions, the aggregate amount of all large exposures must not exceed 800 percent of the bank's eligible capital (Art. 21b par. 1 of the Banking Ordinance). A risk position may exceed these limits if the excess is covered by freely eligible capital (Art. 21a par. 5 of the Banking Ordinance). An allocation of this nature of freely eligible equity resources must be disclosed in the quarterly computation of required equity submitted to the Swiss National Bank (SNB). The risk position of each single counterparty or connected group of counterparties (according to Art. 21c par. 1 of the Banking Ordinance, related counterparties are considered as a unit) comprises all outstanding positions, off-balance sheet transactions and net long positions in securities which are risk weighted pursuant to the general rules on capital requirements (Art. 21d par. 1 of the Banking Ordinance). Off-balance sheet transactions are converted into their credit equivalent before being added to the risk position. Intra-group transactions may not be subject to the usual rules if the whole group and the group company concerned are supervised on a consolidated and individual basis that is considered to be appropriate (Art. 21a par. 2 of the Banking Ordinance). As far as market risks are concerned, each institution must provide for adequate internal limits. Other than the lending limits described beforehand, Swiss law imposes relatively few restrictions on lending activities of banks. There are no regulatory limits applied to lending to economic sectors or geographical areas, and there are no minimum lending requirements to certain economic sectors, social classes, or geographical areas. The basic rule governing lending activities is the standard of safe and sound banking, which includes a duty to properly establish and assess risk levels, including counterparty risk. In addition, the internal policies and procedures of banks must clearly define the type and geographical scope of the institution's business. Several banks have internal limits for industry sectors and in the case of the two largest banks, the SFBC receives quarterly, a breakdown of exposures by industry. The breakdown is based on the so-called NOGA-code (nomenclature generale des activities) and includes such industries as real estate, construction, oil and gas, telecoms, and automotive. Annually, all banks must report their 10 largest borrowers to the SFBC. Further, banks are under a duty to establish reporting lines, lending limits for each borrower and margin requirements. Finally, all loans must be properly documented in order to promote informed lending decisions and asset quality assessment by internal and external auditors. There are no fiscal arrangements for the lending business. However, a preferential regulatory arrangement exists for certain banks, where the upper limit of 25 percent of the eligible capital in the case of short-term claims (remaining duration of less than one year) on banks is reached very quickly as they must be weighted with a factor of 25 percent (Art. 12a par. 1 point 2.4 of the Banking Ordinance). In the area of risk diversification, the SFBC establishes a risk-weighting rate of 8 percent for short-term claims on large banks, cantonal banks with a cantonal guarantee and for claims on the RBA Central Bank held by banks of the RBA Group (group of more than 80 regional banks). In addition to that, a risk-weighting rate of 12 percent is established for short-term claims on foreign banks with a short-term rating “Prime 1” and a long-term rating “AA” or higher as well as a BIS capital of at least SwF 5 billion (per SFBC-Circular 00/1 of October 26, 2000 on less restricted risk diversification, Regulations for Claims with Residual Maturity of up to One Year on Certain Banks “short-term Interbank Claims “). All banks must comply with the lending limits described above. Moreover, since June 2000, banks must report the 10 largest claims on Swiss and foreign banks on a quarterly basis to the SNB where the data is collected, recorded and transmitted to the SFBC. The regular analysis of the data allows the SFBC to assess and to monitor a possible impact of financial difficulties of banks and systemic risks that might arise from them. The risk diversification rules are based on the general rules on capital requirements. For each position involving a counterparty, the risk weighting factor corresponding to this counterparty or to the collateral received pursuant to Art. 12a par. 1 of the Banking Ordinance should be applied. The risk weighting for certain counterparties (e.g., 25 percent for claims from other public sector entities in OECD countries) and for the collateral received (e.g., 50, 75, or 100 percent for claims directly or indirectly secured by mortgages on residential properties) allows banks a certain flexibility in their lending business within the current rules. In contrast to these general rules, for Lombard facilities which are secured by marketable assets which derive from a diversified portfolio and are traded on a recognized securities exchange or on a representative market (pursuant to Art. 12a par 1 point 4.3 of the Banking Ordinance), a risk weighting factor of 50 percent (instead of 75 percent) is applied. This kind of business has a very long tradition in Switzerland and the inherent credit risk is viewed as very low due to over-collateralization. In special cases the SFBC can allow an easing of the regulations of Art. 21–21m of the Banking Ordinance, or it can order a tightening of them (Art. 22 of the Banking Ordinance). In practice, the SFBC follows a very restrictive policy and exceptions have only been granted in very limited special cases. The Banking Act, Banking Ordinance, and SFBC Guidelines impose limits on large exposures to a single borrower or “closely related group” of borrowers. These limits reflect actual risk exposure and include all claims and transactions, on-balance sheet as well as off-balance sheet. 10 percent or more of a bank's capital is defined as a large exposure and 25 percent of a bank's capital is the limit for an individual large exposure to a private sector nonbank borrower or a closely related group of borrowers. In special cases, deviations from these limits may be acceptable, if approved by the SFBC. During their annual bank audits, the external auditors verify that banks have management information systems which enable them to identify and monitor concentrations on a timely basis (including large individual exposures) within the portfolio on a solo as well as a consolidated basis. The external auditors and the SFBC regularly obtain information that details concentrations within a bank's credit portfolio and can determine if limits have been exceeded.
Assessment	Compliant.
Comments
Principle 10.	Connected Lending In order to prevent abuses arising from connected lending, banking supervisors must have in place requirements that banks lend to related companies and individuals on an arm's-length basis, that such extensions of credit are effectively monitored, and that other appropriate steps are taken to control or mitigate the risks.
Description	The amount of loans to shareholders, officers and “other related parties” is detailed in Art. 4ter of the Banking Act, which states that such credits may be granted “only in conformance with generally accepted principles of the banking profession.” However, such principles are not defined in the Banking Act, Banking Ordinance or any of the guidance issuances of the SFBC or the SBA. Art. 21 paragraph 3, of the Banking Ordinance addresses risk diversification and concentrations and covers such risk positions involving a member of the bank's governing bodies or a person who holds a qualified participation in the bank (i.e., a shareholder) or any person or body corporate closely related to them. Article 25c, paragraph 1 item 3.13 and the SFBC's Guidelines on Financial Statement Reporting Requirements (paragraphs 67, 92, 182-184) require insider lending be disclosed. However, neither the Banking Act nor the Banking Ordinance prescribe limits on such loans outside of the general caveat that such loans should conform to generally accepted principles of the banking profession. Although no specific guidance or circular has been issued on this particular subject, the SFBC states that there is strict supervision over such loans by the internal auditors, external bank auditors and the SFBC. Per the SFBC, “insider” loans should be granted on similar terms and at similar rates as loans to unaffiliated parties. On a quarterly basis, the banks have to prepare the “notification of risk concentration” report and submit it to the external bank auditor. Should the risk position involve a member of the bank's governing bodies or a person who holds a qualified participation in the bank or any person or body corporate closely related to them, the risk concentration shall be designated accordingly in the list under the collective term “Transactions with Governing Bodies.” SFBC-Circ. 96/3 Appendix III requires banks detail their 10 largest borrowers annually; if an “insider” has a large exposure, that individual will be identified. Prudent practices would limit such credits to a specific amount that, as a percentage, would be covered separately by eligible equity. SFBC stated in their response to IMF's questionnaire that such loans shall not exceed 25 percent of eligible equity. This restriction is valid on an individual basis. On an aggregate basis, the amount of risk concentration for all such loans is the same as other concentrations and shall not exceed the percentage of 800 percent of the eligible equity. However, all loans to “insiders,” regardless of whether they meet the threshold of being a concentration, warrant review and scrutiny by the external auditors and the SFBC to ensure they are granted and monitored on an arm's-length basis without preferential terms granted. Pursuant to Art. 4ter of the Banking Act, commercially based lending and collection policies must be applied to loans to shareholders, officers and other related parties. The terms and conditions applied to loans to related parties must not be more favorable than credits extended to non-related borrowers under similar circumstances. During the annual external audit, related party loans are selected for review by the auditor to determine conformance with generally accepted principles of the banking profession. Any preferential treatment to such borrowers would be reported to the SFBC. Directors are expected to abstain from voting on their own or related party loans. The external auditor has discretion in making judgments about the existence of connections between a bank and other parties. The SFBC expectations are that generally accepted principles of the banking profession require that transactions with connected or related parties not pose undue risk to the bank and that such loans are addressed in a bank's loan policy with appropriate steps in place for underwriting, approval and monitoring repayment. The SFBC has set limits on loans to connected or related parties that are consistent with those associated with concentrations to any individual or related groups. Pursuant to circulars issued by the SFBC on the Long Form audit report the SFBC expects banks to have information systems to identify individual loans to connected and related parties as well as the total amount of such loans, and to monitor them through an independent credit administration process. The SFBC obtains and reviews information on aggregate lending to connected and related parties on a regular basis and external auditors check this area closely during their annual audit. Such loans are included in a bank's annual published report and the external auditor's Long Form report to the SFBC.
Assessment	Compliant.
Comments
Principle 11.	Country Risk Banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring, and controlling country risk and transfer risk in their international lending and investment activities, and for maintaining appropriate reserves against such risks.
Description	Art. 9 par. 2 of the Banking Ordinance requires banks to establish regulations or internal guidelines that address the main principles underlying the management of risks and the competencies and procedures for the approval of high-risk transactions. Specifically detailed in the Ordinance are market, credit, default, settlement, liquidity, and image risks as well as operational and legal risks, which must be identified, limited, and supervised. Although country risk and transfer risk are not specifically identified, they can be captured under any of the listed categories. The SBA issued qualitative guidelines for the Management of Country Risk dated September 4, 1997 and also has an issuance on Practices in Foreign Exchange Trading dated December 5, 1996 that are germane to transfer and country risks and the SFBC has concurred with the guidelines. Limits on all relevant risks a bank is exposed to are also a requirement stated in paragraph 1 of the Guidelines of the SBA for the Risk Management in Trading and in the Use of Financial Derivatives dated January 31, 1996. There are no explicit limits being imposed by the SFBC on open positions in individual foreign currencies but banks must have an adequate risk measurement system in place, which includes the setting of limits (paragraph 1 of the “Risk Management Guidelines for Trading and for the Use of Derivatives”). The size of these limits (e.g., EUR 200 million, US$500 million) and the limit type (e.g., intra-day or overnight, position limit or value-at-risk limit) are bank specific. Capital adequacy requirements are imposed on open foreign exchange positions. In 1983, the SFBC issued a circular requiring for the first time that internationally active banks allocate 20 percent of their general loan loss reserves to loans with a country risk. This percentage was retained until the end of 1988, when the rate was raised to 35 percent. Then beginning December 31, 1989, a distinction was made: the required general loan loss reserves for short-term trades with a maturity of at most one year was 10 percent, the one for other trades 50 percent. At the end of 1991 the required general loan loss reserves for the other loans was raised to 65 percent while requirements regarding general loan loss reserves were dropped. The regulation changed again in 1992 and every year the SFBC published a list of countries with the minimal rates for the general loan loss reserves (between 5 percent and 100 percent) for the individual countries and the types of business exempted from these specific provisions. The SBA issued Guidelines for the Management of Country Risk dated September 4, 1997, which impose on banks the obligation to introduce their own systems of identifying, controlling and measuring country risk. Under SFBC-Circular 92/4 (which was repealed as of January 1,1999), banks were to establish specific sovereign risk provisions with respect to all exposures in countries listed in an appendix to the circular. Provisioning rates were specified and subject to certain exemptions. The SFBC decided to repeal its circular because when considering the banks with the most significant country risks, the country risk reserves required, according to the circular, had decreased. The banks in this business asked the SFBC to exempt parts of their business from the general loan loss reserves. The guidelines of the SBA address more than provisions and include risk policy, recordation (identification and measurement), risk limitation and provisions, reporting and disclosure and audit. The SFBC felt these self-regulating guidelines, coupled with the banks' knowledge on specific countries, were more comprehensive than the SFBC circular. The banks' external auditors examine whether the guidelines have been adhered to, utilize rating agency information on particular sovereign risks, and record the audit results in the annual audit report and Long Form report that goes to bank and SFBC management. Banks are expected to review their provisioning for country risks at least semi-annually. The SFBC receives aggregate numbers on a country basis quarterly and further detailed information is incorporated in the annual external audit report. Under the Swiss tax code, bad debt reserves and country risk provisions are allowed as follows: – individual risks can be adjusted at the discretion of the bank, and these adjustments can be challenged at the discretion of the tax authorities. Provisions can be made before the debtor has been declared bankrupt. Write-offs of bad debts are made only when the debtor is adjudged bankrupt or it is highly unlikely that the debtor will ever be in a position to pay; – in addition, a general reserve can be made on the remaining outstanding receivables if the debtors are not banks in an OECD country. In general, 5 percent of the outstanding receivables from Swiss clients and up to 7 percent on the outstanding receivables from non-Swiss clients are allowed. All provisions must be reviewed annually and adopted. Failure to do so will lead to disallowance of excess bad debt reserves or of country risk provisions no longer being required. Only foreign banks and a few of the other Swiss banks, including the two large banks, are involved in cross-border or transfer risk activities. The SFBC does not receive monthly a Currency Report, broken down by country, from the applicable licensed institutions. However, the quarterly Large Exposures report also contains some country exposure information. The two largest Swiss banks report quarterly to the SFBC a breakdown of exposures for emerging market countries. Of the country/transfer risk exposure that exists, most of it is with/to large multinational corporate borrowers and OECD countries. Generally, the SFBC has not had much need to involve itself with cross-border and transfer risk given the limited number of banks involved. However, in those instances where a particular country is experiencing problems, the SFBC know which of its banks may have currency and large exposures in a particular region or country. The bank, its external auditor and the SFBC will review the data and the magnitude of the exposure and determine if any supervisory action is needed. In order to complete the SFBC's Large Exposures reports, banks must have policies, procedures and systems in place to identify, monitor and control country and transfer risks. As part of their on-site inspection, the external auditors review the banks' policies and procedures for adequacy. Lending policies should address the geographic spread of risk, including appropriate limits and then compare them to a bank's own internal country risk data. In addition, the Swiss Accounting Standards and the Tax Code address accounting for and disclosure of country and transfer risks. As previously noted, although not specifically required, banks are encouraged to apply the Swiss standards with respect to their financial statements, including adequate disclosure. Thus, banks involved in international lending must have the systems in place for identifying and monitoring country and transfer risks so that appropriate measures can be taken as/when needed. The SFBC, the Banking Act and Banking Ordinance all require credit institutions have in place appropriate policies relating to the management and control of the lending function. During the external auditor's on-site audit, auditors review an institution's loan administration, assess the internal controls, internal loan review function, problem loan policies and loans, review loan files against stated policies, review related management information systems and review management reports and any related actions taken. The SFBC no longer imposes blanket requirements regarding provisions on a country specific basis. The banks themselves determine the appropriate amount of provisioning, generally in accordance with standard accounting guidance. The appropriateness of a bank's provisions is reviewed annually by the external auditor in conjunction with the review of a bank's financial statements and also by the SFBC upon receipt of the audit report. Monthly prudential reports filed by the largest Swiss banks may provide details of provisions made and arrears statistics which allows the SFBC to monitor, off-site, any deterioration in banks' loan portfolios. The SFBC, in conjunction with information received from the banks and external auditors, determines that a bank's policies and procedures give due regard to the identification, monitoring and control of country risk and transfer risk with exposures identified and monitored on an individual country basis. Banks are required to monitor and evaluate developments in country and transfer risks, apply appropriate countermeasures and have information systems, risk management systems and internal control systems in place to comply with its policies. The SFBC permits the banks themselves to decide for each individual loan the appropriate provisioning in conjunction with the SBA's guidelines and in line with perceived and/or identified specific risks. The provisioning is judged by the external auditor and by the SBC for adequacy. The SFBC receives and reviews sufficient information annually via the external audit Long Form report on the country risk/transfer risk of individual banks.
Assessment	Compliant.
Comments
Principle 12.	Market Risks Banking supervisors must be satisfied that banks have in place systems that accurately measure, monitor, and adequately control market risks; supervisors should have powers to impose specific limits and/or a specific capital charge on market risk exposure, if warranted.
Description	The SFBC-Circular 97/1 “Guidelines governing capital adequacy requirements to support market risks” focuses on capital adequacy but also covers market risk. Financial intermediaries applying the model-based approach have to observe detailed qualitative standards with respect to their market risk management process. In particular, they have to ensure that the risk aggregation model is closely integrated into the daily risk control. Its results must be an integral part of the planning, monitoring and management of the market risk profile of the bank. There must exist a clear and permanent relationship between the internal trading limits and the value-at-risk as it is used to determine capital requirements for market risks. The computation of required equity is made according to the rules set out in Art. 12a through 12o of the Banking Ordinance. The requirements to support market risks are further regulated through Guidelines issued in SFBC-Circular 99/1. The market risks may be computed using the standard approach described in the Banking Ordinance and Guidelines or, with the consent of the SFBC, using a model-based approach. The use of the model-based approach is conditional upon the bank fulfilling specific SFBC requirements. Simplified rules apply for computing capital charges on trading book positions if a bank's trading book at no time exceeds 6 percent of all on- and off-balance-sheet positions and the absolute level of SwF 30 million (so-called “de minimis” rule). EC Directive 93/6/EEC issued in March 1993 and amended in 1998, addresses the capital adequacy of investments firms and credit institutions and contains requirements for credit institutions in the area of market risk. Information, risk management and internal control systems must be in place for all areas, not just the market risk area. Although Switzerland is not a member of the EU and not required to implement EU Directives, generally the Swiss banks adopt the significant aspects of the directives into their own system since they are major competitors to EU banks. Swiss credit institutions are required to determine a trading book policy statement that sets out the basis on which positions are allocated between the trading and the banking books. The SFBC requires banks to assess associated market related risks (position, interest rate, settlement and counterparty, foreign exchange and large exposures) and identify, measure, monitor and control them. External auditors perform on-site audits annually using established industry procedures regarding Treasury/Market activities. Part of the procedures requires the auditors to review the banks' policies during on-site audits to ensure adequacy and suitability. The EC Directive was amended in 1998 to permit the use of models in identifying, measuring, monitoring and controlling market risks. In order to carry out its supervisory duties in the area of market risk, the SFBC has established a separate risk management unit that has specialists who review bank models and keep abreast of the products offered by those institutions identified from prudential reports as being market players. The unit goes on-site to those larger banks that have developed internal models for tracking, assessing and monitoring their market risks. The SFBC experts validate/evaluate the models in use. The SFBC plans to add five additional staff to the unit in the next few years in anticipation of finalization of the revised Basel Capital Accord that is currently under review. It is important for the banks and the SFBC to know what types of products are being traded and when they are due. This is an item for discussion when the SFBC meets quarterly with the largest Swiss banks. The SFBC does not approve models subject to any conditions. The staff discuss with the banks what a representative model would be and what it might factor into the assumptions. Although the SFBC does not conduct stress tests of the banks or system, individual banks have set up their own modeling scenarios to stress test shocks to the markets. Both large Swiss banks stated that the September 11 terrorist attacks in the United States tested their system but results at both banks were reportedly within the stress test parameters. The risk management staff reviews internal bank limits and their appropriateness in regard to the models. They review the bank's trading book policy statements and discuss the limits set for their various market risks and the appropriateness of the levels. These limits are subject to ongoing monitoring by the SFBC Risk Management unit. In addition to the on-site inspections, the SFBC collects details of the market risk incurred by the banks through the monthly Prudential Return, which the large banks with models provide. Information submitted includes interest rate, equity, foreign exchange, settlement/counterparty and large exposure risks arising due to a bank's trading activity. The SFBC does not prescribe specific limits on market risk exposures. For market risk, capital requirements are determined in line with the Basel Accord and Swiss standards at appropriate levels for each institution. Details of the supervisory process used by the SFBC's examiners during their on-site model validation inspections include review of a bank's treasury and market risk activities. The Risk Management staff is supported in their on-site inspections by external auditors and staff from the Large Bank unit. An important part of the on-site inspection, as well as the quarterly meetings with bank management, is to ensure that the Board and management understand the various products the institution offers and their associated risks. Information, risk management and internal control systems must be in place for all areas, not just the market risk area. Institutions are checked to see that they capture transactions on a timely basis and that positions are revalued using reliable market data. Inspection procedures specifically verifying confirmations, settlement, and reconciliation activities are important for overall operational validation. As part of the process, SFBC examiners determine that an institution has an appropriate number of traders for the type and volume of activity conducted. Most banks involved in market risk management are international institutions using some type of internal Value at Risk (VaR) model. The SFBC staff looks to an institution's internal and external audit processes for support in ensuring banks conduct periodic validation/testing of the systems used to measure market risk. SFBC's risk experts review approaches used for identifying and measuring risks with the banks in great detail. Banks conduct “extreme” scenario calculations and stress- and back-testing are done in instances where models are used for validation purposes. Contingency planning, in case systems fail, is a required part of a bank's risk management process. Both UBS and the Credit Suisse Group (Switzerland's two largest banks) have requested, and received, the SFBC's formal review and approval of their models (required under the Capital Adequacy Directive of the EU). As previously noted, Switzerland is implementing the models approach of the Directive even though it is not an EU member. Institutions with an approved model perform stress testing, scenario analysis and contingency planning, as appropriate, in addition to periodic evaluation and system testing. For the level of activity and the number of institutions involved in market activities, the Risk Management unit is adequately staffed. However, once the revision to the Basel Accord is finalized, if many more Swiss banks adopt the internal rating method for determining capital adequacy, the additional five planned staff positions plus possibly several more will need to be provided to ensure the requisite expertise to monitor market activity and review/assess banks' models. Resources could be stretched should multiple banks request approval of their models at the same time. The Banking Act and Banking Ordinance require all bank directors and senior management to have the appropriate competence and experience to enable them to fulfill their fiduciary duties. A bank must have in place comprehensive risk management systems commensurate with the scope, size, and complexity of all of its activities, incorporating continuous measuring and monitoring of risk, accurate, and reliable management information systems and timely management reports. During the SFBC's quarterly meetings and its on-site inspections, and in conjunction with the external auditors, the SFBC assesses the direct involvement of senior management in the market risk activities of the bank to ensure that management is kept informed of the activities and that senior management are exercising their duties responsibly. The role of the risk management function within the bank is carefully reviewed and its independence assessed. SFBC Large Bank and Market Risk units get monthly data from the largest banks, which facilitate timely review. Management reports are reviewed for completeness, accuracy, and timeliness. Management is questioned regarding their use of such reports and their overall knowledge of the products being offered by the bank. Stress testing assumptions are reviewed in conjunction with a bank's overall business plan/strategy, its operating environment and current market conditions. Stress testing scenarios and contingency planning are also frequent topics for discussion during the SFBC's quarterly meetings with bank management. The SFBC determines in conjunction with a bank's external auditors, that banks have suitable policies and procedures related to the identification, measuring, monitoring and controlling of market risk. These policies and procedures include setting appropriate limits for various market risks, including foreign exchange business. The SFBC has the power to impose a specific capital charge and/or specific limits on market risk exposures, including foreign exchange business and ascertains independently or in conjunction with external auditors that banks have information systems, risk management systems and internal control systems in place to comply with those policies. The SFBC and external auditors verify that any limits are adhered to and that there are systems and controls in place to ensure that all transactions are captured on a timely basis and positions are revalued frequently, using reliable and prudent market data. The SFBC has requested banks perform scenario analysis, stress testing and contingency planning, as appropriate, and periodically validate or test the systems used to measure market risk. The SFBC reviews the assumptions management has used in their stress testing scenarios, and the banks' contingency plans for dealing with such conditions. The SFBC reviews management's understanding of the bank's products and the quality of management information.
Assessment	Compliant.
Comments
Principle 13.	Other Risks Banking supervisors must be satisfied that banks have in place a comprehensive risk management process (including appropriate board and senior management oversight) to identify, measure, monitor, and control all other material risks and, where appropriate, to hold capital against these risks.
Description	Within the scope of self-regulation, the Swiss Bankers' Association (SBA) has established guidelines for the management of country risks and guidelines concerning risk management in trading and the use of derivatives (“Risk Management Guidelines for Trading and for the Use of Derivatives” of January 1996 and “Guidelines for the Management of Country Risk” of November 1997). These two guidelines set out the professional rules concerning risk policy, risk identification, measurement and limitation, valuation, reporting and disclosure. The external auditors must describe and assess in their annual audit report the bank's risk management process, in particular the integrity of the input data, the measurement of risks, the monitoring of limits, the validation of models and procedures employed and their correct application and the reporting to management and the board. In addition, they must assess the independence and the integration of the risk management and risk control process into the bank's organization (SFBC-Circulars 96/3 “Audit Report,” par. 16). The external auditors have to give their opinion whether a bank is in compliance with the applicable SFBC-Circulars and SBA-Guidelines. It is the responsibility of each bank's board to establish the entity's risk appetite and set appropriate limits commensurate with that appetite. The SFBC intercedes when a bank's appetite for risk results in its involvement in new activities. Since all activities must be detailed in a bank's bylaws, which are approved by the SFBC at the time of licensing, any new activities must be added to the bank's bylaws and the SFBC must approve all bylaw changes. This provides the SFBC with the opportunity to determine if a bank can handle the risks associated with a particular new activity. Where the SFBC has doubts, staff contacts the bank and discuss the proposed change. Liquidity Risk. The applicable liquidity requirements are set out in Art. 4 of the Banking Act and in Art. 15 to 20 of the Banking Ordinance. Liquidity management addresses a bank's ability to meet its actual and contingent obligations, various liquidity scenarios (day-to-day, liquidity crisis, market/worst case crisis), foreign and domestic currency positions, measurement systems and their underlying assumptions, contingency plans, funding sources and requirements, and overall liquidity management. Banks are required to maintain an emergency buffer to ensure that there are sufficient liquid funds in the banking system to protect the interests of creditors against the impact of any unexpected drain of money from the banking system. Liquidity management should include developing measurement techniques (such as GAP reports, VaR models, duration, or simulation models), procedures, and identifying an appropriate mix of assets and liabilities. Trading positions should be either closed or reduced to minimal levels at the end of each business day; tactical positions require daily management; and strategic positions, while generally stable, should be reviewed periodically to determine if change is needed. Following discussions with SFBC staff, GAP reports are not filed as part of the prudential reporting process and the current supervisory system for monitoring liquidity as part of the off-site supervision is in the process of review. The SFBC has mandated a working group to overhaul the current system and align the present liquidity requirements more closely with the Basel Committee's paper on “Sound Practices for Managing Liquidity in Banking Organizations.” The working group hopes to develop a framework for liquidity analysis in the next year with implementation two to three years from now. Swiss banking law distinguishes between liquid (cash or first grade liquidity) and marketable assets (general or second grade liquidity). The cash liquidity serves to ensure that there are sufficient giro deposits with the SNB. The required liquidity is based on defined Swiss franc short-term liabilities. These liabilities include short-term deposits from banks and other creditors with a maturity not exceeding three months and 20 percent of savings, deposits and similar books or accounts, excluding pension fund liabilities. The base is computed as the average of outstanding balances at the end of the three months preceding the computation. The Federal Finance Department fixes an across-the-board cash-liquidity ratio for all banks based on recommendations of the SNB and the SFBC. Cash liquidity requirements may not exceed 4 percent of the above-mentioned average liabilities. Currently, the first grade liquidity ratio requirement is fixed at 2.5 percent (per the Ordinance of the Department of Finance of November 26, 1987). The required liquid assets must be held on average for the entire 30-day period from the 20th of the month following the calculation period to the 19th of the following month. The ratio is recalculated monthly based on the new average. Although one function of cash liquidity requirements is to allow banks to fulfill unexpected cash claims without recourse to credit facilities at other banks or the SNB, the main purpose of this across-the-board ratio is to enable the SNB to control monetary policy. For that reason, it was decided to transfer the cash or first grade liquidity regulation from the Banking Act and Banking Ordinance to the pending revised SNB Law. The total revision of the SNB Law is currently in consultation process. The across-the-board ratio will be set forth in Art. 17 (minimum reserve) of the revised SNB Law. The general or second grade liquidity is designed to ensure that a bank retains an emergency supply of liquidity to meet its own needs for a certain time. The short-term liabilities which form the basis for the computation include the excess of off-settable short-term liabilities (Art. 17a of the Banking Ordinance) over easily realizable off-settable assets (Art. 16a of the Banking Ordinance); 50 percent of short-term creditors and other accounts or books without withdrawal restrictions; and 15 percent of deposits in savings, deposits or similar books or accounts with withdrawal restrictions excluding amounts not available for distributions (e.g., pension fund liabilities). Based on this calculation, 33 percent of the total of these three components must be covered by liquid assets (Art. 15 of the Banking Ordinance) and easily realizable assets (Art. 16 of the Banking Ordinance). The levels of cash liquidity and general liquidity have to be maintained continuously. Banks must prepare monthly returns for cash liquidity and quarterly returns for the general liquidity. These returns are prepared on official forms and submitted to the SNB. If a bank does not meet the liquidity requirements the SNB must immediately give notice to the SFBC. Banks are also required to ensure that adequate levels of liquidity are maintained on a group-wide basis. Large Exposure Risk. Banks are required to notify their external bank auditors whenever their sight and other liabilities due within one month to a single customer or bank exceed 10 percent of their total (not netted) sight and other liabilities due within one month. The liabilities to a single customer include those to parties related to the customer when there are majority interlocking shareholdings. The auditors must include this information in their annual audit report. They must recommend corrective action if the funding appears to be inappropriately concentrated. One of the criteria for holding a banking license is the establishment of an adequate organization corresponding to the business activities (Art. 3 of the Banking Act). Art. 9 par. 2 of the Banking Ordinance states that financial intermediaries have to document the main principles for the management of risk and the competencies and procedures for the approval of taking risks in internal guidelines. They must in particular identify, limit, and supervise market, credit, default, settlement, liquidity risks as well as reputational, operational and legal risks. Market Risk. See CP 12 above. Interest-rate risk. SFBC-Circular 99/1 dated March 25, 1999 on “Measurement, Management and Monitoring of Interest-Rate Risks” sets out the minimum standards to be applied in the measurement, management and monitoring of interest-rate risks. The external auditors ensure that the banks' standards cover foreign and domestic currency positions and include reviewing measurement techniques used to assess interest rate risk and the underlying assumptions, reviewing MIS for timeliness and accuracy, and reviewing simulations of interest rate scenarios (increasing and decreasing). In addition, banks have to report to the SFBC their risk exposure on a cash flow basis. Based on this information the SFBC will be able to identify outlier banks, that is, banks with a significant risk exposure. The supervisory review process reveals whether such risk exposure is in line with the bank's implemented risk management policies and procedures. If the identified risk exposure is deemed to be too high, an additional capital charge will be levied on the bank by the SFBC. Foreign Exchange Risk. Sound banking practices require banks set overnight open position limits and intra-day limits. The largest banks conduct their business in this way and guidance is available in SFBC-Circular 97/1 dated October 22, 1997, as amended October 1, 1999. External auditors verify on behalf of the SFBC that limits for more volatile and less liquid currencies are lower than those for stable and liquid currencies, and that long positions in currencies susceptible to devaluation or that lack ready availability are strictly limited in conjunction with safe and sound practices. Operational Risk. Such risk crosses all business lines and can be more significant in the asset management investment lines than in the more traditional banking activities of lending. The SFBC requires every banking entity licensed to conduct business have an internal auditor and/or internal audit function to monitor the entire institution and in the process of such monitoring, reduce overall operational risk. The SFBC and sound banking practice supports a Board audit committee chaired by a non-management person with a direct reporting line for the internal auditor. If there is no Board committee in the licensed entity (which happens in branches and small subsidiaries of international institutions), then the auditor must have a direct reporting line to the entity's Chairman of the Board. As noted above, the SFBC is in the process of reviewing and possibly replacing the current liquidity ratio concept with a new approach. Incorporating stock and maturity mismatch (or gap-based) approach and including contingencies and off-balance sheet items should result in a more up-to-date measurement process. External audit procedures require auditors determine the appropriateness, adequacy and suitability of the processes in place during on-site inspections, including whether limits and procedures are operating effectively and appropriate responsibility is assigned to the relevant business units and personnel based on their operations. The SFBC's supervisory process includes regular collection and analysis of data; regular review meetings with senior bank management and external auditors; review of audited accounts and Long Form audit reports; approval of proposals for new business activities; and ad hoc meetings, correspondence, and phone calls with the banks as the need arises. On a monthly basis the SFBC receives prudential data, which permits it to verify a credit institution's compliance with the liquidity requirements. In addition, the SFBC is immediately notified should a bank have a shortfall of its capital requirements. SFBC's examiners review banks' internal audit reports which can indicate areas of potential concern and meet with banks' external auditors as deemed necessary to supplement qualitative assessment. During the external auditor's on-site inspections, the auditors verify the accuracy of the data submitted and determine whether risk management processes are operating effectively. The frequency of inspections depends on an institution's structure, quality of ownership, size, financial condition, risk profile, profitability (current and trend), activities, and the SFBC's perception of management. Institutions where the SFBC is the “home country” supervisor (Swiss owned banks) are required to receive an annual on-site audit performed by an audit firm approved/licensed by the SFBC. See CP 6 for details regarding capital adequacy requirements for banks based on a risk assessment. Swiss banks adhere to the current Basel Accord with more stringent standards imposed by the SFBC. Banks are encouraged to follow or be standard setters for best practices on corporate governance issues, including the disclosure of a statement on risk management policies and procedures in their published financial statements. Financial reporting standards, which apply to all banks and financial institutions, require that an explanation of the role financial instruments play in creating or changing the risks that the entity faces in its activities be disclosed in their public accounts. In addition, the institutions are required to explain the directors' approach to managing each of these risks, including a description of the objectives, policies and strategies for holding and issuing financial instruments. The SFBC requires individual banks to have in place appropriate board and senior management oversight of its comprehensive risk management processes that identifies, measures, monitors and controls material risks and are periodically adjusted in light of the changing risk profile of the bank and external market developments. The SFBC in conjunction with the banks' external auditors determines that the risk management process addresses liquidity risk, interest rate risk, and operational risk as well as all other risks, including credit and market risk. The external auditors address liquidity risk, interest rate risk, foreign exchange risk, and operational risk in their audit standards and on-site procedures. The SFBC sets liquidity guidelines for banks, and ensures external auditors determine that the risk management processes, capital requirements, liquidity guidelines, and qualitative standards are being adhered to in practice. The SFBC has the authority to require a bank to hold capital against risks in addition to credit and market risk.
Assessment	Compliant.
Comments	GAP reports are not filed as part of the prudential reporting process and the current supervisory system for monitoring liquidity as part of the off-site supervision is in the process of review. The SFBC should continue investigating ways to improve its current liquidity monitoring to align it more closely with the Basel Committee's paper on managing liquidity in banking organizations.
Principle 14.	Internal Control and Audit Banking supervisors must determine that banks have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls, as well as applicable laws and regulations.
Description	According to Art. 9 par. 4 of the Banking Ordinance banks must provide for an effective system of internal control. This includes an effective internal segregation of functions between trading, asset management and back office. The SFBC may grant an exemption in certain justified individual cases or require, in addition, the segregation of other functions (Art. 9 par. 1 of the Banking Ordinance). The management of the bank must assemble all documents concerning transactions with risks, which are necessary for taking decisions and monitoring such risks. These documents must also enable the auditors to form a reliable opinion on the business transactions (Art. 9 par. 3 of the Banking Ordinance). The SBA Guidelines concerning the concept and organization of internal audit in banks, dated from 1978, as amended in 1987, is currently under revision. The SFBC-Circular 95/1 dated December 14, 1995, provides guidance on Internal Audit and in their annual audit, external auditors are required by SFBC-Circular 96/3 dated October 21, 1996, to assess the appropriateness of internal control and the internal audit function. The EU's Second Banking Directive (89/646/EEC) issued in 1992 and adapted by the SFBC in several respects, also sets out requirements relating to internal controls. Swiss banks are required to have comprehensive risk management systems commensurate with the scope, size and complexity of all the bank's activities, and to continuously measure, monitor and control risk. Such systems must be accurate and reliable, and include timely management reporting and sound internal controls. Internal control systems and reporting arrangements should provide for the effective, prudent and efficient administration of (an institution's) assets and liabilities. It is the Board's and Management's responsibility to ensure that the business of the credit institution is being managed, conducted and controlled in a prudent manner. These are sound Corporate Governance requirements for Board and senior management involvement in the operations of credit institutions. (See CP 13 for discussion of Operational Risk management, which crosses over into all business units.) An internal audit function is required per the SFBC and good corporate governance standards. A good internal audit program is designed to include procedures to counter fraud. Management's strategic plans are reviewed to assess plans for (and the impact of) major system changes and how the bank is being positioned to deal with changes in their business environment. Management resumption plans were developed and reviewed in connection with planning for Y2K; the SFBC and external auditors should determine that such plans are kept up-to-date going forward, particularly in light of the September 11 terrorist attacks in the United States. According to Art. 9 par. 4 of the Banking Ordinance, a bank must appoint internal auditors independent from the management. The SFBC may, in certain justified individual cases, exempt a bank from the obligation of appointing internal auditors. The reports of the internal auditor must be submitted to the external auditor and in the case of the largest banks, the SFBC's large bank unit also reviews internal audit reports. The internal auditor has to communicate to the external auditors all information needed by them to fulfill their duties. The internal and the external auditors have to coordinate their activities to avoid duplication of auditing efforts as far as possible (per Art. 19 par. 3 of the Banking Act and Art. 40a of the Banking Ordinance). SFBC-Circular 95/1 of December 14, 1995 on Internal Audit further requires that the internal auditor be selected by the board of directors, report directly to it and execute the supervisory tasks, which have been transferred to it. In this connection, it is important to note that no member of the board of directors shall belong to the bank's management (per Art. 8 par. 2 of the Banking Ordinance). The Internal Audit circular details the rules for the organization, the personnel requirements and the field of activity of the internal audit function. The circular also states that the internal audit function can be transferred to the internal audit of the parent company or another group company or an auditing firm recognized by the SFBC but must be independent of the external auditors of the enterprise. Independent third parties who can demonstrate a thorough knowledge of banking and bank auditing are permitted to serve as internal auditors. The external auditors have to comment in the bank's annual audit report in connection with the assessment of the compliance with the licensing requirements on the appropriateness of the internal audit (SFBC-Circular 96/3 Audit Report, par. 14). The assessment of the internal audit area includes staff qualifications and numbers, independence, audit work plan, audit procedures, work papers, and reports. Internal manuals on credit, foreign exchange and other market activities are required as part of sound corporate governance and should correspond to the business activities of a bank. Such is necessary to obtain and retain a banking license. The external auditor is responsible for assessing global controls in those banks with foreign operations. Deficiencies in foreign operations should be identified first by internal auditors. External auditors, in addition to assessing the adequacy of controls and internal audit, must also assess the fitness and propriety of the board and management in carrying out their fiduciary responsibilities. Both internal and external auditors review systems as well as controls. The lead external auditor is required to change every seven years to avoid the auditors losing their objectivity in regard of any one bank. Corporate or banking laws identify the responsibilities of the board of directors with respect to corporate governance principles to ensure that there is effective control over every aspect of risk management. The SFBC requires that banks have in place internal controls that are adequate for the nature and scale of their business. To achieve a strong control environment, the SFBC requires that the board of directors and senior management of a bank understand the underlying risks in their business and are both committed to, and legally responsible for, the control environment. The SFBC has the legal authority to require changes in the composition of the board and management as well as in the external audit firm. The SFBC requires that banks have an appropriate audit function charged with (a) ensuring that policies and procedures are complied with and (b) reviewing whether the existing policies, practices and controls remain sufficient and appropriate for the bank's business.
Assessment	Compliant.
Comments
Principle 15.	Money Laundering Banking supervisors must determine that banks have adequate policies, practices, and procedures in place, including strict “know-your-customer” rules, that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements.
Description	Money laundering was made a crime by Art. 305bis of the Swiss Penal Code (Criminal Code) and all banks and other financial intermediaries are now required to comply with certain due diligence obligations with the passage of the Money Laundering Act (MLL) on October 10, 1997, effective April 1, 1998. Art. 305ter of the Criminal Code impose a general obligation to ascertain the identity of customers and beneficial owners of accounts. Violation is punishable with imprisonment of up to one year. In the financial sector, the SFBC issued its first circular on the subject in 1991 to all licensed banks and auditing firms containing guidelines for preventing and combating money laundering. This circular is presently being revised and the current version is SFBC Circular 98/1 dated March 26, 1998. The SFBC's circular complements the Swiss Banks' Code of Conduct and the MLL in that it sets out certain requirements regarding internal operating procedures, and refines the due diligence requirement with respect to cases where a heightened degree of diligence is necessary. Switzerland has implemented legislation for identifying, tracing, freezing, seizing and forfeiting narcotics-related assets. The Swiss banks self-regulation has been an essential part of the fight against money laundering. The Due Diligence Agreement has been in place since 1977, prior to the 1998 Anti-Money Laundering legislation and is deeply enshrined in the Swiss banking system. The Due Diligence Agreement is revised every five years and lists the following duties which banks must comply: – duty to ascertain the identity of customers – duty to ascertain the beneficial owner of assets – duty to verify specific aspects – duty to retain documentary records – duty to take appropriate organizational measures. In 2000, the two large Swiss banks joined with nine other internationally active banks to form the “Wolfsberg Anti-Money Laundering Principles,” These principles are based on the Due Diligence Agreement but do not set out any sanctions or penalties. Adoption of and compliance with the principles are voluntary by the banks but have been agreed to by UBS and the Credit Suisse Group. Switzerland is a member of the Financial Action Task Force (FATF) on money laundering and was accepted into the Egmont Group of financial intelligence units in 1998. Switzerland has ratified the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime of 1990. In December 2000, Switzerland signed the United Nations Convention Against Transnational Organized Crime. Switzerland also has a Mutual Legal Assistance Treaty in place with the United States to exchange records and provide information in connection with narcotics investigations and proceedings. The Swiss signed a declaration of intent with the Belgian reporting office laying out details of cooperation in 1999 and are also negotiating similar arrangements with France, Finland and the Czech Republic. On December 22, 1999, the Efficiency Bill was passed by Parliament. The purpose of this bill is to make the prosecution of organized crime, money laundering, corruption and other white-collar crime more effective, by increasing personnel and financing of the criminal police of the Federal Office of Police (FOP). The new law gives the FOP and Attorney General's Office the authority to handle cases with international scope, involve several cantons, and deal with money laundering, organized crime, corruption, and white-collar crime more effectively. The law modifies Art. 340bis of the Criminal Code and takes effect on January 1, 2002. The SFBC ensures that banks have adequate policies, practices and internal operating procedures in place that promote high ethical and professional standards and prevent the banks from being used, intentionally or unintentionally, by criminal elements. The prevention and combating of money laundering is to be given due weight in the training of personnel, in particular of the employees having customer contacts. Beginning at the licensing phase, the SFBC relies on the external bank audit process to confirm that banks take the appropriate steps to prevent and detect criminal activity or fraud and report any suspicious activities to the appropriate authorities. Such steps must continue to be in place once a bank commences business and are reconfirmed annually by the external auditor. Banks must provide for internal operating procedures and control mechanisms necessary for the prevention and combating of money laundering. They must ensure adequate training of their personnel, in particular of employees having contact with customers. Each bank has to designate one or more persons or a specialized body (e.g., legal or compliance department) which advises the management and all employees in developing and implementing the internal operating procedures, in training personnel, in spotting cases of suspicious customers and transactions, and in all other questions related to money laundering. Internal auditors have to review the measures taken. Procedures are checked annually by the external auditors and any deficiencies require corrective action. SFBC-licensed external auditors determine that banks have complied with the law, SFBC guidance and the Due Diligence Agreement. Such annual audit attestations are part of the Swiss anti-money laundering program. As noted above, clear rules and guidelines are in place regarding what records must be kept on customer identification and individual transactions. Documentation must be retained for a minimum of 10 years after the account relationship is closed. The banks must investigate the purpose and economic background of transactions or business relationships appearing unusual unless their legality is clear (Art. 6 lit. a MLL). The banks must conduct further investigations if a customer or third party, at the time of opening an account or business relationship with the bank, deposits, for the credit of an account or security deposit, bank notes, securities or precious metals in a value equal to more than SwF 100,000. If a customer or third party, during the period of the business relationship, deposits or withdraws bank notes, securities or precious metals for the credit or debit of his deposit account, and the amount of the individual transactions or the number of transactions appear unusually high in relation to the known business activity and the known financial circumstances of the customer, the same procedure applies. The banks must set forth the framework for these investigations in their internal operating procedures for action. If the bank becomes aware of indications that certain funds originate from a crime, or that a criminal organization has the power of attorney with respect to these funds, special investigations are required to assess satisfactorily the background of the transactions. The banks must require for this purpose either a written declaration of the contracting party or prepare a memorandum for the record in which they must set forth the result of the investigations. Depending on the circumstances of each case, in principle, particular information is required on: – the purpose and nature of a particular transaction; – the financial circumstances of the contracting partner or the beneficial owner; – the professional or business activity of the contracting partner or the beneficial owner; – the origin of the funds deposited or invested. The SFBC as the supervisory authority for banks, securities dealers, stock exchanges and investment funds is also responsible for the supervision of the anti money laundering implementation with regard to these institutions. The approved external auditing firms are required to verify the implementation and application of the anti-money laundering rule in the context of their regular auditing activities. Violations must be immediately reported to the SFBC. Art. 8 MLL requires banks to take all measures necessary to prevent money laundering. They must make sure that their personnel are adequately trained and instructed and that regular internal controls are developed and followed. If a bank knows or has a justified suspicion that funds are connected with money laundering, it must notify the Money Laundering Reporting Office (MROS) immediately. For the year 2000, 311 reports were filed in total of which 234 (75 percent) were filed by banks. The SFBC should also be notified when serious issues are evident or in the case of noncompliance. The obligation to notify is also triggered if a customer refuses to cooperate in investigations. If a bank continues with a business relationship despite having doubts about it but without a well-founded suspicion and without informing the relevant authorities, it must monitor the business relationship. If a bank breaks off the relationship without informing the relevant authorities, it must ensure that the assets are withdrawn in a form that allows the prosecution authorities to follow the “paper trail” if necessary. The bank must not pay out large sums of money in cash or physically issue securities or precious metals. These obligations also apply if the bank suspects corruption or misuse of public funds. The bank must not break off the business relationship or allow the withdrawal of large sums if there are concrete indications that the authorities are about to undertake seizure steps. Once notification has been made, banks must block the funds without delay and maintain the freeze until they receive a ruling from the criminal authorities but for no longer than five working days. Banks must neither inform the customer nor third parties about the notification and the freezing of the funds if not permitted by the criminal authorities. The banks must prepare files on their customers to document relationships, transactions and investigations sufficiently to permit a third-party professional, such as the external auditor, to reach a reliable opinion about the transactions and the compliance with the law and the implementing SFBC Circulars. The identification document as well as the documents concerning the transactions undertaken have to be retained for at least ten years after the cessation of the relationship or the transaction (Art. 7 MLL). Banks must designate one or more persons or a specialized body who can ensure compliance with internal procedures and policies and advise the management and train all employees in cases of suspicious transactions or customers. Internal auditors must review the measures taken by the bank to prevent and combat money laundering. The SFBC Guidelines apply to the consolidated bank and provide that banks must not misuse their foreign branches and financial companies to circumvent the money laundering guidelines. They must ensure that banking group companies and establishments in countries that are not members of the FATF, follow the FATF recommendations applicable. The SFBC may prohibit banks from establishing affiliates in countries where the regulatory environment, in particular the anti-money laundering regulation, is deemed inadequate. Swiss banks' foreign offices must abide by the Swiss standards of due diligence as set forth in the SFBC Circular and the Swiss Banks' Code of Conduct and external audits of offices in foreign jurisdictions are done by Swiss auditors familiar with the Swiss standards. The SFBC may also order a “special audit” to verify compliance with the anti-money laundering provision. The SFBC mandated a special audit after serious omissions and organizational shortcomings were disclosed in a number of banks in Switzerland following a high profile case. The audit covered several establishments of the banks both within and outside of Switzerland. In addition to the “special audit,” the SFBC may, within the context of regular consolidated supervision activities, require examination with a special focus on anti-money laundering procedures. In January 2001, the SFBC asked Swiss banks with significant activities outside of Switzerland to mandate that their auditing firms conduct in-depth examinations to verify the adequacy of their internal procedures, systems and controls governing anti-money laundering. These in-depth examinations place a particular focus on the adequacy and effectiveness of customer identification procedures, the functioning of internal control mechanisms and the communication and cooperation between internal audit and external audits. In addition, the auditors are required to report immediately to the SFBC any indications that the foreign establishments are used to circumvent Swiss legal requirements and professional rules. In the event of non-compliance, the SFBC shall impose administrative sanctions and may refer the violation to the criminal authorities. The SFBC has a range of sanctions available for banks in violation of the money laundering rules. Sanctions range from a reprimand to a special audit and/or dismissal of bank officials to the revocation of a bank's license if licensing criteria are no longer met or the bank is in serious breach of its legal obligations. Besides administrative measures, the SFBC may, in case of violation of the Banking Act, the MLL or the Criminal Code, bring criminal charges. Compliance with the Code of Conduct is enforced by an independent Supervisory Board set up by the Swiss Banker's Association (SBA). This Board may impose fines up to SwF 10 million. According to Art. 9 MLL, a bank who knows or has a justified suspicion that the funds in a business transaction are related to a criminal act as defined in Art. 305bis of the Criminal Code, must notify without delay the MROS. Banks cannot invoke banking secrecy provisions with regard to criminal or administrative authorities conducting investigations. They must provide all information requested by these authorities and allow access to all their files. Banking secrecy or confidentiality provisions therefore cannot hamper anti-money laundering investigations. The Criminal Code allows bank employees to report suspicious transactions without fear of violating the bank secrecy regulations. The SFBC and the SBA are in the process of updating the Due Diligence guidelines to clarify foreign corruption (currently addressed under the old law) and the duty for top bank management to know the big/high profile customers and to frequently check such accounts. These efforts are not limited to foreign corruption but also include a working group to revise the current SFBC money laundering circular. The working group consists of representatives of the Money Laundering Control Authority, the Money Laundering Reporting Office, and cantonal enforcement agencies. The objective is to also formulate recommendations for a review of the SBA's Code of Conduct on Customer Due Diligence. The revised SFBC guidelines will address: – Formulation of a more differentiated approach to customer identification; – Rules for non-face-to-face customer relationships, in particular internet-only banks; – Rules regarding identification of customers by third parties and independent asset managers; – More detailed rules on the verification of the beneficial owner; – Use of client profiles; – Heightened due diligence requirements in special cases, for example, Politically Exposed Persons (PEPs); – Adaptation of the existing rules to the criminal code provisions regarding foreign corruption and criminal liability of corporations. On March 29, 2001, the SFBC addressed a letter to all banks stating the minimum standards for account openings and the monitoring of accounts with “Internet only” banks. The letter currently imposes the same due diligence standards on such “virtual” bank account openings as on “brick and mortar” banks. These minimum standards will be subject to review and incorporated into the revised SFBC Anti-Money Laundering Circular. The minimum standards of March 29, 2001, will remain in force until their inclusion into and the issuance of the revised SFBC Anti-Money Laundering Circular. The SFBC requires, and periodically verifies via the dualistic supervisory process with external auditors, that banks have in place adequate policies, practices and procedures that promote high ethical and professional standards and prevent the bank from being used, intentionally or unintentionally, by criminal elements. Such policies, practices and procedures include the prevention and detection of criminal activity or fraud, and reporting of such suspected activities to the appropriate authorities. The SFBC requires banks to appoint a senior officer or committee with explicit responsibility for ensuring that bank policies and procedures are, at a minimum, in accordance with local statutory and regulatory anti-money laundering requirements. Laws, ordinances and guidelines and/or banks' policies protect staff who report suspicious transactions in good faith. The SFBC has adequate regulatory enforcement powers but has no criminal enforcement powers. It can impose administrative sanctions and, if criminal violations are found, the SFBC must inform the competent criminal enforcement authorities to take action against a bank that does not comply with its anti-money laundering obligations. The SFBC is able, directly or indirectly, to share with domestic and foreign financial sector supervisory authorities information related to suspected or actual criminal activities. However, one area where the SFBC would appreciate, and should have, clear legal enforcement authority is in their right to publish the identities of banks and individuals involved in money laundering activities and to impose monetary penalties for noncompliance with the MLL. The SFBC currently has established the practice of naming offenders in money laundering cases and providing a clear legal basis for the practice in law is desirable. Any new legal enforcement authority should not limit the SFBC to violations of the Money Laundering Act but rather apply more generally to all kinds of violations of a certain degree of seriousness, including violations of prudential rules and regulations in addition to violations of due-diligence and the anti-money laundering rules. The SFBC via the external audit process determines that banks have a policy statement on ethics and professional behavior that is clearly communicated to all staff. The Swiss laws and/or regulations embody international sound practices, such as compliance with the relevant forty Financial Action Task Force Recommendations issued in 1990 (revised 1996) and a 1998 FATF evaluation concluded that Switzerland has a comprehensive and solid legislative scheme in place to combat money laundering. Switzerland has been vigilant in developing anti-money laundering policies, and allocating resources to prevent money laundering. Information related to suspected or actual criminal activities is shared by way of various international agreements.
Assessment	Compliant.
Comments	Although the banking sector is compliant and diligent in complying with Switzerland's Money Laundering Act, the mission was not in a position to assess the effectiveness of measures introduced outside the financial sector.
Principle 16.	On-Site and Off-Site Supervision An effective banking supervisory system should consist of some form of both on-site and off-site supervision.
Description	Bank supervision for the vast majority of Swiss banks can be viewed as a three-pillar approach: The indirect supervision of the SFBC, the direct supervision of the external auditor, and the ongoing on-site supervision of the internal auditor. In addition, a fourth pillar, the Swiss Bankers Association (SBA) acts as a self-regulatory body and adds to the Swiss system of supervisory checks and balances. The internal audit function of the banks has been previously discussed in the assessment of CP 14. Also see CP 19. The Swiss system, also referred to as a “dualistic system,” relies traditionally on the banks' external auditors, which perform an official supervisory function with respect to the financial intermediaries subject to SFBC supervision. The external auditors are part of the supervisory system. They are licensed and supervised by the SFBC. The external auditors carry out official duties and can be subject to sanctions imposed by the SFBC, that is, withdrawal of their license and replacement of the external auditor. In case of an external auditor violating the banking law, the SFBC must inform the Swiss Federal Department of Finance, which is the competent authority for the imposition of fines. The appointment of the external auditor by the bank is effected under private law, however the scope of the audit is laid down under public law in the Banking Act, the Banking Ordinance and the guidelines of the SFBC. The SBA is a very influential body in Swiss banking. It consults and cooperates with the SFBC on the development of new banking legislative proposals as well as draft ordinances and SFBC guidance circulars. The SBA also has initiated and established rules and conventions in consultation with the SFBC which SBA members are obliged to follow. Frequently such self-regulating guidelines are endorsed by the SFBC and then become of the same legal weight as SFBC issued guidelines and become applicable to all Swiss banks. Recent examples include legislation against insider trading and money laundering. The SBA is also very active in maintaining a code of ethics for the Swiss banking community. The Agreement on Swiss Banks Code of Conduct with Regard to the Exercise of Due Diligence of Banks is an example of such industry setting standards and procedures. External auditors are obligated to verify compliance with the professional rules of the SBA in the annual audits of the banks. The SFBC has a supervision staff of about 100 of which approximately 13 are in the large bank program. As part of its ongoing supervision of credit institutions, the SFBC performs primarily off-site assessments using a combination of quantitative and qualitative supervisory techniques, including external auditors. On-site supervision by the SFBC is limited to the market risk unit and the large bank unit. The principle quantitative measures require key ratios relating to minimum capital and liquidity levels, large exposures, lending to connected parties, and to individual economic sectors, concentration of deposits and acquisitions by banks in other entities and by other entities in banks. The supervisory process is interactive in nature and often entails dialogue between the SFBC, the auditors and the banks. The process draws its strengths from the principle of cooperation by the management of the institutions with the SFBC. The SFBC's supervision incorporates: regular collection and analysis of data; regular review meetings with bank management and external auditors; dealing with new issues as they arise; and the on-site inspections provided by the external auditors. However, data of detailed asset quality information (e.g., classified assets, past due loans, renegotiated credits and impaired loans) is limited and consideration should be given obtaining this type of information from all banks on a quarterly basis. Once obtained such information along with balance sheet growth and the profit and loss statement could form the basis for development of an early warning system. Regarding this disclosure see also CP 21. Of particular note is the shift in the last few years toward more direct supervision by the SFBC for its largest two banks. The SFBC created the large bank unit in 1998 to provide more direct supervision of these entities due to their significance to the Swiss market and economy and their extensive global operations. The large bank unit changed considerably the Swiss supervisory strategy for these banks, which had been based primarily on reporting by the external auditors. The new supervisory approach still comprises the traditional instruments of the indirect supervision (Long Form audit report in accordance with the Banking Act, meetings with external and internal audit), but also applies the customary tools associated with direct supervision, such as regular quarterly meetings with the bank management, supervisory visits, on-site reviews, regulatory attendance, standardized additional information requirements, and regular meetings with host regulators. The SFBC also has assumed a direct role in the area of evaluating and validating VaR models developed by the large banks and other major market banks for determining capital requirements for market risks in their trading books. Both the large bank and risk management units of the SFBC have been well received and accepted by the institutions. The main tool used by the SFBC for the supervision of all Swiss banks is the annual Long Form report (audit and inspection report) prepared by the external auditors on each bank in the system. The SFBC receives a copy of the report, reviews it and then meets with the external auditors to discuss any issues and the scope of activities for the applicable banks for the next supervisory cycle. If problems are noted, the SFBC may also schedule a meeting with bank management to discuss the results of the report. Other than the two largest banks, the SFBC meets with bank management in the remaining institutions once every three years unless problems surface requiring more frequent meetings. Art. 47 of the Banking Ordinance states that the audit report must be remitted within one year after the date of the financial statements or a shorter time period stipulated by the SFBC. The SFBC states that the reports are generally received within four months. The four-month period appears reasonable given that the report is one of the SFBC's most important off-site supervisory tools. If a Swiss bank is a part of a banking group which is supervised on a consolidated basis by the SFBC, the annual Long Form report will contain the auditor's opinion on a consolidated basis on the bank's organization, management, capital adequacy, large exposures, liquidity, internal audit, internal controls, and financial and risk profiles. External auditors also include in the Long Form report a detailed list of all engagements entrusted to them by the bank in order to address any matters that could impair their independence. The annual Long Form reports are reviewed by the SFBC and discussed with the auditor regarding content and quality. In addition, annual meetings between the SFBC and each licensed audit firm are held, where general issues as well as all audited banks are discussed. The audit firms have to hand in to the SFBC a report on their activities covering organizational, management, human resources, independence and audit procedure issues on an annual basis. If the SFCB has reasonable doubts on the performance of the audit in an individual case, it carries out a procedure to clarify if the audit is performed in compliance with SFBC guidelines. The SFBC may request another properly qualified auditor to review the institution and if the doubts are proven the SFCB can impose sanctions on the initial audit firm and lead auditor such as withdrawal of the license, replacement of the external auditor and fines. The annual Long Form reports are analyzed by the Banks / Securities Firms Supervision Department, which employs 23 people. In addition, the department processes notifications and inquiries of the supervised institutions and deals with questions of interpretation and of principle that are of importance for the supervision of licensed institutions. The department is responsible for the continuous supervision of all banks and securities firms that do not belong to one of the two large Swiss banking groups. In the last few years, supervision has become more risk-focused with the SFBC creating the large bank unit. In the case of the large banking groups, the supervision and analysis of the annual Long Form reports is carried out by the Large Banking Groups department. Members of this department also carry out supervisory visits or attend on-site inspections conducted by the banks' external auditors (“regulatory attendance”). SFBC management and staff appear well apprised of the condition of their portfolio of banks, and the conditions and composition of the business activities do not seem to change on a monthly or even quarterly basis. Usually prudential reports are used as a supplement to the annual Long Form report. The large bank group prepares a formal financial and risk profile, which is submitted to the SFBC management on a quarterly basis. The profile includes: – information from the regular quarterly meetings with Executive Boards and Group Executive Boards; – information from the regular quarterly meetings with the external auditors; – information from the regular annual activity reports and audit plans of internal audit; – the SFBC's assessment of the consolidated risk reports prepared by the two financial conglomerates; and – the SFBC's assessment of quarterly global credit and market risk reports provided by the two investment banking business units UBS Warburg and CSFB. Consideration should be given to formalizing the process of regular meetings, on-site exams, etc. for the large banks by adding to the annual risk profile of each credit institution. The profile should utilize off-site data as well as information obtained from trilateral meetings with foreign supervisors, insurance supervisors, management, and external auditors. When developing an institution's risk profile, the SFBC should specifically focus on any gaps in its supervisory process to determine an appropriate mix of on- and off-site supervision. In those instances where the SFBC perceives an institution exhibits a higher risk profile (in individual and/or systemic risk), greater emphasis should be on conducting an on-site inspection or analyzing information from the primary (in the case of insurance activities) or host (in the case of foreign operations) supervisors. Banks and securities firms are required to report to the SNB and SFBC their annual figures within 60 days of year-end (“early-information,” see SFBC-Circular 99/3 Early Information). Based on this data, the SFBC carries out a peer group analysis and decides on measures where necessary. The SFBC is a member of various international financial working groups that monitor trends and developments and establish new principles on issues of concern to the banking industry on a global basis (e.g., the Basel Committee on Banking Supervision, the Joint Forum on Financial Conglomerates, FATF, and others). Participation in such groups has allowed the SFBC to keep in the forefront of emerging banking trends/issues. One example is in Internet only banks. The SFBC has licensed five such banks. Staff required E-Bank specific information and addressed a letter to all banks on March 29, 2001 on opening accounts in Internet exclusive banks and know-your-customer rules. SFBC staff monitor compliance with prudential ratios off-site through the monthly and quarterly returns received from the banks; staff take follow-up action where appropriate. In addition, the on-site inspection process includes checks for compliance with prudential reports and regulations. The SFBC has an internal rating system (A, B, C) for the Swiss banks. The SFBC management receive a complete list of “C” (i.e., problem banks) annually and is immediately informed on an individual basis of any significant event concerning these problem banks. Management is also kept informed of any earnings, organizational or operational problems at any of the banks. The goal of SFBC management oversight of the on-site and off-site inspection processes is to ensure the effectiveness of the on-site and off-site processes. Regarding on-site inspections, the external auditors are viewed by SFBC as doing a thorough job. They produce an inspection report that is provided to bank management and the SFBC. Where appropriate, issues are brought to the attention of the Board of the bank and senior management at the SFBC. Although the process of report review and meetings with the external auditors generally works, a more formal quality control or quality assurance program for overseeing and verifying the work of the external auditors is needed. There is no routine process in place to verify the information in the Long Form audit report. Since the SFBC authorizes the firms, continual oversight of the firms is necessary in order for the SFBC to ensure its supervisory role, outsourced to the auditors, is being properly discharged. This has also been recommended by one of the expert groups reviewing the Swiss supervisory system. Regarding off-site work, more could be done in compiling and using the data for supervisory purposes. However such reports can't take the place of regular meetings and contact with bank management. Any issues arising regarding prudential ratios and/or supervision requirements are identified by SFBC staff as well as changes to an institution's business profile/management structure. Although the SFBC does not have a specific legal mandate to share banking information with the Swiss insurance supervisor in financial conglomerate groups (such as CS Group), the lack of a legal mandate has not prevented sharing information useful to the assessment of the conglomerate. Even in the absence of a clear legal basis, the two supervisory agencies share information necessary for the supervision of the banking conglomerates. This includes customer data to the extent that this information is necessary for the purpose of consolidated supervision and is kept confidential. However, a clear legal basis for such information sharing is desirable. SFBC staff may not disclose any information concerning the business of any of the institutions under the SFBC's supervision unless such disclosure is permitted by law. Generally, non-disclosure requirements are waived if information is needed by and communicated to another domestic or foreign supervisor involved in financial institution supervision and such information disclosed will be held confidential by those other supervisors. The SFBC's supervision of credit institutions includes an in-depth understanding, periodic analysis and evaluation of individual banks, focusing on safety and soundness, based on meetings with management and a combination of both on-site and off-site supervision. The SFBC, through the external auditors on-site inspections, verifies that adequate corporate governance (including risk management and internal control systems) exists at individual banks; determines that information provided by banks to the SFBC and the public is reliable; obtains additional information needed to assess the condition of the bank and uses off-site work to review and analyze the financial condition of individual banks using prudential reports, statistical returns and other appropriate information, including publicly available information; and monitors trends and developments for the banking sector as a whole. Off-site and on-site work is prioritized based on the results of an assessment of the nature, importance and scope of the risks to which individual banks are exposed, including the business focus, the risk profile and the internal control environment.
Assessment	Compliant.
Comments	The Swiss authorities need to take the following actions: (1) formalize a quality assurance process for supervision of the external auditors to ensure the SFBC's mandates are being followed; (2) obtain sufficient additional detailed data, for example, asset quality, and develop an early warning system; (3) consider a more detailed large bank risk profile that would utilize off-site data as well as information obtained from trilateral meetings with foreign supervisors, insurance supervisors, management and external auditors; and (4) step up on-site supervision.
Principle 17.	Bank Management Contact Banking supervisors must have regular contact with bank management and a thorough understanding of the institution's operations.
Description	Also see CP 16. The supervisory function is effected through a combination of both off-site surveillance and on-site inspections. Off-site surveillance involves the examination of detailed prudential/statistical returns received from the credit institutions on a monthly, quarterly, semi-annual and annual basis. On-site exams are done by external auditors within the scope developed jointly between the SFBC and the external auditor and focuses on asset quality, large exposures, capital, liquidity, corporate governance and internal controls and compliance with laws, etc. External audits are complemented by regular review meetings with senior management of the credit institutions (quarterly or monthly if necessary with the two large bank groups and on a rotating basis for the other banks (about 1/3 per year have a general meeting with the SFBC staff to discuss their individual bank)). Particularly in regard to the large banks, the interaction between the SFBC and bank management is excellent. Consideration should be given to implementing a process with the other Swiss banks whereby SFBC staff meets with management annually, possibly in conjunction with completion of the annual external audit and receipt of the Long Form report. The SFBC has a supervisory program in place that includes regular meetings with bank management, external and internal auditors and foreign country supervisors where appropriate. Quarterly meetings at the large banks address operational matters including strategy, group structure, corporate governance, performance, capital adequacy, liquidity, asset quality and risk management systems. The SFBC staff and management are very familiar with their institutions, including corporate structure, condition, and business activities. Staff remains current through review of the Long Form audit report, prudential report analysis, meetings with management and external auditors. The SFBC must be notified immediately by the banks and the external auditors, per the Banking Act and Banking Ordinance, of any violations or noncompliance with the approved business plans of the bank's license. Moreover, all changes to business activities must be incorporated into a bank's bylaws which require the approval of the SFBC. The fitness and propriety of bank management is always considered in granting a license and in supervising the bank once it commences business.
Assessment	Compliant.
Comments	Consideration should be given to implementing a process with the all Swiss banks whereby SFBC staff meet with management annually, possibly in conjunction with completion of the annual external audit and receipt of the Long Form report. Contacts with management of the two large banks should be more frequent.
Principle 18.	Off-Site Supervision Banking supervisors must have a means of collecting, reviewing, and analyzing prudential reports and statistical returns from banks on a solo and consolidated basis.
Description	See CP 16. Banks are subject to periodic reporting requirements (see also SFBC-Circular 92/1 of September 24, 1992, Matters Requiring Approval and Notification for Stock Exchanges, Financial intermediaries, Securities Dealers and Bank Auditors). A number of these reports encompass a range of financial data that are required for statistical and monetary policy purposes and thus must be submitted to the Swiss National Bank on a monthly, quarterly or annual basis. Other data is necessary for prudential purposes and is prepared on a solo and consolidated basis depending on the bank. The Banking Act and Banking Ordinance provide the legal authority for the SFBC to request information on a periodic basis from the banks. The reports vary in frequency but include own funds information, BIS equity statements, liquidity statements, large exposures, risk diversification information, annual reports and interim financial statements, early information following year end of income statement analysis, own funds data and supplementary data on a solo and a consolidated basis. Banks are also required to notify the SFBC of changes in controlling owners and business activities and bylaws. The annual Long Form external audit report provides detailed financial statement information that addresses all asset and liability categories in addition to other data. The Banking Act and Banking Ordinance provide the authority for the SFBC to implement additional rules/guidelines regarding the consolidation of accounts as well as accounting techniques. (See CP 21 for the assessment on accounting.) International Accounting Standards (IAS) and U.S. Generally Accepted Accounting Principles (USGAAP) are considered to be equivalent to Swiss Financial Statement Reporting Provisions for banks. Banks organized in accordance with Swiss law which are under the controlling influence of persons with residence or registered office in an European Economic Area (EEA) member country may prepare their annual financial statements in accordance with the applicable provisions in their country of origin. Material deviations from the provisions of the Banking Ordinance and SFBC Guidelines of those international standards of financial statement reporting applied must be disclosed and detailed in the Appendix to the financial statements (see SFBC Guidelines concerning the provisions governing the preparation of financial statements, 29a-c). The SFBC has the power and the legal authority to enforce compliance with the requirements that information be submitted on a timely and accurate basis. In the event of material misreporting, the SFBC can require republication and pre-clearance of future filings until such time as they are confident that the filing bank will not misrepresent the financial data again. The SFBC and the SNB have standardized reports that must be filed by all banks. Details of the contents of the reports are either contained in the blank copy of the reports or in RRV-SFBC guidelines on Financial Statement Reporting dated December 14, 1994. Asset quality information is provided annually in the Long Form report for the general population of banks. Balance sheet information is provided monthly. The SFBC has the authority (per the Banking Act and Banking Ordinance) to request and receive all information deemed necessary to properly supervise the banks in Switzerland. The SFBC has staff responsible for reviewing and analyzing the prudential data filed and using it to supplement the annual Long Form external audit report. Using the information to establish peer group data to compare similar institutions would be an additional off-site tool for the SFBC and contribute to an early warning system. Prudential reports are collected from all banks and provided on a comparable basis. The prudential reports for the large banks are obtained on a monthly or quarterly basis, which is appropriate based on the higher risk profiles of these two institutions. Reports from smaller less complex banks are collected quarterly, semi-annually or annually depending on the type of information being collected.
Assessment	Compliant.
Comments
Principle 19.	Validation of Supervisory Information Banking supervisors must have a means of independent validation of supervisory information either through on-site examinations or use of external auditors.
Description	See CP 16 regarding the use of licensed external auditors. While the SFBC is authorized by law to conduct on-site inspections, it does not generally perform such examinations itself. The staff of the SFBC holds meetings with senior bank management to discuss prudential issues or issues of supervisory concern. On-site inspections, including unscheduled audits, are carried out by the banks' external auditors on a regular basis. The costs incurred for such audits are paid for by the banks. In Switzerland, the use of independent though non-governmental external auditors is a primary tool for bank supervision. The responsibility of external auditors not only encompasses an audit of annual accounts but also entails a review of the bank's compliance with all prudential requirements, including due diligence rules (see SFBC Circular 96/3 Audit Report Form and Content). Thus, external audit firms can be seen as performing a quasi-governmental function, since they are required by law to inform supervisory institutions, and specifically the SFBC, of any violations or practices that have the potential of placing depositors' funds at risk. In 1999 external auditors charged 228,441 hours for the audit of the large financial intermediaries and 360,714 hours for all other financial intermediaries. While the appointment of external auditors is the responsibility of the directors of each bank, an audit firm must be selected from a list approved by the SFBC. By the end of 2000 eleven audit firms were approved and licensed. Approval criteria include the overall reputation and professional competence of the firm and its independent status. To be deemed independent, an approved audit firm must regularly audit at least five banks, and the firm's compensation from any one mandate must not exceed 10 percent of the firm's total fee income. The replacement of an audit firm by a bank is subject to approval by the SFBC. The bank has to indicate the reasons for the replacement. The SFBC also has the authority to require additional audits. For instance, in January 2001, the SFBC asked that banks with establishments in foreign financial centers commission their external auditors to perform an in-depth examination of the adequacy of their procedures, systems and controls governing anti-money laundering in meeting the requirements of the SFBC Guidelines. The scope of these examinations covered the adequacy and effectiveness of customer identification procedures, the functioning of internal control mechanisms and the communication and cooperation between internal audit and external audits. In addition, the auditors were required to report any indications that the foreign establishments may be used to circumvent Swiss legal requirements and professional rules. The in-depth exam was to be conducted by Swiss auditors familiar with the SFBC's and SBA's due diligence agreement and guidelines for such activities. Besides the in-depth examinations which fall within the scope of regular consolidated supervision activities required by Swiss law, the SFBC itself may mandate special audits to further investigate suspected shortcomings or irregularities or to verify the implementation of corrective measures or organizational improvements in particular banks. In the past year, the SFBC had comprehensive investigations conducted in several banks, which entered into business relations with the entourage of the former president of a foreign country and found serious omissions and organizational shortcomings in some. In order to establish whether these banks had corrected the identified irregularities and verify compliance with know-your-customer rules and policies regarding business relationships with politically exposed persons (“PEP rules”), the SFBC in August 2000 ordered a special audit to be carried out by an independent auditing firm, which included establishments of Swiss banks both within and outside of Switzerland. The auditors' specific tasks will consist primarily of reviewing the organizational structure and policies regarding the acceptance of clients, the account-opening procedures and the monitoring of accounts and testing of adherence to relevant internal control procedures, including a sampling of individual client files to assess compliance with due diligence requirements. The responsibility of external auditors not only encompasses an audit of annual financial statements but also entails the review of the banks' compliance with all prudential requirements (compliance with licensing requirements, due diligence rules, and the like). The assignment of the external auditor is not limited to the reporting of audit findings to the bank and the SFBC. In the event that the audit reveals either the violation of a legal provision or any other irregularity, the external auditor has to set an appropriate deadline for the bank to take corrective action. The external auditor must inform the SFBC if the correction is not carried out within the prescribed deadline (Art. 41 of the Banking Ordinance). Where the setting of a time limit appears of no use, or where the external auditor discovers a criminal offense, serious violations, or losses reducing the capital funds by 50 percent, or other irregularities jeopardizing the creditors' interests, or where it can no longer be affirmed that all creditors claims are still covered by the assets, the SFBC must be informed immediately (Art. 21 of the Banking Act). The role of the external auditor in the Swiss supervisory system is more comprehensive than the role of a bank's external auditor as described in §§ 15-28 of a joint paper issued by the Basel Committee on Banking Supervision and the International Federation of Accountants (IFAC) on “The relationship between banking supervisors and banks' external auditors.” However, the criteria regarding additional requests for the auditor to contribute to the supervisory process laid down in the mentioned paper of the Basel Committee and the IFAC (§§ 57–68) are respected in the Swiss system. The Banking Act requires that, as part of their annual examination, auditors perform one or several interim examinations on a surprise basis to ascertain the existence of the bank's assets and the reliability of its records. Art. 40 of the Banking Act requires that the external auditors also perform unannounced interim examinations. Each year, in addition to the ordinary audit, the external auditors perform an in-depth examination of at least one area that is significant to the activities and risks of the bank. The SFBC supervises licensed audit firms and issues guidelines for conducting the annual bank audits and the form and content of the resulting audit report (frequently referred to as the “Long Form” report) (see RRV-SFBC dated December 14, 1994 and SFBC-Circular 96/3 dated October 21, 1996). SFBC staff maintains regular contact with the banks' external auditors and participates in bilateral and trilateral meetings with the auditors and the banks following completion of the annual Long Form report and at other times when setting the scope for special, follow-up or the next year's on-site exam. SFBC officials may meet with external auditors to discuss the audit report, even without the presence of bank officials and without the approval of the bank. Pursuant to Art. 46 of the Banking Act, a recognized bank auditor who intentionally violates the duties assigned to him/her by the Banking Act or the Banking Ordinance, for instance, who makes untrue statements in the audit report or omits essential facts, fails to request pertinent information from the client or fails to report all findings to the SFBC, can be punished by a prison term not exceeding six months or a fine. Moreover, the SFBC will withdraw the lead auditor's and firm's license preventing them from conducting further bank audits in Switzerland. Whenever major irregularities are found in an institution, the SFBC will initiate a procedure against the bank in order to establish whether any breaches were committed. In addition, the SFBC will initiate a procedure against the bank's external auditing firm to establish whether or not it has violated the requirement to perform the audit with the “care of a properly qualified auditor” (Art. 20 par. 4 of the Banking Act). As such, in the year 2000 the SFBC conducted a procedure with respect to the application of proper care in the audit of the global compliance function of an internationally active banking group (see SFBC's Annual Report 2000, pp. 47- 49). Following significant losses of the UBS business unit, Global Equity Derivatives Business (GEDE), in 1997/98, the SFBC also examined whether or not the external audit had carried out its audit mandate with the proper care. The SFBC found structural and organizational shortcomings in the exercise of the audit by the external auditor (SFBC's Annual Report 1999, p. 55). In another case the SFBC found that the external auditor failed to report certain violations of competence rules and insufficient credit documentation. The SFBC filed charges against two of the responsible chief auditors. (SFBC's Annual Report 1996, pp. 39-42). In another case, the SFBC initiated a procedure because the external auditors had reported irregularities to the bank management, but failed to report them to the SFBC as required (SFBC's Annual Report 1995, pp. 37-38). The most severe sanction the SFBC can take against an external auditing firm is the withdrawal of its recognition and license pursuant to the Banking Act. There are cases where the SFBC withdrew the recognition for non-fulfillment of recognition requirements as laid down in Arts. 35 and 36 of the Banking Ordinance (see, e.g., SFBC's Annual Report 1997, p. 55). In one case upon threatening to withdraw the recognition due to shortcomings in the audit performance, the auditing firm itself surrendered its recognition. The SFBC has sufficient legal authority to have bank information verified and to use external auditors to perform that function. The only possible exception to the process is the lack of a formal quality assurance program for supervising the work of the external auditors. Such a program is necessary given the key reliance placed on the external auditors.
Assessment	Compliant.
Comments	A formal quality assurance program for supervising and verifying the work of the external auditors is should be developed and implemented. Such a program seems necessary given the reliance placed on the external auditors.
Principle 20.	Consolidated Supervision An essential element of banking supervision is the ability of the supervisors to supervise the banking group on a consolidated basis.
Description	Due to increased concerns by the SFBC on the growing size and complexity of the two big Swiss banking groups, a new department was created in 1998 to strengthen supervision of these banks. The separate Large Bank Supervision unit is responsible for the ongoing monitoring of the two large banks, both at a group level and the single subsidiary level. The new program includes regular periodic visits of the two banks foreign branches and subsidiaries, on-site reviews domestically and abroad, and trilateral discussions with host country supervisors and with group management, external auditors and recently with staff from the Swiss Federal Office of Private Insurance (FOPI). The SFBC's authority is contained in the Banking Act and implementing Banking Ordinance. In 2001, the SFBC supervised 84 groups of banks on a consolidated basis, among these UBS and the Credit Suisse Group. The SFBC has an established practice for supervising banking groups, although the legal provisions for this consolidated supervisory task imposed on banking groups can be inferred from the general authority contained in the Banking Act and the Banking Ordinance, the current practice could be more clearly codified. Supervision of banking groups and financial conglomerates has become increasingly important and a more coherent set of rules should be put in place. Currently, a draft proposal for an amendment of the Banking Act and the SESTA (securities law) provides for a more comprehensive set of legal rules for the supervision of groups of banks and/or securities dealers as well as financial conglomerates are being brought before the Federal Council. If these amendments should pass Parliament, this would clarify the existing practice of the SFBC and provide it with a clear basis to coordinate its action with other regulators in the case of internationally active market players. Since there is no legal definition of a banking group in the Banking Act or the Banking Ordinance, whether or not to force groups to submit to supervision by the SFBC on a consolidated basis is not totally clear. Where the parent company holds a banking license, the requirement and scope of consolidated supervision is clearly circumscribed in the law (see provisions relative to consolidated capital requirements, Art. 13a Banking Act, 14 Securities Act, risk diversification rules on consolidated basis, Art. 21m Banking Ordinance, and consolidated financial statements, Art. 25e ff Banking Ordinance and SFBC-Circular 31ff). A loophole exists in the case of a financial group or conglomerate where the parent institution does not hold a banking license. This shortcoming is being addressed by a proposal for an amendment to the Banking Act and Securities Act, which was finalized in November 2001. The proposal establishes the supervisory competence of the SFBC relative to a financial group/ conglomerate that controls a Swiss bank or is being directed from Switzerland. The proposal lays down principles for the coordination of oversight functions in case of overlapping cross-sectoral and/or cross-border competencies. The proposal further sets forth, among other things, requirements regarding the “fitness and propriety” at group management level, adequate organization and risk management, accounting, auditing and reporting to the SFBC. The SFBC has the power to define specific requirements, for example, regarding capital and risk diversification. The SFBC imposes a regime of consolidated supervision on banking groups if their activity apart from that of its licensed bank(s) in the financial sector is of certain importance for the whole group and if it is impossible to have a fair view of the relevant financial risks by looking solely at the licensed bank(s). In a decision of February 26, 1998, concerning the Credit Suisse Group, the SFBC established formal duties of a financial conglomerate, which do not formally fall within the scope of the Banking Act. Credit Suisse Group was, among other things, required to comply as a group with capital and large exposure requirements, ensure adequate levels of liquidity of all members of the group and group-wide compliance with all the SFBC reporting requirements, the fitness and propriety and adequacy of the management of all group companies. In addition, the SFBC applies the requirement of fitness and propriety to persons in charge of the administration and management of banking groups in accordance with Art. 3 par. 2 lit. The Banking Act not only applies to banks but also to banking groups as well. This is the case even if the structure on top of a banking group is a not a licensed bank. However there appears to be a gap in the overall consolidated supervision of Credit Suisse Group relating to its insurance activities. These activities account for almost 25 percent of group earnings and yet the Swiss insurance supervisor purportedly is restricted by law from sharing confidential supervisory insurance relevant information with the SFBC absent a written agreement. As a result, the SFBC has persuaded both Credit Suisse Group and Winterthur insurance sub-group that it needs risk related information directly from its insurance activities. While the practice has worked successfully for the last two years, a clear legal basis for information sharing across financial sectors should be pursued. The host country bank supervisors in the United States and the United Kingdom acknowledged their review of the insurance activities of the group was very limited and that coordination in the United States with multiple state insurance regulators was in the early phases. Insurance supervisors have only recently begun looking at their supervised entities from a consolidated supervision perspective. With respect to the Credit Suisse Group conglomerate, SFBC large bank staff should evaluate the extent of the risk from the insurance activities of the group and immediately commence implementing better coordination efforts with insurance supervisors in major markets where Credit Suisse Group operates. Foreign entities are subject to the same prudential standards and audit requirements as their domestic parents. Therefore, a foreign affiliate of a Swiss bank may not decline to disclose information to Swiss supervisory authorities on the grounds that such disclosure is barred by local secrecy laws. In 1982, the Swiss Federal Court held that a Swiss bank with foreign-incorporated affiliates must be capable of providing the SFBC with all information that it deems necessary for supervisory purposes (BCE 108 II 519). A Swiss bank must neither circumvent Swiss due diligence rules (including the money laundering guidelines of the SFBC ), nor place managers who fail the competence and fitness tests into key positions with affiliates aboard. Consolidated supervision, capital adequacy, and large exposure rules apply to all financial affiliates of Swiss banks whether domestic or foreign. Consolidated supervision and capital adequacy rules are applicable only to affiliated financial institutions and real estate firms. In general, a bank's ownership interest in a non-financial/non-real estate-related company does not involve the application of consolidated supervision or capital adequacy to the affiliated company. Large loan exposure limits are governed by provisions contained in Art. 21 of the Banking Ordinance. The new provisions on risk diversification became effective on December 31, 1997. The provisions on risk diversification are to be complied with both on a single-company and consolidated basis. Under specific circumstances, the SFBC may allow a certain relaxation—as defined in Art. 22 of the Banking Ordinance—or apply even stricter limitations. The SFBC requires the banks which it supervises as home-country regulator to report on a group-wide consolidated basis. If foreign regulations do not allow direct reporting to the Swiss based parent bank by the affiliate or branch, the SFBC requests information on affiliates and branches from the foreign host-country regulator (Art. 23sexies of the Banking Act). If a complex financial group is not a financial conglomerate, that is, it only includes banks, securities firms, real-estate subsidiaries and financial companies but not insurance companies, capital adequacy is still measured on a consolidated basis and all subsidiaries are fully consolidated if they are majority owned or dominated and conduct financial activities. The Banking Act has a very broad interpretation of financial activities, which includes leasing, factoring, consumer credit, and asset management. Such activities qualify as “financial” and must be fully consolidated. The only exception to financial consolidation is historically the insurance business, which is not “financial” in the sense of the Banking Act and the Banking Ordinance. However, the investment in the company is risk weighted at 500 percent (5 times the Basel Capital Accord Minimum). Other non-financial activities, which are in the form of a participation, also require a 500 percent risk weighting. A banking supervisor is deemed to supervise on a consolidated basis if it receives sufficient information on the bank's worldwide operations, including relationships of a bank to any affiliate, to assess the overall financial condition of the bank and its compliance with laws and regulations. The SFBC ensures its banks have adequate procedures for monitoring and controlling worldwide activities through statutory and regulatory standards for operations that each Swiss bank must meet. Among these standards are requirements for adequate internal controls, oversight, administration and financial resources. The SFBC reviews compliance with these limitations on operations and with internal control requirements through an annual audit performed by an authorized/licensed external auditor. The SFBC may take supervisory actions that include requiring divestiture of a subsidiary in response to supervisory concerns. The SFBC obtains information on the condition of its globally active banks, their foreign offices and subsidiaries by requiring submission of periodic, consolidated financial reports and through the mandatory annual report by the external auditor. Generally, Swiss banks must consolidate for accounting purposes all foreign offices on a line-byline basis and must include any majority-owned banking, finance or real estate subsidiary on a prorata or proportional accounting basis. The Banking Act requires Swiss banks to submit annual and semi-annual balance sheets and income statements to the SFBC. The SFBC also receives information regarding capital adequacy, country risk exposure and foreign exchange exposures from its banks annually. Information on risks (such as IRR) and inter-company transactions is received through large exposure reports that must be submitted both when such loans occur and annually. The SFBC evaluates prudential standards with respect to capital adequacy that effectively follows the risk-based capital standards of the Basel Accord. The Banking Act and Banking Ordinance prescribe the content of the mandatory annual report produced by a bank's external auditor. The auditor must review and report on a range of prudential issues and must express an opinion regarding compliance on a global consolidated basis with the conditions for licensing, accounting accuracy, risks, adjustments, undisclosed reserves, treatment of classified assets, fiduciary operations, exposures to single borrowers, insider lending, capital, liquidity, reserve allocation, foreign assets, internal controls and organization, and compliance with monetary controls. The Banking Act contains penalties to ensure correct reporting to the SFBC and external auditors face penalties for violations of their audit duties. Based on these facts, the SFBC is deemed to subject its banks to comprehensive supervision and regulation on a consolidated basis.
Assessment	Compliant.
Comments	A draft proposal for an amendment of the Banking Act and the SESTA provides for a more comprehensive set of legal rules for the supervision of groups of banks and/or securities dealers as well as financial conglomerates are being brought before the Federal Council. Passage of these amendments is recommended in order to clarify the existing practice of the SFBC and provide for a clear basis for the SFBC to coordinate its action with other regulators in the case of internationally active market players. SFBC supervises its banks on a consolidated basis but a potential gap was noted in its efforts to supervise the CS Group on a consolidated basis in light of the group's conglomerate status due to its significant insurance activities. The mission team recommends the large bank unit detail its risk profile for the group to account for the insurance activities. Efforts should begin as soon as possible to develop a strategy for ensuring insurance activities in major markets are adequately supervised.
Principle 21.	Accounting Standards Banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business, and that the bank publishes on a regular basis financial statements that fairly reflect its condition.
Description	Refer also to CP 20. Accounting practices, valuations and the preparation of balance sheet data are governed by the relevant provisions of the Swiss Code of Obligations, the Banking Act and its implementing Banking Ordinance, the guidelines of the SFBC. The accounting practices are meant to give a true and fair view of the financial position and the results of operations and cash flows. The listed nonbanking companies are required to disclose true and fair financial statements based on the Swiss-GAAP, the IAS or the U.S.-GAAP. The banking companies' financial statements are considered equivalent to these standards and are recognized by the Swiss exchange. All Swiss bank reporting is based upon the legal principles set out in the Code of Obligations which require that the financial statements be prepared according to Swiss GAAP and expressed in Swiss currency. The code, however, is modified and complemented by the Swiss banking regulations standards (RRV-SFBC issued December 14, 1994 and amended October 28, 1999, on Financial Statement Reporting Requirements) and means banks can, in a number of circumstances, report in adherence to IAS or U.S. GAAP. The SFBC may allow financial reporting to deviate from the guidelines if it is in conformity with recognized international standards (Art. 28 of the Banking Ordinance). The RRV-SFBC guidelines, influenced by EU accounting practices, now make Swiss financial statements more transparent and useful for investors and regulators as they clarify certain issues not dealt with in the Code of Obligations. The method for providing allowances is not specifically regulated; however, specific and general allowances are customary and disclosed in the notes to financial statements. Swiss accounting has changed significantly in the 1990s and bank reporting is now seen as closer to international standards. As a result, three different accounting standards are used in the published financial statements of banks. While most institutions use Swiss accounting standards, other international firms have adopted IAS, and other firms the U.S. Generally Accepted Accounting Principles (US GAAP). In other cases, institutions have maintained Swiss standards and reconciled them to US GAAP, for example, in order to facilitate listing on U.S. stock exchanges. But Swiss standards are less sufficient in the level of disclosure, particularly on asset quality. The SFBC is provided with additional non-public information in this area through the annual audit reports and the reporting (prudential returns) of the banks. However, it would be helpful in light of the growing internationalization of the Swiss financial system on the one hand and the progress toward a global set of accounting standards on the other, if the Swiss authorities were to encourage more detailed disclosure in their banks' financial statements. Prior to implementation, most of the SFBC's circular letters, rules and amendments to the Bank Act and Banking Ordinances are submitted to the Swiss Institute of Certified Accountants and Tax Consultants (an independent body for the country's external auditing firms) and the Swiss Bankers Association (SBA) for consultation. Once agreed upon, the changes to the Banking Act and Banking Ordinance will be officially promulgated. The SFBC publishes new or amended circulars. The Banking Act states that all banks must be audited annually by an independent audit corporation that is recognized by the SFBC. In order to be recognized by the SFBC as a bank auditor, the auditor must fulfill a number of requirements outlined in Articles 34-38 of the Banking Ordinance. The requirements pertain to a required capital structure of the audit firm, the integrity of the auditor's operations and professional certification. Both the audit firm and lead team auditor must be recognized in order to perform bank audits. An exception is made for the 537 Raiffeisen banks provided they have their own qualified audit department. They comprise 11 percent of the Swiss banking market with total group assets of SwF77.2 billion and equity of SwF3.5 billion. Pursuant to the Banking Act, all banks must prepare annual financial statements consisting of a balance sheet, income statement and an appendix. These statements are supplemented by an annual business report which details material events that occurred subsequent to the balance sheet date. Banks with total assets of at least SwF 100 million and whose off-balance sheet operations represent a significant portion of their business must also prepare a statement of cash flows as part of the annual financial statements. They must also prepare semi-annual interim financial statements consisting of a balance sheet and a profit and loss account. If a Swiss bank exercises control over one or more companies, it must prepare consolidated financial statements provided the activities of the companies are material. Swiss banks are required to disclose their annual reports in printed form within four months of the end of the business year. Banks are also required to publish their interim financial statements in the Swiss Official Gazette or other Swiss newspaper within two months of the end of the reporting period. The business reports must be made available to the press and any person requesting them. Auditing practices can vary from accounting firm to accounting firm. The Swiss Institute of Accounting Firms and Qualified Accountants provides considerable guidance. Standards applicable to the profession are incorporated in the Swiss Handbook of Auditing, which provides practical guidance. Regarding asset and liability valuation, the following items are noteworthy: – Loan classification: According to the guidelines of the SFBC, loans with interests that are more than 90 days overdue are considered as being at risk and thus non performing. The amount of the nonperforming loans is part of the direct reporting of the banks to the SFBC. The amount (and variation) of the allowances concerning impaired loans is part of the abovementioned direct reporting and is indicated in the public annual financial statements. Depending on the accounting standards used, some banks may disclose nonperforming loans while others may not. – Swiss banks may not include interest past due more than 90 days in interest income. For loans more than 90 days past due, interest income recognition ceases and previous unearned interest income is reversed against current earnings. – Swiss banks may create both specific and general reserves for nonperforming loans subject to management discretion within limits set by law. – Pursuant to Swiss law, banks are permitted to consolidate the activities of insurance companies. The equity method of accounting is required for Swiss banks that exert significant influence over other companies and the bank maintains 20 percent or more of the voting capital of the subject entity. – Swiss banks are permitted to invest in non-financial companies up to a certain limit (a qualified participation may not exceed the equivalent of 15 percent of its equity and the total of such participations may not exceed 60 percent of equity). The material holdings are disclosed in the appendix of the public annual financial statements. Annual financial statements consist of the balance sheet, the statements of earnings and the appendix as detailed in Art. 23ss of the Banking Ordinance. Banks must issue annual financial statements and prudential reports on a stand alone and on a consolidated basis. International Accounting Standards (IAS) and U.S. Generally Accepted Accounting Principles (US GAAP) are considered to be equivalent to Swiss Financial Statement Reporting Provisions for banks. Banks organized in accordance with Swiss law which are under the controlling influence of persons with residence or registered office in an EEA member country may prepare their annual financial statements in accordance with the applicable provisions in their country of origin. Material deviations from the provisions of the Banking Ordinance and SFBC Guidelines of the international standards of financial statement reporting must be mentioned and quantified in the Appendix to the financial statements (see SFBC Guidelines concerning the provisions governing the preparation of financial statements, 29a-c). An external audit of banks' annual financial statements is mandatory. The responsibility of external bank auditors in Switzerland exceeds the audit of annual financial accounts. External bank auditors also must review a bank's compliance with all prudential requirements (compliance with licensing requirements, due diligence rules, etc.) in light of the Swiss dualistic bank supervision system. In order for an auditing firm and its lead auditor to perform a bank audit, both must be authorized and licensed by the SFBC. A bank must obtain the approval of the SFBC prior to changing its auditing firm or appointing one for the first time. The external auditor must prepare a report, commonly called the “Long Form,” that contains the details required by the SFBC pursuant to SFBC Circular 96/3 dated October 21, 1996 with Amendments of August 26, 1999 and of October 28, 1999: Audit Report: Form and Content (”Audit Report”). Not only does the Long Form contain annual certification of a bank's financial statements, but it also contains detailed information on a bank's compliance with all requirements of the Banking Act, the Banking Ordinance, SFBC Circulars and Guidelines of the SBA. The Long Form is comprehensive and must be submitted to the SFBC. The annual Long Form plus any special audit reports requested from special exams are important tools for supervision by the SFBC. See CP 16 and 19 for further information regarding the role of the external auditor in the Swiss supervisory process, verification of records and on-site audits. The SFBC may hold bank management and the external auditors responsible for ensuring the accuracy and adequacy of the financial record keeping systems and timely filing of required reports. Annual reports likewise receive similar scrutiny for those banks required to file (non- deposit taking Private Banks, which are General Partnerships, are not required to produce or publish annual reports).
Assessment	Compliant.
Comments
Principle 22.	Remedial Measures Banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective action when banks fail to meet prudential requirements (such as minimum capital adequacy ratios), when there are regulatory violations, or where depositors are threatened in any other way. In extreme circumstances, this should include the ability to revoke the banking license or recommend its revocation.
Description	Art. 23ter par. 1 of the Banking Act provides the required powers to the SFBC for taking an appropriate range of remedial actions against banks depending on the severity of a situation. These remedial actions are used to address such problems as failure to meet prudential requirements and violations of regulations. They range from informal oral or written communication with bank management to actions that involve the revocation of the banking license (Art. 23quinquies par. 1 of the Banking Act). In addition to the powers mentioned above, under the Banking Act the SFBC has a broad range of possible actions, including: – suspending voting rights (Art. 23ter par. 1 of the Banking Act) and issuing an instruction to suspend dividend payments, – freezing the current activities of the bank, and – withholding approval of new activities or acquisitions. The SFBC is required to ensure that remedial actions are taken in a timely manner (Art. 23ter par. 2 of the Banking Act). However, the SFBC does not have the authority to publish enforcement activities, which have been imposed by them. The SFBC can order temporary measures, such as the suspension of bank directors and managers, which take effect immediately. However, there is no mechanism for the automatic imposition of administrative or penal sanctions. Under Swiss law, this requires the conduct of legal proceedings with the respect of all procedural guarantees. These penalties and sanctions may not only be applied to the bank, but, when and if necessary, also to management and/or the supervisory board. SFBC should have the authority to impose direct civil monetary penalties on banks or directors or managers on its own. In addition, Art. 23quater of the Banking Act empowers the SFBC to delegate an expert to act as its observer in a bank if, because of misdemeanors, the claims of the creditors appear seriously jeopardized. The draft proposal on the amendment to the Banking Act delegate to this expert limited supervisory functions to act in a flexible way. The SFBC has no legal power to force a credit institution with material problems to merge with a healthier institution. However, the SFBC supports any solution more favorable than a piecemeal liquidation, such as initiating an acquisition or a merger. The proposed amendment to the Banking Act will streamline the existing regulation and codify the SFBC's current practices. In addition, the proposed amendment will explicitly empower the SFBC, for example, to bar, suspend or dismiss managers or directors, alter, reduce or terminate any activity that poses excessive risk, restrict an institution's business activities, or to impose temporary management along with reorganization measures. The draft law explicitly provides that a reorganization measure, such as a purchase and assumption transaction, does not require the approval of the shareholders assembly and thus may be imposed on unwilling shareholders.
Assessment	Compliant.
Comments	SFBC should have the authority to impose direct civil monetary penalties on banks or directors or managers on its own. In addition, the SFBC does not have the authority to publish enforcement activities that have been imposed by them. The proposed amendment to the Banking Act should cover both. Improvements are under way. An additional area where the SFBC would appreciate, and should have, clear legal enforcement authority is in their right to publish the identities of banks and individuals involved in money laundering activities and to impose monetary penalties for non-compliance with the money laundering law.
Principle 23.	Globally Consolidated Supervision Banking supervisors must practice global consolidated supervision over their internationally active banking organizations, adequately monitoring and applying appropriate prudential norms to all aspects of the business conducted by these banking organizations worldwide, primarily at their foreign branches, joint ventures, and subsidiaries.
Description	According to Art. 3 par. 7 of the Banking Act, banks organized under Swiss law shall notify the SFBC before they establish a subsidiary, branch, agency or representation abroad. Under Art. 23septies99 par. 1 of the Banking Act, the SFBC has the authority to supervise the overseas activities of locally incorporated banks. In this regard, Art. 7 par. 3, the scope of the bank's operations and their geographic terms shall correspond to its financial resources and administrative organization. In terms of the oversight of foreign entities and “fit and proper” bank management, these have to meet the same oversight requirement as is applicable to the head office of credit institutions. The SFBC has a policy for assessing whether it needs to conduct on-site examinations (through SFBC or external auditors) or require additional reporting, and it has the legal authority and resources to take such steps as and when appropriate. As mentioned above, under Art. 6b of the Banking Ordinance the SFBC can prohibit the foundation of new banking entities and can demand the closing of existing ones. The following describes the process by which consolidated supervision of international active banks is carried out in Switzerland: – The large banking group department regularly visits the local bank management (so far, mainly in the United Kingdom and the United States, exceptionally in other jurisdictions). The objectives are to be in touch with local management, make them realize there is a home regulator/supervisor, and for the Secretariat's staff to get to know the major businesses abroad. – On-site reviews consist of an audit-like visit in order to assess a previously well-defined area within one or both of the large banks. The review team is a joint legal and large banking department team. Such visits require a close coordination with the work of the internal and external audit. – Staff of the large banking groups department attends audits of external auditors. This is meant to improve the information level of the staff and to get an idea about the quality and the procedure of the external audit firm. Their attendance is mainly passive, thus not interrupting the work of the external audit. – The aim of meetings with foreign regulators is to share the same information and to achieve a common risk assessment. Moreover, the supervisory action plans are coordinated. The meetings have taken place so far three times a year in the three financial centers of Zurich, New York, and London. The meetings can also consist in the participation of a specific audit/inspection work of a foreign regulator. Beginning in the fall of 2001, the meetings have also been held on a less frequent basis in places like Singapore, Hong Kong, and Tokyo.
Assessment	Compliant.
Comments
Principle 24.	Host Country Supervision A key component of consolidated supervision is establishing contact and information exchange with the various other supervisors involved, primarily host country supervisory authorities.
Description	The proper supervision of the foreign bank branches and subsidiaries in Switzerland, and Swiss banks' overseas branches and subsidiaries requires close international cooperation, ideally based on MoUs or letters of exchange. The SFBC has not signed any MoUs. Letters of exchange (compliance with rules and regulation of the respective country) have been signed with Denmark, the Netherlands, Sweden, and the United Kingdom. The exchange of information, cooperation and on-site visits are, in general, based only on informal arrangements. This could cause problems in conducting on-site visits in foreign countries with a higher frequency, as expected in the future, and after the implementation of the new Basel Capital Accord. A higher frequency of on-site inspections carried out by the SFBC makes it necessary, in the opinion of the assessors, to formalize this process through the conclusion of MoUs. However, such informal arrangements have not impaired the SFBC's ability to practice consolidated supervision in the past, including on-site inspections if necessary. As an outcome of the meetings with the Federal Reserve Bank of New York (FRB NY) and the Financial Services Authority (FSA) in the United Kingdom, the SFBC does not have direct contact with the U.S. SEC, which oversees the bulk of CSFB's U.S. operations. Instead, they deal with the FRB NY as the so-called umbrella supervisor. It is important that the SFBC establish a relationship with the primary supervisor of CSFB's U.S. operations. Neither the Fed nor the SFBC are closely monitoring the insurance activities of the Credit Swiss Group in the United States. The FSA acknowledges they are re-examining their insurance supervision Credit Suisse Group (24 percent of its income is from insurance). The FSA has recently started bilateral meetings with the Swiss insurance supervisor, but consolidated supervision is a relatively new concept for insurance supervisors. Under Art. 23sexies of the Banking Act, the SFBC is empowered to provide information to host country supervisors, insofar as these authorities: – will use such information exclusively for direct supervision of banks; – are bound by official professional secrecy law; and – will not transmit this information to competent authorities or bodies which are entrusted with supervisory activities in the public interest without the prior consent of the SFBC or on the basis of a blanket permission contained in a treaty with a contracting state. As the establishment of operation in foreign countries requires approval by the SFBC, the Banking Commission has the power to reject any application where consolidated supervision would be hindered.
Assessment	Compliant.
Comments	Informal arrangements have not impaired the SFBC's ability to practice consolidated supervision in the past, including on-site inspections if necessary. The expected higher frequency of on-site inspections to be carried out by the SFBC would be facilitated if this process were formalized through the conclusion of MoUs.
Principle 25.	Supervision Over Foreign Banks' Establishments Banking supervisors must require the local operations of foreign banks to be conducted with the same high standards as are required of domestic institutions and must have powers to share information needed by the home country supervisors of those banks for the purpose of carrying out consolidated supervision.
Description	For branches and subsidiaries of foreign banks, the SFBC requires a license. These institutions are subject to similar regulatory requirements applicable to all other Swiss banks. Under Art. 3bis par. 1bis, the SFBC requires that no objection or, preferably, the approval of the home country supervisor is received. In addition, the Banking Act provides some special requirements for foreign-owned banks that are similar to those for branches of foreign banks: – The country or countries where controlling shareholders are incorporated (or if the shareholders are individuals, the countries where they reside) must grant reciprocity to Swiss banks.3 – If the Swiss bank is controlled by a foreign bank or other foreign financial institution, the parent must be subject to adequate supervision. Where no consolidated supervision exists by home-country authorities, the SFBC may impose specific reporting requirements for the Swiss entity in order to assure consolidated supervision. – The supervisory agencies of the parent's home-country must not object to the establishment of the subsidiary in Switzerland. – The bank must select a name that does not imply Swiss control. The SFBC requires all banks subject to its supervision as a lead home-country regulator to report on a group-wide consolidated basis. Conversely, Art. 4quiquies of the Banking Act authorizes the Swiss-based affiliates (and branches) of foreign financial institutions to furnish information required for the parent institution's internal control purposes or for consolidated supervision by their home-country regulator to their parent institution. The authorization is subject to three conditions: – the information may only be used for group-internal control purposes or for the direct regulatory supervision of the financial institution; – the parent company and the supervisory authority must be bound by official or professional secrecy; and – the information so obtained must not be forwarded to third parties without prior authorization by the Swiss affiliate unless generally agreed upon in a treaty (Art. 4quinquies of the Banking Act). That information may also include customer-related information provided it is used exclusively for internal control and consolidated supervision purposes. Under Art. 23septies par. 2 of the Banking Act, the SFBC may permit foreign financial supervisory authorities to carry out direct inspections at Swiss establishments of foreign banks. Since the law was amended, foreign supervisors have conducted on-site examinations of foreign banks Swiss affiliates. Art. 23sexies of the Banking Act give the SFBC the power to advise the home country supervisor on any material remedial action it takes.
Assessment	Compliant.
Comments

Table 2.

Summary Compliance with the Basel Core Principles

^1/C: Compliant.

^2/LC: Largely compliant.

^3/MNC: Materially non-compliant.

^4/NC: Non-compliant.

^5/NA: Not applicable.

Table 2.

Summary Compliance with the Basel Core Principles

Core Principle	C1/	LC2/	MNC3/	NC4/	NA5/
1. Objectives, Autonomy, Powers, and Resources		X
1.1 Objectives	X
1.2 Independence		X
1.3 Legal framework	X
1.4 Enforcement powers	X
1.5 Legal protection	X
1.6 Information sharing	X
2. Permissible Activities		X
3. Licensing Criteria	X
4. Ownership	X
5. Investment Criteria	X
6. Capital Adequacy	X
7. Credit Policies	X
8. Loan Evaluation and Loan-Loss Provisioning	X
9. Large Exposure Limits	X
10. Connected Lending	X
11. Country Risk	X
12. Market Risks	X
13. Other Risks	X
14. Internal Control and Audit	X
15. Money Laundering	X
16. On-Site and Off-Site Supervision	X
17. Bank Management Contact	X
18. Off-Site Supervision	X
19. Validation of Supervisory Information	X
20. Consolidated Supervision	X
21. Accounting Standards	X
22. Remedial Measures	X
23. Globally Consolidated Supervision	X
24. Host Country Supervision	X
25. Supervision Over Foreign Banks' Establishments	X

^1/C: Compliant.

^2/LC: Largely compliant.

^3/MNC: Materially non-compliant.

^4/NC: Non-compliant.

^5/NA: Not applicable.

View Table

Table 2.

Summary Compliance with the Basel Core Principles

Core Principle	C1/	LC2/	MNC3/	NC4/	NA5/
1. Objectives, Autonomy, Powers, and Resources		X
1.1 Objectives	X
1.2 Independence		X
1.3 Legal framework	X
1.4 Enforcement powers	X
1.5 Legal protection	X
1.6 Information sharing	X
2. Permissible Activities		X
3. Licensing Criteria	X
4. Ownership	X
5. Investment Criteria	X
6. Capital Adequacy	X
7. Credit Policies	X
8. Loan Evaluation and Loan-Loss Provisioning	X
9. Large Exposure Limits	X
10. Connected Lending	X
11. Country Risk	X
12. Market Risks	X
13. Other Risks	X
14. Internal Control and Audit	X
15. Money Laundering	X
16. On-Site and Off-Site Supervision	X
17. Bank Management Contact	X
18. Off-Site Supervision	X
19. Validation of Supervisory Information	X
20. Consolidated Supervision	X
21. Accounting Standards	X
22. Remedial Measures	X
23. Globally Consolidated Supervision	X
24. Host Country Supervision	X
25. Supervision Over Foreign Banks' Establishments	X

^1/C: Compliant.

^2/LC: Largely compliant.

^3/MNC: Materially non-compliant.

^4/NC: Non-compliant.

^5/NA: Not applicable.

Recommended action plan and authorities' response to the assessment

Table 3.

Recommended Action Plan—Basel Core Principles

Table 3.

Recommended Action Plan—Basel Core Principles

Reference Principle	Recommended Action
CP 1.2. Independence	The SFBC should have full budgetary independence, based on the law.
CP 1.6. Information sharing	The SFBC should consider formalizing the exchange of information and on-site visits for example, through the conclusion of MOUs or the exchange of letters.
CP 2. Permissible Activities	An exception in the Banking Act (Art. 1 par. 2) permits nonbank employer-sponsored deposit-taking entities that are not licensed or regulated as financial institutions. This poses a risk to the system and should be eliminated.
CP 6. Capital Adequacy	The 12.5 percent capital reduction for cantonal banks should be eliminated on competition grounds.
CP 7. Credit Policies	Insufficient data is collected by the SFBC regarding renegotiated, past due, and internally classified credits. Such information, along with provisions, charge-offs, and recoveries, would be useful in monitoring asset quality trends in the banking system.
CP 13. Other Risks	Gap reports are not filed as part of the prudential reporting process and the current supervisory system for monitoring liquidity as part of off-site supervision is under review. The SFBC should continue investigating ways to improve its liquidity monitoring to align it with the Basel Committee's paper on managing liquidity in banking organizations.
CP 16. On-Site and Off-Site Supervision	Additional detailed data should be obtained (e.g., on asset quality), and an early warning system should be developed. Consideration should be given to setting up a more detailed large bank risk profile using off-site data and information from trilateral meetings with foreign supervisors, insurance supervisors, management and external auditors.
CP 17. Bank Management Contact	Consideration should be given to implementing a process with all Swiss banks whereby SFBC staff meets with management annually, possibly in conjunction with completion of the annual external audit and receipt of the Long Form report.
CP 19. Validation of Supervisory Information	A formal quality assurance program for supervising and verifying the work of the external auditors has to be developed and implemented. Such a program seems necessary given the reliance placed on the external auditors.
CP 20. Consolidated Supervision	A proposed amendment of the Banking Act, the Stock Exchange and Securities Trading Act, and the Insurance Supervision Act provides for a more comprehensive set of legal rules for the supervision of groups of banks and/or securities dealers as well as financial conglomerates. These amendments will be welcome. Further development of a strategy for supervision of insurance activities of Swiss conglomerates in major markets is recommended.
CP 22. Remedial Measures	The SFBC should have the authority to impose direct civil monetary penalties on banks or directors or managers and to publish enforcement activities. The proposed amendment to the Banking Act should cover both. An additional area where the SFBC should have, clear legal enforcement authority is in their right to publish the identities of banks and individuals involved in money laundering activities and to impose monetary penalties for noncompliance with the MLL.
CP 24. Host Country Supervision	Informal arrangements have not impaired the SFBC's ability to practice consolidated supervision in the past, including on-site inspections if necessary. The necessary higher frequency of on-site inspections to be carried out by the SFBC would be facilitated if this process were formalized through the conclusion of MOUs.

View Table

Table 3.

Recommended Action Plan—Basel Core Principles

Reference Principle	Recommended Action
CP 1.2. Independence	The SFBC should have full budgetary independence, based on the law.
CP 1.6. Information sharing	The SFBC should consider formalizing the exchange of information and on-site visits for example, through the conclusion of MOUs or the exchange of letters.
CP 2. Permissible Activities	An exception in the Banking Act (Art. 1 par. 2) permits nonbank employer-sponsored deposit-taking entities that are not licensed or regulated as financial institutions. This poses a risk to the system and should be eliminated.
CP 6. Capital Adequacy	The 12.5 percent capital reduction for cantonal banks should be eliminated on competition grounds.
CP 7. Credit Policies	Insufficient data is collected by the SFBC regarding renegotiated, past due, and internally classified credits. Such information, along with provisions, charge-offs, and recoveries, would be useful in monitoring asset quality trends in the banking system.
CP 13. Other Risks	Gap reports are not filed as part of the prudential reporting process and the current supervisory system for monitoring liquidity as part of off-site supervision is under review. The SFBC should continue investigating ways to improve its liquidity monitoring to align it with the Basel Committee's paper on managing liquidity in banking organizations.
CP 16. On-Site and Off-Site Supervision	Additional detailed data should be obtained (e.g., on asset quality), and an early warning system should be developed. Consideration should be given to setting up a more detailed large bank risk profile using off-site data and information from trilateral meetings with foreign supervisors, insurance supervisors, management and external auditors.
CP 17. Bank Management Contact	Consideration should be given to implementing a process with all Swiss banks whereby SFBC staff meets with management annually, possibly in conjunction with completion of the annual external audit and receipt of the Long Form report.
CP 19. Validation of Supervisory Information	A formal quality assurance program for supervising and verifying the work of the external auditors has to be developed and implemented. Such a program seems necessary given the reliance placed on the external auditors.
CP 20. Consolidated Supervision	A proposed amendment of the Banking Act, the Stock Exchange and Securities Trading Act, and the Insurance Supervision Act provides for a more comprehensive set of legal rules for the supervision of groups of banks and/or securities dealers as well as financial conglomerates. These amendments will be welcome. Further development of a strategy for supervision of insurance activities of Swiss conglomerates in major markets is recommended.
CP 22. Remedial Measures	The SFBC should have the authority to impose direct civil monetary penalties on banks or directors or managers and to publish enforcement activities. The proposed amendment to the Banking Act should cover both. An additional area where the SFBC should have, clear legal enforcement authority is in their right to publish the identities of banks and individuals involved in money laundering activities and to impose monetary penalties for noncompliance with the MLL.
CP 24. Host Country Supervision	Informal arrangements have not impaired the SFBC's ability to practice consolidated supervision in the past, including on-site inspections if necessary. The necessary higher frequency of on-site inspections to be carried out by the SFBC would be facilitated if this process were formalized through the conclusion of MOUs.

Institutional Setting and Market Structure

Supervision and regulation of the securities market are entrusted to the SFBC. The SFBC is responsible for licensing and supervising securities dealers and stock exchanges; it regulates disclosure of shareholdings in listed companies and takeover bids. Supervisory functions are also delegated to the exchanges, which function as SROs and supervise trading, exchange members and listing procedures.

As with the supervision of banks, the SFBC relies on recognized private external auditors to conduct front-line supervision and has not performed on-site inspections of securities dealers in the recent past. Front-line supervision of the SWX is also performed by an external auditor. The auditor is required to examine compliance with the obligations arising from the Stock Exchange Act, the implementing ordinance, and the relevant rules and regulations.

The SWX, as an SRO, is responsible for regulating its members and admitting participants to trading (who have to be licensed securities dealers); supervising price formation, execution and settlement of transactions; and ensuring that the information necessary “to maintain a transparent market” is made public. The Exchange is also responsible for enforcing listing rules and checking listing prospectuses.

In 2000, the SWX ranked 10^th in the world by turnover in equities, with turnover of SwF1.0 trillion, more than double the turnover in 1996. Market capitalization of the Swiss Performance Index (SPI) was SwF 1.3 trillion at the end of 2000 (equivalent to three times annual GDP). Since June 2001, the stocks represented in the Swiss blue chip index (SMI) are being traded exclusively on Virt-x—the new pan-European blue chip exchange in London, which is a joint venture between the SWX and Tradepoint. The SWX is also one of the largest markets for warrants in the world with almost 3500 warrants listed. Since 1998, all Swiss standardized derivatives are traded on EUREX, which was created by the merger of the Swiss Options and Financial Futures Exchange (SOFFEX) with the Deutsche Terminbörse (DTB).

Securities intermediaries comprise primarily securities dealers and investment funds.⁵ Since the Swiss system is based on the universal bank model, both the securities and the fund businesses are dominated by banks. Total assets of investment funds have almost doubled since 1996 to SwF 468 billion (115 percent of GDP) at end-2000. More than two-thirds of the assets are invested in foreign funds, which are in most cases established by Swiss financial institutions in Luxembourg and their products are then offered in Switzerland to residents and nonresidents.

Principle-by-Principle Assessment

This section presents a detailed discussion and assessment of practices in Switzerland regarding securities regulation, vis-à-vis the practices in the IOSCO Objectives and Principles of Securities Regulation. The assessment of observance of each practice is made on a qualitative basis using a four-part assessment system: implemented; partially implemented; non-implemented; not applicable.

A Principle will be considered implemented whenever all assessment criteria are met without any material deficiencies. It will be considered partially implemented when the authorities have not fully implemented one or more assessment criteria. A Principle will be considered non-implemented whenever material shortcomings are found in adhering to the assessment criteria. When a principle is assessed to be partially or non-implemented, recommendations are provided to improve observance. A Principle will be considered not applicable whenever it does not apply given the existing structural and institutional conditions.

Table 4.

Detailed Assessment of Observance of the IOSCO Objectives and Principles

Table 4.

Detailed Assessment of Observance of the IOSCO Objectives and Principles

Principle 1.	The responsibilities of the regulator should be clear and objectively stated.
Description	According to Article 23 of the Federal Law on Banks and Savings Banks, of November 8, 1934 (as subsequently amended), the Swiss Federal Banking Commission (SFBC) is responsible for the supervision of banks, securities dealers, investment funds, stock exchanges, the disclosure of significant participations, and public takeover bids. Details are provided in the Federal Law on Stock Exchange and Securities Trading (SESTA) of March 24, 1995 (as subsequently amended) and in the Federal Law on Investment Funds (IFL) of March 18, 1994. The above-mentioned laws do not include regulation of primary markets and of some asset management activities. A recently established commission of experts has a mandate to draft an oversight regime for asset managers.
Assessment	Partially implemented.
Comments	The law sets out the responsibilities of the regulator—the SFBC. The scope of securities legislation, however, does not include all types of securities transactions or financial intermediaries and, as required by the IOSCO Objectives and Principles, regulation of primary markets. In particular, the jurisdiction of the SFBC does not include the regulation of (i) primary markets (details under Principle 14); (ii) asset managers or investment advisors who manage the assets of third parties only on the basis of powers of attorney, that is, they do not maintain accounts or security deposits in their own name for the account of these third parties; and (iii) closed-end funds.
Principle 2.	The regulator should be operationally independent and accountable in the exercise of its functions and powers.
Description	The Federal Law on Banking and Savings Banks (Banking Act) as supplemented by the Implementing Ordinance on Banks and Saving Banks of May 17, 1972 (as subsequently amended), establishes the procedure for appointing the members of the SFBC Board (the Commission), the mandate, and the incompatibilities. The Commission may consist of 7 to 11 members, appointed by the Federal Council (the Government), whose term is four years. The Federal Council appoints the Chairman and the Deputy Chairman (or Deputy Chairmen). The members need to be experts, presumably in the banking and securities field. The law establishes special incompatibilities for SFBC members. They cannot perform management functions or be chairman, vice-chairman, a delegated member of a board with executive responsibilities (or member of the executive committee of the board) of a bank, a fund manager, a stock exchange, a securities dealer, or a recognized auditing firm. However, SFBC members are allowed to perform other professional activities. The Federal Council, in consultation with the SFBC, appoints the Director and the Deputy Director of the Secretariat, and may remove an appointee in case of serious misbehavior. The Commission appoints the other employees. The Chairman of the Commission is responsible for handling general policy matters, running the Commission's meetings and supervising the Secretariat. The Chairman, as a general rule, does not get involved in the examination of individual cases. The Commission may delegate competences to the Secretariat and, in minor cases, can instruct the Secretariat to take decisions in its place. According to the relevant laws, the Secretariat is responsible for administrative and staff matters. It prepares the files for the Commission, makes proposals and implements the Commission's decisions. It carries out investigations and may deal directly with supervised entities. The decisions of the SFBC are subject to judicial review. The SFBC communicates with the Federal Council via the Federal Department of Finance. The SFBC must report annually to the Federal Council on its activities and must submit an annual report addressed to the Federal Assembly. The annual report is published. The Federal Council and the Federal Department of Finance may obtain special reports on demand. The SFBC has no budgetary independence and it is part of the central government budget. The SFBC's expenses are entirely covered by fees that are charged to institutions under its supervision. Proposals are under examination to grant the SFBC full administrative and budgetary independence from the Government.
Assessment	Partially implemented.
Comments	The SFBC does not appear to be fully operationally independent from the Government. Effective separation between the regulator and the government could be strengthened. The law could list in detail the cases when removal of the members of the Commission is possible. Currently, the law does not regulate in detail the procedure for the removal of the members of the Commission. The Commission's budget (see Principle 3 below) is part of the Federal Budget and therefore the SFBC has no budgetary independence. The Commission cannot deal directly with the Federal Council, and the intermediation of the Federal Department of Finance is necessary. The SFBC staff stresses that de facto the SFBC is independent, and that the Government has no legal basis to interfere with policy matters or individual decisions. Comprehensive rules on incompatibilities with professional activities could be established. The list of the forbidden activities is limited to certain managerial functions in supervised entities, and allows Commission members to perform other professional activities. If a conflict of interest arises in a particular matter, the member involved must abstain from participating and voting (the Federal Act on Administrative Procedure applies).
Principle 3	The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
Description	The SFBC has a staff of 115 (about 80 of which perform supervisory functions). There are no restrictions for SFBC staff to be employed by supervised institutions. The legal provisions applicable to Federal employees regulate the employment of SFBC staff, including their responsibilities. Civil liability claims cannot be addressed directly against the members of the SFBC or SFBC staff. The action must be brought against the Swiss Confederation. The private sector offers higher salaries, and SFBC staff is paid less than the staff of the SNB. The rate of staff turnover reached 18 percent in 2000. According to the law, the Commission, with the consent of the Federal Department of Finance, may deviate from the classification of a position in order to hire and/or retain particularly qualified personnel. The SFBC budget is part of the Federal budget; thus the use of resources must be approved by the Swiss Parliament. The SFBC, as part of the Federal Administration, is subject to audits by the Finance Control Office. The SFBC is funded through fees paid by supervised entities. The type and amount of fees are fixed in an ordinance issued by the Federal Council. Each authorized entity pays a basic fee and a turnover fee once a year. In addition, each time the SFBC issues a decision the concerned entity has to pay a decision fee. The SFBC is responsible for licensing securities dealers, investment funds, and exchanges. The SFBC powers can be summarized as follows. It can demand information and documents from (i) exchanges, institutions similar to exchanges, securities dealers, and investment funds; (ii) persons who hold a qualified participation in the capital of a stock exchange, a securities dealer or an investment fund; (iii) auditing firms; (iv) persons obliged to notify major holdings in listed companies; and (v) bidder and target companies subject to take-over regulations. The SFBC does not perform direct supervision on entities falling within its jurisdiction. Instead, it relies on external auditors, duly recognized, to perform front-line supervision of securities dealers, investment funds, and securities exchanges, that is, the SWX and Eurex Zürich. It maintains a list of auditors that are authorized to audit regulated financial intermediaries. The SFBC may issue supervisory orders requiring supervised entities to put an end to violations or other irregularities; suspend for a limited time all legal transactions and payments of (or due to) a securities dealer; bar the employees of a securities dealer from work (provisionally or for an unlimited duration). The SFBC may withdraw the license of a supervised entity. In cases where orders are not executed, the SFBC may take the necessary measures. The costs are born by the person or entity concerned. The SFBC, after having warned the concerned person, may publish its order and the fact that it was not complied with. According to the law, the SWX is responsible for regulating listed companies and supervising the market to detect market abuse practices. In case of suspicion, the exchange must inform the SFBC, which, in turn, can order the necessary investigations. The Takeover Board is responsible for administering takeover bids regulations. It refers violations and other irregularities to the SFBC.
Assessment	Partially implemented.
Comments	The independence of the SFBC in deciding about funding and resource allocation could be increased. The current process seems to be linked to decisions taken by the Government. Concerns have emerged about the ability of the regulator to retain skilled staff and reduce turnover. Furthermore, resources allocated to supervisory tasks seem to be inadequate given the size of the supervised securities and banking industry. The SFBC relies heavily on the front-line supervisory role played by external auditors. A more active involvement of the SFBC in direct supervision (including direct controls/on site inspections on the external auditors and their operations) would be advisable. The SFBC role in enforcing securities legislation could also be increased. Powers of investigation and enforcement in cases of market abuse (insider dealing and market manipulation) do not seem to be regulated in detail by the relevant legislation. The range of sanctions available to the regulator seems to be limited. The SFBC is working on a draft proposal (to be submitted to the legislator) that would broaden the set of available sanctions.
Principle 4.	The regulator should adopt clear and consistent regulatory processes.
Description	The SFBC consults extensively with the market before adopting new policies or new regulations. The legislation does not regulate formally this consultation process. Some regulations are drafted and proposed by professional associations (Swiss Bankers Association and Swiss Funds Association). If the SFBC approves the proposed regulation and endorses the proposed text, it makes the regulations binding. The decisions adopted by the SFBC are subject to judicial review. The SFBC does not organize investor education activities. The SFBC, however, publishes useful information on its website (http://www.ebk.admin.ch) and issues press releases, if necessary, to inform investors.
Assessment	Implemented.
Comments	It could be advisable, for the sake of transparency, to introduce formal rules on the consultation procedure with market participants and especially on the role played by professional associations. The issue of a possible conflict of interest when SROs and trade associations perform regulatory functions could also be addressed.
Principle 5.	The staff of the regulator should observe the highest professional standards including appropriate standards of confidentiality.
Description	The staff is subject to laws governing federal employees (including confidentiality obligations). Criminal provisions that punish misconduct by members of government agencies supplement these rules. The SFBC has also adopted a code of conduct that regulates financial transactions carried out by its members and employees. They must refrain from trading in securities issued by companies that are being supervised by the SFBC. There are no restrictions on future employment at supervised entities immediately after staff leaves the SFBC.
Assessment	Implemented.
Comments	Introducing restrictions on future employment, at least for senior officials, could be considered.
Principle 6.	The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, and to the extent appropriate to the size and complexity of the markets.
Description	According to the law, formally only securities exchanges can be SROs. However, there are other bodies with regulatory functions in Switzerland such as the Takeover Board. This organization, which is a Federal Commission, is in charge of supervising takeover bids. The trade associations can also play a role in regulating securities markets on a voluntary basis. According to the law, the exchanges/SROs are responsible for (i) regulating their members and admitting participants to trading (who have to be licensed broker dealers); (ii) supervising price formation, execution and settlement of transactions; and (iii) ensuring that the information necessary “to maintain a transparent market” is made public. Exchanges/SROs are also responsible for listing rules. The law (Article 9) requires the SRO to establish an independent Board of Appeal. The right of civil action is unaffected. However, the civil action may be undertaken only after internal procedures have been exhausted. Exchanges/SROs should refer to the SFBC any irregularities and breaches of laws or of exchange regulations. The SFBC shall order the necessary investigations. However, the SRO retains the power of sanctioning its members. Imposed fines are regulated by civil law (as part of the contractual agreement between the exchange and its members). Presently, the SFBC has authorized only the SWX Swiss Exchange (SWX) and Eurex Zürich AG to act as SROs. The SWX is a nonprofit organization established as an association (according to article 60 of the Swiss Civil Code). Members have no claims on the assets or profits of the association. The purpose of the association is to operate an electronic securities exchange, and it may carry out other activities with the goal of improving and promoting the Swiss financial market. The SWX Swiss Exchange is part of the SWX Group, which includes participation in Eurex (derivatives exchange); EEX (European Energy Exchange); Virt-X; STOXX (a joint venture that offers indexes based on industry groups) and EXFEED (financial data). The Takeover Board is in charge of administering the regulations on takeover bids. According to the law, the Board is an independent body, not a SRO. The Takeover Board is set up by the SFBC. The Board comprises representatives of securities dealers, listed companies and investors. The Board does not have the power to issue binding decisions but can make recommendations. If these recommendations are not complied with, the Takeover Board informs the SFBC, which has the power to issue decisions. The budget of the Takeover Board is financed by the Exchange. However, the Takeover Board “may levy fees on the offeror and the offeree companies.” The rules governing the activities of the SWX and of the Takeover Board must be approved by the SFBC. Professional associations—such as the Swiss Bankers Association (SBA) and Swiss Funds Association (SFA)—also play a role in drafting regulations and enforcing rules vis-à-vis their members. This role, however, is not formalized. Professional associations must report to the SFBC any serious irregularities committed by their members.
Assessment	Implemented.
Comments	The SFBC could play a more proactive and direct role in supervising the SWX, especially in the area of market surveillance and listing. In the area of admission to listing and supervision of listed companies, the role of the SFBC is to vet the rules (and the subsequent amendments) of the Exchange. On that occasion the SFBC may comment and ask for amendments. The SFBC is not responsible for the admission to listing of securities, nor for supervising the relevant disclosure obligations (initial, ongoing, and ad hoc disclosure obligations). The SFBC is still considering the regulatory treatment of ECNs or Alternative Trading Systems operated by authorized broker dealers or other entities for trading securities. For the sake of transparency and clarity in securities regulation, it might be advisable to regulate explicitly the regulatory functions performed by professional associations such as SBA and SFA.
Principle 7.	SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.
Description	The rules issued by the SWX (and the changes thereof) must be approved by the SFBC. The law sets the conditions for granting authorization to stock exchanges. For example, it mandates an internal organization that ensures the separation of certain functions, such as admission to listing, supervision, and management. The department responsible for listing admission must include representatives of issuers and investors. The SWX is governed by a Board of Directors; the general assembly of its members has a role in the approval of financial statements; ratification of the appointment of the members of the Board of Directors; removal of members of the Board for legally justified reasons; appointment of the auditors; approval of the annual membership fees; and decision on mergers, “de-mergers,” and dissolution. At least four of the members of the Board are representatives of the major banks. The SWX has implemented the required separation of functions. The Admissions Board is responsible for issuing listing rules and for deciding on listing applications. It is composed of twelve members; five are nominated by the Swiss Federation of Trade and Industry, and seven by the SWX Board of Directors. The supervisory responsibilities entrusted to the SWX Swiss Exchange are discharged by the Supervisory Department, which is established by the Board of Directors. The appointment of the Head of the Supervisory Department is subject to prior approval by the SFBC. The Appeals Board is composed of three independent members and three substitutes (designated by the Board). The organizational structure, the rules of the procedure, and the nomination of the members are subject to approval by the SFBC. SWX employees and directors are subject to professional secrecy obligations. The rules adopted by the Takeover Board must be approved by the SFBC. The Takeover Board can issue recommendations. If the addressee does not comply, the SFBC has to be informed. There is the possibility to appeal to the SFBC. Incompatibility and obligations to abstain from participating in deliberations and voting are included in the rules approved by the SFBC.
Assessment	Implemented.
Comments	Given that the SWX is largely dominated by a few large private institutions, strong supervision by the SFBC may be needed to ensure adequate protection of end-users and investors, as well as the policing of possible market abuse practices. The SFBC's reliance on an external auditor may not be sufficient to ensure proper implementation of the Principle. In fact, according to the Principle, the regulator should be able to perform direct supervisory functions and to adopt directly relevant measures, when deemed necessary. The SFBC argues that it can exercise direct supervision whenever deemed necessary to enforce the Securities Act.
Principle 8.	The regulator should have comprehensive inspection, investigation and surveillance powers.
Description	According to the law, the SFBC has the legal power to demand information from supervised entities. It may carry out on-site investigations. According to the dualistic supervision model (see also Principle 3), the front-line supervision—both routine supervision and special examinations—is, however, performed by external auditors. The auditors must carry out at least one inspection per year on supervised entities and may perform interim audits if necessary. The external auditor has the duty to verify whether a securities dealer has fulfilled its legal duties and has complied with the licensing conditions. This verification is detailed in a report addressed to the SFBC. If, in the course of the annual or interim audit, violations or other irregularities emerge, the auditors must ask the securities dealer to put an end to the said irregularities and set a time limit. If the deadline is not respected, the auditor has to inform the SFBC. If violations or irregularities appear to be serious (or criminal activities are involved), the SFBC must be informed immediately. Exchanges and investment funds are supervised in a similar way (see Principles 6 and 7). The external auditors also play a role in examining licensing applications. Similarly, the regulations on takeover bids require external auditors to examine the conditions of the offer and the prospectus before the relevant documents are submitted to the Take-over Board. The SWX (acting as an SRO) must supervise trading in the market, including monitoring for insider dealing or price manipulation. The SWX, however, is not entitled to obtain information on securities dealers' clients (i.e., those who ordered the execution of the relevant transactions). Violations discovered by the SWX must be notified to the SFBC. The SFBC orders the required investigations. According to Article 11 of SESTA, it can instruct the stock exchange, an auditing firm, or other qualified individuals to conduct those investigations. The SWX is also responsible for the listing of securities and the disclosure of relevant holdings in listed companies. It can ask the respective external auditor to perform certain examinations of its members and of listed companies. The legislative framework does not clarify in detail which investigative powers are available to the SFBC concerning individuals and entities that are not subject to licensing requirements or obliged by law to report to the SFBC. The law (Article 51.b of the ordinance implementing banking legislation) authorizes the SFBC Secretariat and the members of the Commission to hear witnesses when necessary. This mechanism can be used to question individuals or entities, including those that are unsupervised. In this case, requirements set out in the Act on Administrative Procedure are applicable. Nevertheless, the scope of investigative powers vis-à-vis unregulated individuals/entities committing violations of securities is not clearly regulated. In performing its activities (including investigations), the SFBC must adhere to the rules set out in the Law on Administrative Procedure.
Assessment	Implemented.
Comments	The powers conferred to the SFBC could be strengthened. The SFBC relies heavily on the front-line supervision of external auditors or other bodies such as the SWX. In the first instance, it is up to the external auditors to decide how, if, and when on-site verifications should be carried out (apart from the general obligation to produce a report once per year). The fact that the front-line supervisory authority (the SWX) cannot directly investigate the person or entity that transmitted the order could delay market abuse investigations. It might be more effective to concentrate all the investigative activities directly in the SFBC. The legislative framework could also clarify expressly which direct investigative powers are available to the SFBC with respect to individuals or entities that are not subject to prudential supervision. The SFBC should be entrusted with formal surveillance powers on external auditors. At present, the only sanction available to the SFBC is to withdraw the auditor's recognition. According to the law, this measure can be adopted only when an auditor acts in violation of regulations (“grossly violates its legal duties”). There are no other intermediate measures available to the SFBC. The SFBC is considering how the independence of the auditor—who is paid by the supervised entity—could be reinforced, including by introducing a rotating mechanism for auditors. In Switzerland, there are currently 11 recognized auditors. However, only the major auditing firms are likely to be able to supervise large securities dealers (or the SWX). The Expert Commission on Bank Auditing has issued recommendations on the use of auditors. This Expert Commission emphasized the need of a more direct involvement of the SFBC in the examination process and a quality assurance program for the external auditors. External auditor reports should be closely examined by the SFBC even if they do not identify any violation by the supervised entity.
Principle 9.	The regulator should have comprehensive enforcement powers.
Description	The SFBC has the powers to order supervised entities to put an end to breaches of securities legislation, correct misbehaviors, and restore a sound organization. In case of non-compliance, the SFBC can decide, after having warned the concerned entity, to disclose to the public the relevant facts. The range of sanctions available to the SFBC includes (i) withdrawing the license from securities dealers, stock exchanges, and investment funds; (ii) imposing trading restrictions on securities dealers; (iii) ordering the suspension of payments by (or due to) a securities dealer when creditors (or debtors) may be damaged; (iv) appointing an observer if a securities dealer's or investment management company's governing body proves incapable of properly performing its functions; and (v) withdrawing the recognition of external auditors. In other cases, the SFBC must report to the authorities in charge of administrative and criminal prosecution (Federal Finance Department or cantons). Notably, this occurs when (i) securities activities for which a license is required are performed without a license; (ii) notification requirements on the acquisition or sale of relevant holdings in listed companies are violated; (iii) the takeover bid legislation is violated; or (iv) professional secrecy obligations are breached. Insider dealing and market manipulation are punished as criminal offenses. These offenses can be prosecuted directly by the SFBC under administrative law if regulated persons or entities are involved. Sanctions available in these cases are those described in general terms above (i.e., withdrawal of a license, and other sanctions). If the SFBC becomes aware of possible criminal acts (by regulated or non-regulated individuals/entities), it has the obligation to notify the competent criminal prosecutor. The SWX (as SRO) can enforce its rules and can fine its members or listed companies. The following measures are available: reprimands; suspension of participants or traders; imposition of fines up to SwF10 million; suspension of securities from trading (or delisting). These measures are classified as civil law measures. Entities affected by a SWX decision may appeal directly to the Appeals Board of the exchange.
Assessment	Partially implemented.
Comments	The type and quality of sanctions available in cases of securities legislation violations is relevant in evaluating the soundness of a supervisory system. The range of sanctions available to the SFBC is confined to supervised entities and does not provide for a sufficient ladder of available sanctions. The withdrawal of the license is a decision that, probably, would be adopted only when substantial violations have been committed. Violations of conduct of business rules probably will be punished by a simple order to avoid such misbehaviors in the future. Market abuse behaviors, such as insider dealing and market manipulation, if punished under criminal law require the prosecutor to be able to prove the intent to violate the law (as well as other elements of the criminal conduct). Since in many cases it is difficult to achieve such a level of proof, it can be difficult to sanction these illegal activities. The fact that certain violations can be sanctioned only under criminal law may make enforcement less efficient. In most jurisdictions, administrative sanctions are commonly used in those circumstances. The SFBC is working on a draft proposal aimed at broadening and strengthening the sanctions that can be imposed directly by the SFBC, including the power to impose monetary penalties. This project should be supported.
Principle 10.	The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
Description	As discussed under Principles 8 and 9 above, the SFBC does not normally perform direct supervision. Typically, it gets directly involved when complaints are lodged or information is received from the auditors that warrant its intervention. The auditors normally decide about the type of auditing activity they perform on supervised entities. The SFBC may give instructions. Particular attention is paid to the supervision of large banking groups, which are also active in the securities field. The SFBC does not publish supervisory programs.
Assessment	Partially implemented.
Comments	The implementation of this principle depends on the comprehensive evaluation of the supervision and enforcement system discussed under Principle 8 and 9. There are ongoing discussions between the external auditors and SFBC staff (at least in the case of the large internationally active financial institutions). The system, however, could be improved by more direct intervention by the regulator. The recommendations by the Expert Commission on the use of auditors were mentioned under Principle 9. Supervision could be more focused on compliance with investor protection rules. The core of the supervisory efforts appears to be addressed to verifying the financial soundness of the supervised entities more than their behaviors towards customers. Investor protection rules could be strengthened, for example through better disclosure. In the context of asset management (at least the regulated part), more attention could be paid to potential conflict of interest issues and suitability rules. The SFBC is in the process of drafting guidelines on market conduct.
Principle 11.	The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
Description	The law regulates the exchange of supervisory information, cooperation and mutual assistance (domestic and cross border). The relationship between the SFBC and the external auditors, or among the SFBC, the SWX and the Takeover Board, are regulated in detail by laws and implementing regulations. The banking law and implementing measures provide for some cooperation between the SFBC and the SNB. Cooperation with insurance and/or pension funds regulators is not regulated, but there is some of cooperation, especially in the supervision of financial conglomerates. Exchange of information with foreign regulators is governed in detail by legal provisions. The law distinguishes two cases: (i) confidential information concerning supervised entities, and (ii) confidential information on clients of Swiss intermediaries (banks, securities dealers, funds). In the case of confidential information concerning supervised entities, the information can be transmitted only if the foreign supervisor (i) “uses such information exclusively for the purpose of direct supervision of the exchange and the trading in securities”; (ii) is bound by official or professional secrecy; and (iii) does not, without the prior consent of the SFBC or by virtue of a general authorization clause in an International Treaty, forward such information to competent authorities and to other bodies, which carry out supervisory functions in the public interest. Forwarding information to criminal authorities is only permitted in the context of agreements on mutual assistance in criminal matters. The SFBC decides in consultation with the Federal Office for Police Matters if the recipient authority can use the information in the context of a criminal procedure. For the sharing of confidential information concerning clients of a Swiss intermediary, in addition to the above criteria, further requirements must be met. In particular, requirements established in the Federal Act on Administrative Procedure must be fulfilled. In accordance with that law, the SFBC must issue an order to the intermediary and to the client before it passes the information to the foreign regulator. If the client does not consent, he/she can appeal to the relevant Court, and the SFBC cannot communicate the information to the requesting regulator until (and if) the Court permits it.
Assessment	Partially implemented.
Comments	The Swiss legislation in this area is not fully in line with IOSCO standards and international practice. According to IOSCO standards, relevant information must be exchanged among regulators, domestically and internationally, without restrictions. Administrative cooperation among regulators should not be subject to restrictions and delays imposed by judicial cooperation, such as the need to wait for a Court decision. According to IOSCO standards the exchange of confidential information is a pre-condition for ensuring proper functioning of securities markets and effective law enforcement. The regulator should be able to communicate all types of confidential information in its own right without being obliged to wait for a Court decision. At the domestic level, the legislation does not provide for full freedom to exchange information with all concerned authorities (including those responsible for insurance and pensions), especially when individuals are involved. At the international level, for the exchange of confidential information concerning clients of Swiss intermediaries, an intervention of the Court is necessary. It is up to the Court to decide whether the information can be transmitted or not, and there have been cases when the Courts have ruled against such communication. The SFBC has publicly recognized that the Swiss law does not allow adequate cooperation with foreign regulators. It announced the intention to submit a proposal for amendment to the Federal Department of Finance. Swiss law can have other undesirable implications for cross-border investigations. The client of a Swiss intermediary must be informed of being under investigation by a foreign authority. If the individual goes to court, the investigation is publicly disclosed in the court proceeding. As a result, other targets of the investigation can adopt measures to avoid prosecution. The dual criminality requirement may also not be fully in line with international standards. According to Swiss law, information on supervised entities or on securities dealers' clients may be communicated by the regulator in the context of a criminal procedure only if the conduct is also illegal under Swiss criminal law. If the foreign definition of the illegal conduct is broader, the Swiss authorities may withhold their consent to use the information in a criminal procedure. Therefore, the foreign regulator who according to its legislation is responsible for assisting in criminal or administrative sanctioning proceedings, cannot use the information.
Principle 12.	Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.
Description	The conditions for exchanging confidential information are established by law. According to the SFBC, therefore, there is no necessity for concluding memoranda of understanding (MOUs) between supervisory authorities. The SFBC has obtained declarations from supervisory authorities in 15 countries in which the relevant authorities commit to fulfill the conditions set out in Article 38 of the Federal Law on Exchanges and Securities Trading. Information can be transmitted to authorities in other countries with the previous consent of the SFBC. Consent from the Federal Police Office is necessary for the information to be used in a criminal procedure. Special agreements have been signed with regulators that are responsible for supervising exchange alliances, such as Virt-X and Eurex, or in case of remote membership.
Assessment	Partially implemented.
Comments	The restrictions on the international exchange of information and the procedures described under Principle 11 are applicable, irrespective of existing MOUs. Notwithstanding the special agreements for Virt-X and Eurex, the restrictions explained above under Principle 11 fully apply. This implies that if the U.K. or German authorities responsible for supervising the said regulated markets need information about clients of Swiss intermediaries (which are market members), they are subject to the rules described above. Therefore there is the danger that they are unable to properly enforce legislation against market abuse.
Principle 13.	The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.
Description	The SFBC can provide information to foreign regulators on license holders, brokerage accounts, and disclosure of relevant holdings in listed companies (information on listed companies is available from the SWX). Other types of information on non-supervised entities or activities are available if it is verified through an investigation that Swiss law has been breached. The SFBC is under no obligation, however, to provide assistance to foreign regulators. Foreign regulators can only perform on-site inspections (or joint inspections) for the purpose of consolidated supervision.
Assessment	Partially implemented.
Comments	In addition to the legal restrictions examined under Principles 11 and 12, the ability of the SFBC to gather information on behalf of a foreign regulator could be limited by the fact that certain securities transactions and activities do not fall under securities regulations. As expressly recognized in the answers to the self-assessment questionnaires, the SFBC is not in a position to provide assistance in the case of boiler rooms activities, and in the case of information concerning individuals, since the restrictions explained under Principles 11 and 12 fully apply.
Principle 14.	There should be full, accurate and timely disclosure of financial results and other information that is material to investors' decisions.
Description	Public offers on the primary market are outside the scope of securities regulation. Few articles in the civil code regulate the matter. Remedies available are also limited to civil law. Therefore, the SFBC does not have the power to verify that the information published is accurate, and that all information material to investors' decisions is disclosed. There is no oversight of offering procedures, and the SFBC does not have the power to stop or delay offerings that may be prejudicial to investors. Investors have to rely on civil law remedies, for instance, bringing suit against the issuer. In case of public offerings for the subsequent admission to listing, the prospectus is to be drafted according to listing rules and once listed, the issuer is subject to supervision by the relevant SRO. The listing admission process falls within the jurisdiction of the exchange/SRO (the SWX). The rules are drafted by the SRO and must be approved by the SFBC (on the Admission Board of the SWX, see under Principle 7). Listing rules, which according to SFBC staff are in line with the European Listing Directives (79/279/EEC and 80/390/EEC), provide for initial, ongoing, and ad hoc disclosure requirements. Initial disclosure requirements include the obligation to publish a prospectus. However, the SWX allows securities to be listed without a Swiss prospectus if they have been previously listed on an official exchange recognized by the SWX. Under the listing rules the issuer must disclose all material information relevant to investors. The information must be presented in a way that is not misleading to prospective investors. However, the rules on the minimum content of the prospectus differ according to the type of securities (shares, bonds, derivative products), the type of issuer (large company, small cap, start up, high tech), and the segment of the market where the securities are traded. In case of small caps or start ups, additional information is required, as the SWX holds the view that more detailed information is necessary to allow investors to make informed investment decisions. As regards ongoing disclosure requirements, issuers of securities admitted to trading on the SWX must publish annual reports. Share issuers must also publish interim reports (on a semi-annual basis). Issuers listed in the SWX New Market segment have to provide quarterly reports. The SWX reviews the annual and interim reports. As regards ad hoc disclosure requirements, according to listing rules the issuer must inform the market of any not-publicly known fact that may result in “substantial” movements in the price of the securities. The issuer may postpone or omit disclosure if (i) the new facts are based on a plan or decision of the issuer, and (ii) its dissemination is liable to prejudice the legitimate interests of the issuer. Special rules deal with disclosure of shareholdings in listed companies. An owner who, directly, indirectly, or in concert with third parties, acquires or sells for his own account equities that represent certain threshold levels of the voting rights in a company listed in Switzerland must notify the company and the stock exchange where the company is listed. The SWX can refuse the admission to listing or can impose conditions that need to be met by the issuer before the securities can be traded. Sanctions can be imposed for violations, including reprimands, financial fines, suspension from trading, and delisting.
Assessment	Partially implemented.
Comments	According to the IOSCO Principles, securities regulation should include the primary market. The regulator should have the power to require (and enforce) the disclosure of all information material to investors' decisions. The regulator should also have the power to delay or stop an offer if investor protection is jeopardized. The relevant articles in the Civil Code do not require the issuer to comply with internationally accepted disclosure standards—see IOSCO Principles (chapter 10.4) and IOSCO International Disclosure Standards for Cross-Border Offerings and Initial Listing for Foreign Issuers. Since the primary market is not subject to supervision, the SFBC's (or the SRO's) powers do not extend to issuers that do not subsequently list on an exchange. From a legal viewpoint, also in the case of subsequent listing, the issuer will be subject to SRO obligations only in connection with listing. The SFBC does not have direct supervisory powers on listed companies. The responsible authority is the SRO (the SWX).
Principle 15.	Holders of securities in a company should be treated in a fair and equitable manner.
Description	Shareholders' rights are regulated under ordinary company law. According to company law, preferential voting treatment can be provided for certain categories of shares. There are no specific rules on corporate governance dealing with the rights of minority shareholders. The SWX has recently issued a consultative paper on good corporate governance practices, which focuses only on disclosure matters and proper conduct by board members, but does not cover rules on minority shareholders' rights (i.e., appointment of independent directors, members of the internal auditing committee of issuers) and collecting and exercising proxies. Only judicial authorities are responsible in case of appeals against decisions adopted at the shareholders' meeting. As described under Principle 14 above, there are rules obliging those who intend to acquire or to sell major holdings in a listed company to disclose their holdings. Also, rules exist on take-over bids applicable to Swiss companies whose shares are listed on a Swiss stock exchange. The law, however, applies only on a voluntary basis. In fact, according to Article 22 of the Federal Law on Stock Exchanges and Trading in Securities of March 24, 1995, a company may add to its by-laws, under specific conditions, even after having been admitted to listing, a provision that eliminates the obligation to launch a mandatory offer by those who intend to acquire the control of the company (the threshold is set at 33.3 percent). The only condition, in this case, is that the existing shareholders are not adversely affected. The Takeover Board may grant derogation in specific cases listed in the law. The offeror must publish the content of the offer and a prospectus containing all the relevant information. A recognized auditing firm must examine the bid prior to its publication to verify that the offer is in compliance with the relevant laws. The Board of Directors of the target company must issue a report on the proposed offer. After the publication of the offer and before the closing of the procedure, the Board of Directors of the target company must not adopt resolutions or acts that would significantly alter the assets and liabilities of the company. No restrictions are provided for decisions adopted by the shareholders meeting. These decisions may be executed irrespective of when they are adopted (prior or after the publication of the bid).
Assessment	Partially implemented.
Comments	The SFBC has limited competence in ensuring shareholder protection. The fact that a company may choose whether or not to be subject to takeover bid rules seems to be at odds with the IOSCO Principle, which requires that shareholders should be treated in a fair and equitable manner. The fact that it is stated in the by-laws that the law on mandatory take-over bids is not applicable does not ensure adequate investor protection. It simply means that the investor may know it. The legislative framework does not deal with the collection and use of proxies.
Principle 16.	Accounting and auditing standards should be of a high and internationally acceptable quality.
Description	The SFBC is not responsible for ensuring the quality of accounting or auditing standards. Professional bodies set accounting standards for issuers. The accounting standards employed in Switzerland are contained in the Swiss Accounting and Reporting Recommendations (ARR) drawn up by the Commission for Accounting and Reporting Recommendations. This Commission is an independent foundation. There is no supervisory body for the ARR. According to the Federal Law on Stock Exchanges and Trading in Securities, for listing purposes “the stock exchange shall take into account internationally recognized standards.” The SWX, via listing rules, can require supplementary information or the application of different standards. According to the existing listing rules, the SWX—depending on the market segment—accepts financial statements drafted according to FER/ARR, IAS, US GAAP as well as financial statements of foreign companies prepared in accordance with the standards of their home countries. The SWX, in performing its supervisory functions, is advised by a panel of experts. The SWX may sanction listed companies that fail to report properly (i.e., who omit material information in their reports). The sanctions available include reprimands, fines, public disclosure of the violation, or deregistration. Auditors are not required to follow a published set of generally accepted auditing standards. However, the Swiss Institute of Certified Accountants and Tax Consultants (SICATC) publishes a set of standards. Members of SICATC are required to follow its standards. Auditors do not need to be approved or licensed except if they audit banks or securities dealers. However, auditors of listed companies must possess professional qualifications as defined by federal regulation and have to be registered with the SWX. Accountants who have passed an examination by the SICATC can be considered as “specially qualified” for auditing listed companies. Ongoing professional educational requirements and reviews to ensure that audit standards are applied properly are provided by SICATC for its members. Affiliation with the Institute is voluntary.
Assessment	Partially implemented.
Comments	The legislation in this area does not provide for a direct involvement of the SFBC in mandating and enforcing the application of international accounting standards. The SRO (the SWX), which is responsible for listing, accepts financial statements drafted according to defined principles. It is not empowered to check the contents and the quality of the principles. It does not have any input in standard setting bodies and is not involved in direct supervision of the auditors (it cannot sanction the auditors). The possible use of different accounting standards may affect the capability of the investors to compare (and properly evaluate) financial results of listed companies. There are no general mandatory requirements for qualifying individuals as accepted auditors of listed companies. There is no general supervisory system. Different bodies and entities are involved. Various assessments, including on an ad hoc basis, seem to be possible. There is no mandatory affiliation to a professional body. Violations of rules may entail different consequences depending on whether or not the auditor belongs to a professional association. The SFBC should ensure that in all cases (not only for financial institutions) the relevant accounting and auditing principles are of high and internationally accepted quality. Improvements in the supervision and enforcement of auditing standards are recommended, including the strengthening of auditors' independence.
Principle 17.	The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.
Description	The Investment Funds Act of 1994 establishes the requirements for operating collective investment schemes in the form of the open-ended contractual type. Closed-end funds are not included in the scope of the law and are not subject to prudential supervision. However, if closed-end funds are admitted to listing, they are subject to disclosure obligations according to the relevant listing rules. This law is inspired by the EC Directive on UCITS (85/611/EEC), and it requires that the asset management companies be set up as independent entities whose sole business is to manage assets belonging to collective investment schemes. The assets belonging to each fund must be segregated and held in a bank (the custodian bank). Fund management companies are legally, personally, and functionally segregated from custodian banks, and their executive managers must be independent of each other. However, fund management companies are often subsidiaries of custodian banks. Custodians that check compliance with the fund's regulations normally belong to the same group (see below). The large financial institutions (UBS and Credit Suisse Group) dominate the fund business. The law is supplemented by the Investment Fund Ordinance and by the Code of Conduct of the Swiss Funds Association that has been endorsed by the SFBC. There are three type of funds: (i) securities funds (UCITS) with a traditional risk profile; (ii) other funds, including funds that have traditional risk profiles but that are not securities funds, and funds bearing special risks not comparable with securities funds' risks (including financial and commodity derivatives funds, and hedge funds); and (iii) real estate funds. Fund management companies must be authorized by the SFBC. A fund's rules, which must be submitted to the SFBC for approval, must contain, inter alia, provisions concerning investment policy (expressly mentioning special risks), calculation of issue and redemption prices, distribution of profits; managers' compensation, and fees and expenses. To be authorized, a company must fulfill capital adequacy requirements, and the executive management be fit and proper. Professional experience to perform the duties is required in all cases; but only in the case of special risk funds, at least two executive managers must possess thorough training in the field of the contemplated investments and have at least five years of business experience. The same persons cannot be managers of the fund management company and of the custodian bank. The names of those who, by virtue of the participation in the capital of the fund management company, are in a position to influence directly or indirectly the business activity of the company, must be notified to the SFBC. The management company must also possess an appropriate organizational structure. Termination or winding down of a fund must follow principles provided for in the law. Persons in charge of selling funds to the public must be authorized. Foreign funds must appoint a representative in Switzerland. The fund management company, the custodian bank, and affiliated parties and agents must operate in the exclusive interest of the unit holders. General principles have been established in the law and the implementing regulations. Detailed requirements are included in the Code of Conduct issued by the Swiss Funds Association and endorsed by the SFBC. The fund management company must maintain separate records for each fund it manages. Transactions must be recorded immediately after they are entered into in accordance with the principles of orderly book-keeping. There are no disclosure obligations concerning non-arms-length transactions. However, these transactions are allowed at market prices only, and best execution should be ensured. Securities lending activities are regulated in detail by the SFBC, may be carried out through banks, brokers, insurance companies or securities clearing organizations, and must always be settled through the custodian bank. The fund management company normally does not register the name of the unit holders, and the units are issued in bearer form. However, those in charge of marketing units issued by investment funds are obliged to fulfill the legislation on anti-money laundering and to identify the customer. The SFBC may withdraw the authorization if the fund does not comply with the relevant regulatory provisions. It may issue orders to correct irregularities and may appoint an observer (in the case the company is unable to fulfill its duties). Within one year, the observer must report to the SFBC. The supervision model for investment funds follows the same approach as for banks and securities dealers. External auditing firms examine compliance with the regulatory standards. They also examine whether the authorization requirements are fulfilled. Once the fund management company has been authorized, the auditing firm must verify compliance with the relevant legislation as well as with the Code of Conduct (including areas where conflict of interest may arise). There is no maximum term for the auditors. Breaches or irregularities must be notified to the SFBC, which, if necessary, will take further actions. The fund management company must, in any case, notify the SFBC of changes in (i) members of the board of directors or those who are responsible for managing the company; and (ii) persons possessing directly or indirectly at least 10 percent of the capital or voting rights or who can influence directly or indirectly the business activities of the fund (including persons acting in concert).
Assessment	Implemented.
Comments	Comments on the delegation of front-line supervisory responsibilities to external auditor apply (Principles 8, 9 and 10). In the case of collective investment schemes, however, the custodian bank, as an additional entity, has to verify that the fund managers behave correctly in the interest of investors. However, normally the custodian belongs to the same group as the fund management company. Improvements could be introduced in the area of disclosure of transactions that are not arms-length.
Principle 18.	The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.
Description	According to the law, the management company must be a limited company with its registered office and principal place of administration in Switzerland. The fund must be created as a contractual fund (i.e., unit trust type). As far as foreign funds are concerned, the definition is broader and includes any type of pool of assets or SICAV-type funds (money market funds). The assets of a fund have to be segregated and they must be entrusted to a separate entity (the custodian bank). It is the responsibility of the custodian bank to ensure proper segregation. The custodian must be a licensed Switzerland-based bank. It is required to appoint a special officer responsible for discharging the custody function vis-à-vis the SFBC and the external auditors. In addition to ensuring the safekeeping of the fund's assets, the custodian bank must perform certain control functions, including verifying compliance with the fund's by-laws and other regulatory requirements, in particular in respect of investment decisions, calculation of the value of the units, and appropriation of income. The segregation principle is observed also in the case of bankruptcy procedures. Creditors of the management company do not have a claim on the fund's assets. In case of misbehavior of the asset management company or of the custodian, the SFBC may order to appoint a new custodian bank or to wind down the fund. It may also refer the case to the Federal Ministry of Finance or to the public prosecutor. Investors may sue the fund for compensation. The SFBC may ask that in case of class actions, unit holder representatives be allowed to participate in the procedure.
Assessment	Implemented.
Comments
Principle 19.	Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor's interest in the scheme.
Description	The law requires the fund management company to publish a prospectus for each fund that it manages. The prospectus must contain the fund rules and all other information required by the standards issued by the Swiss Funds Association and endorsed by the SFBC. The prospectus should highlight the nature of the fund and the instruments in which it can invest. Special requirements are applicable to risky funds such as hedge funds and derivative funds. The prospectus (and the subsequent amendments) must be submitted to the regulator. The SFBC does not approve the prospectus prior to its publication but can veto its publication. The SFBC may ask for the publication of additional information or amendments. The prospectus must be offered free of charge to the investor prior to entering into an agreement. The fund management company, for each fund it manages, is also required to publish annual as well as half-yearly reports. Advertising material is not subject to the same disclosure requirements as the offering materials (prospectus), but it has to refer to the offering material and indicate where the prospectus is available. Changes to the fund rules must be submitted to the SFBC for approval. If approval is granted, the investors are notified and they have the right to raise objections. If this is the case, the SFBC must refer the matter to the relevant judicial authority.
Assessment	Implemented.
Comments
Principle 20.	Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.
Description	The Swiss Funds Association has issued “guidelines on the calculation of net asset values and the handling of valuations errors,” which have been endorsed by the SFBC. According to Articles 48 par.1 and 49 par. 2 and 3 of the Investment Funds Act, the assets must be valued at their market value. To ensure uniform implementation of this requirement, the Swiss Funds Association has issued the above guidelines. If the shares are listed, market value refers to the last price paid. The assets are marked to market at the end of the accounting year and at the end of each day in which units are issued or redeemed. External auditors monitor net asset calculations. The price is disclosed whenever fund units have been issued and/or redeemed, at least twice a month in at least one daily or weekly newspaper. In practice, most funds calculate and publish their prices on a daily basis. Moreover, data are published on the SWX website (http://www.swx.ch). The SFBC, exceptionally and in the interest of investors, may suspend the redemption of fund units. Funds may stipulate rules covering special circumstances such as the closing of relevant markets, restrictions on foreign currency transactions, or extraordinary high volumes of redemptions. Although there is no prior approval requirement, the management company must communicate its decision without delay to the auditors, the SFBC, and the investors.
Assessment	Implemented.
Comments
Principle 21.	Regulation should provide for minimum entry standards for market intermediaries.
Description	The law as supplemented by the implementing ordinance establishes the main criteria for authorization of securities dealers. According to the law, there are five categories of securities traders: (i) securities traders for their own account (with gross turnover that exceeds SwF 5 billion per year); (ii) issuing houses, which offer securities on the primary market; (iii) institutions dealing in derivatives, which issue and offer derivative products to the public on the primary market; (iv) market makers, which trade on their own account and quote prices to the public for certain securities; and (v) securities traders on behalf of the customer. To be included in the latter category, additional criteria have to be met. For example, the trading must be done on a “professional basis” (meaning that it is an independent economic activity directed at achieving regular revenues—which is presumed if the trader directly or indirectly maintains accounts or securities deposits for more than 20 customers). Entities subject to prudential supervision, shareholders or partners with a significant participation in the securities dealer's capital, and other institutional investors are not considered “customers.” Therefore, securities dealers who provide services to these entities do not need to be authorized and supervised. The above-mentioned categories of securities dealers must obtain a license from the SFBC. The license—although by its nature universal—is granted for the proposed activity and category in order to meet the specific organizational set-up needed for that activity. Specifications on the activities carried out by the intermediary can be found in the by-laws. Amendments to the by-laws have to be submitted to the supervisory authority. Banks wishing to trade on securities markets must be licensed as securities dealers. A securities dealer license is always required to operate directly on stock exchanges (in Switzerland or abroad). Individual portfolio management is not considered as a regulated activity. It does not fall under any of the five above-mentioned categories and therefore no authorization from the SFBC is required. However, an asset manager must not maintain accounts or securities deposits in his or her name and on behalf of customers. Asset managers are only subject to anti-money laundering legislation and supervision. Licensing requirements are established in the law as supplemented by the relevant implementing ordinances and circulars. The SFBC may authorize as securities dealers individuals, partnerships, or corporations. A license is granted to the firm as such; employees are not individually licensed. However, during the licensing process, the SFBC assesses the fitness and propriety of senior management. Personnel authorized to trade on stock exchanges must fulfill the professional requirements contained in the rules of the exchanges. In case of corporations, the SFBC also assesses the propriety of major shareholders (above 10 percent of capital) and changes in major shareholding have to be notified to the SFBC. The securities dealer must demonstrate to possess an internal organization that ensures proper management. There is no deadline for the licensing process in the securities law. However, the general law on administrative procedures provides for a 90-day deadline. For the purpose of verifying the applicant's information, the SFBC does not carry out direct investigations, and relies on a detailed report by an external auditor. In practice, the formal licensing process (i.e., submission of a formal request) is normally preceded by an informal consultation between the applicant and the SFBC in order to ensure a smooth processing of the request. If the applicant fulfills the criteria spelled out in the legislation, the license is granted. The SFBC has the power to suspend or revoke the license and to impose remedial action on the intermediary. Denial of a license is subject to an appeal to the Swiss Federal Court. The SFBC publishes the list of authorized intermediaries on its website (http://www.ebk.admin.ch).
Assessment	Partially implemented.
Comments	Earlier comments on the lack of prudential regulation for asset managers (see Principle 1) and on the role of the external auditors are relevant (see Principles 8, 9 and 10). There seems to be a regulatory gap for dealers who trade on their own account (below the threshold of SwF 5 billion) or dealers who provide services to qualified professional investors only. According to the SFBC, these dealers do not constitute a threat for the stability of the system and do not raise investor protection concerns. Therefore, they do not warrant prudential regulation. However, these dealers must be authorized to trade directly on the SWX or on any other exchange. As mentioned earlier, an expert commission is currently drafting legislation for prudential oversight for asset managers and investment advisors.
Principle 22.	There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.
Description	All supervised intermediaries are required to possess a minimum initial capital. It is a flat amount applicable to all securities dealers and has to be paid in full. If the dealer is not incorporated or it is a partnership, the initial capital can be replaced by a guarantee on the private account of the dealer or partner (in this case a declaration by the owners of the account stating that their claims will be subordinated, is necessary). The SFBC may also authorize the intermediary to deposit collateral up to the amount of the required initial capital. Detailed requirements are provided for capital. The SFBC takes into account credit and market risk (mirroring requirements in the banking area). The SFBC has some discretion in modifying capital requirements in individual cases. Monitoring is carried out by external auditors. The securities dealers have to report to the SNB on a quarterly basis and have to provide consolidated semi-annual reports. External auditors are obliged to report as soon as losses reduce the capital by 50 percent. The SFBC may demand remedial measures from the firm concerned and can order the closure of the intermediary and its liquidation.
Assessment	Implemented.
Comments
Principle 23.	Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.
Description	Swiss regulation contains requirements on internal organization and Chinese walls. Measures to prevent conflict of interest and to ensure a proper management of conflict have to be in place. An internal audit function is required. However, small firms may outsource this function (normally to the internal auditor of the parent company). Record keeping and separation between customer assets and firm assets are required. The anti-money laundering law stipulates rules on the identification of the customer and, if required, the beneficial owner (see the assessment of anti-money laundering practices). It seems to be common practice to tape phone conversations between traders and customers. A written contract with the client is the normal practice. However, it is not mandated by law. Guidelines of the SBA require a written contract in the case of asset management, which, however, is not included under securities activities according to categories set out by SESTA (see Principle 23 above). The securities dealer must implement conduct of business rules, including, according to the law, a duty to provide information to the customer, a duty of care, and a duty of “loyalty.” The business experience and the specialized knowledge of the customer should be taken into account. The principles established by the law have been supplemented by the SBA rulebook. This Code has been endorsed by the SFBC and has become mandatory for all securities dealers. The comparison with the conduct of business principles listed in the IOSCO Principles shows that certain areas such as the obligation to ask customers for information on their financial situation and the investment objectives are not covered by the Swiss conduct of business rules. There are no special requirements concerning customer suitability tests. The risk profile of the customer seems to be analyzed only when the intermediary provides additional individual investment advice. There are no rules concerning the obligation to disclose conflict of interest situations (the code of conduct rule book provides only for an ex post disclosure). In the case of risky products, a risk disclosure statement must be offered to the client. The risk disclosure statement is drafted according to standard models. Furthermore, normally securities dealers use standard forms where the customer acknowledges that he/she is aware of the risks involved in the transactions. The conduct of business rules must be applied also in the case of online provision of services. There are no particular rules applicable to proprietary trading activities under securities dealer regulations. Electronic trading systems could be regulated by the SFBC as organizations similar to exchanges.
Assessment	Partially implemented.
Comments	Conduct of business rules could be supplemented by SFBC instructions to ensure a higher degree of investor protection (especially in the area of suitability tests and the disclosure of conflict of interest). The conduct of business rules could also include rules aimed at ensuring market integrity. Rules concerning the identification of clients and beneficial owners are discussed in the anti-money laundering assessment.
Principle 24.	There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.
Description	The SFBC may order an intermediary to take remedial actions; it may appoint an observer, or order the transfer of client assets to another intermediary. Winding down procedures for supervised institutions are regulated, except for few exceptional rules, by general bankruptcy law. The SFBC may order the liquidation of an institution, can withdraw its license and prohibit the making and receiving of payments. The SFBC, however, does not have the power to issue orders to protect the institution and insulate it from creditor actions. This power belongs to the cantonal courts. Winding down procedures involving international groups may involve coordination with responsible foreign regulators. However, the recognition of insolvency measures imposed by the foreign regulator will be decided by the relevant courts.
Assessment	Implemented.
Comments	A new draft bill is under consideration that would introduce more specific rules for regulating the failures of financial intermediaries (banks, securities dealers).
Principle 25.	The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.
Description	An exchange, according to Swiss law, is an organization which is set up for the purpose of securities trading and which enables the simultaneous exchange of offers of securities among a number of securities dealers, as well as the execution of transactions. The SFBC is responsible for licensing exchanges or for granting exemptions from the obligation to register as an exchange when certain criteria are met. It is up to the Federal Council to define such criteria. Exempted trading systems are not subject to prudential supervision. There is an ongoing debate within the SFBC about the type of treatment to be accorded to electronic communication networks (ECNs). A decision whether to grant ECNs an authorization as securities dealers or as organized trading markets has not been taken. So far, the SFBC has authorized as exchange the SWX Swiss Exchange and Eurex Zürich AG (which both act as SROs). An exemption from the obligation to register as an exchange has been granted by the SFBC to the International Securities Markets Association (ISMA), which has been authorized as an “institution similar to a stock exchange.” The SWX operates different market segments, including small caps and fast growing equities (New Market); investment funds; corporate and government bonds, including Eurobonds and warrants. Since the second quarter of 2001, the SWX is part of a joint venture operating the UK-regulated market Virt-X. As a result, the trading of Swiss blue chips (SMI segment) takes place exclusively on Virt-X. The SWX has maintained its responsibilities as a listing authority. Securities dealers admitted to trading on the SWX are automatically admitted to trade on Virt-X. Eurex, which is a 50-50 joint venture between the SWX Group and Deutsche Börse, is one of the largest derivatives markets in the world. The SFBC is responsible for the authorization of Eurex Zürich AG. Special arrangements are in place for the supervision of Eurex. There is continuous cooperation between the Swiss and the German market surveillance departments. In addition, the Eurex Zürich surveillance team and the SWX team cooperate within the same surveillance office in Zurich. Notwithstanding this close cooperation, exchange of confidential information must take place according to relevant rules on administrative assistance. To be licensed, an exchange must demonstrate that its rules and internal organization are appropriate for fulfilling its tasks. The managers responsible of the exchange are subject to a fit and proper test. Minimum capital requirements are not a condition for authorization. The exchange must submit its rules and any subsequent amendment to the SFBC for approval. The rules can be approved only if they guarantee transparency and equal treatment of investors, and ensure a smooth functioning of the exchange. There is no obligation to subject the owner of the system to a fit and proper test (such as for securities dealers and fund management companies). However, the SFBC interprets its mandate such that it is allowed to inquire about the ownership of an exchange (even if this is not formally provided for by law). Once authorized, an exchange is responsible for supervising compliance with its own rules. The stock exchange can admit members to trading only if they are licensed by the SFBC as securities dealers. The exchange notifies the SFBC in cases when it receives requests from foreign securities dealers. Foreign dealers may be admitted to trading on Swiss exchanges only if the responsible foreign regulator confirms to the SFBC that they do not object, that the foreign dealers are properly supervised, and that the foreign regulator is in a position to offer administrative assistance. The SWX distinguishes between members and participants. The members are also the associates and must be Swiss securities dealers. Participants, which include the members, are all dealers that are admitted to trade on the trading platform (including remote members). The exchange, in order to be authorized, must maintain separate functions for admission to listing and supervision (see Principles 7 and 8). Channeling of orders via order routing systems installed with third parties is possible only with the prior agreement of the SWX. The authorized exchange is responsible for maintaining relevant audit trails of all transactions carried out on its trading platform. Over-the-counter (OTC) transactions in listed securities must be reported to the SWX. According to its rules, the SWX may ask participants for information deemed necessary for its investigations, and it may require the auditors of the participant to verify compliance with SWX rules. However, the SWX is unable to ask for the name of the beneficial owner of a transaction carried out on its system. The SFBC can ask the intermediaries to provide that information without restriction, however the SFBC can communicate this information to foreign supervisory authorities only if the client agrees. If the client does not agree, a judicial procedure may be initiated (see Principles 10 and 11). Moreover, there are restrictions on the permissible use of information (see above).
Assessment	Implemented.
Comments	As far as the supervision of the exchanges is concerned, remarks on the use of external auditors (see Principles 7 to 10) apply. However, the SFBC can exercise direct supervisory functions whenever deemed necessary to enforce the Securities Act. Comments made earlier on the exchange of information under Principles 11 to 13 apply.
Principle 26.	There should be ongoing regulatory supervision of exchanges and trading systems, which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.
Description	The SFBC does not monitor a securities exchange directly. The authorized exchange must appoint an external auditor (chosen among those recognized for auditing securities dealers). The auditor must verify annually whether the stock exchange has fulfilled the relevant regulations. Every year, the auditor must submit a report to the Board of Directors, the surveillance department, and the SFBC. The SFBC may withdraw authorization of an exchange that no longer fulfills the authorization requirements, or has serious breached the rules. Before withdrawing the authorization, the SFBC may order the exchange to undertake remedial actions. The SWX is a fully electronic order-driven trading system. Orders are matched based on price-time-priority criteria. According to SWX rules, all traders are granted an equal treatment: all of them have the same access to the system; data transmitted by the system are available to all participants simultaneously; participants' entries are processed according to entry timing; pricing is made in accordance with the same SWX matching rules. In the main market segment, participants are free to act as market makers if they wish. In the New Market segment (small caps), the presence of a market maker for each listed security is mandatory, and it is a precondition for the listing.
Assessment	Implemented.
Comments	Earlier comments on external auditors discussed under Principles 8 to 11 apply.
Principle 27.	Regulation should promote transparency of trading.
Description	The Law on Exchanges and Securities Trading requires an authorized exchange to ensure proper transparency of trading. According to SWX rules, the following data must be published: prices, volumes and timing; best bid and ask prices (with the relevant quantities); and total volumes and data related to reported off-exchange transactions. The public must also be informed when relevant interventions (such as non-opening, interruption, and suspension of trading) have occurred. Market traders are entitled to receive, on a continuous basis, the following information: all bid and ask prices with the correspondent quantities, all reported off-exchange transactions, and all indications of interests.
Assessment	Implemented.
Comments
Principle 28.	Regulation should be designed to detect and deter manipulation and other unfair trading practices.
Description	Swiss law, including criminal law, prohibits market manipulation and other unfair trading practices. Responsibility for prosecution lies with competent criminal authorities. Guidelines of the SBA forbid certain practices such as front running. The SFBC is working on a circular on conduct of business rules for market integrity. The exchange/SRO must ensure continuous market monitoring. The Supervisory Department of the exchange reports relevant findings and ongoing investigations to the SFBC. The Supervisory Department may ask the participants' auditors to investigate on its behalf. In case of non-compliance or irregularities by a participant, the exchange/SRO may impose limitations on future trading, revoke trading privileges, and suspend the participant from trading. The court of arbitration settles disputes between participants and SWX, and disputes among participants arising from participation. Where appropriate, the internal remedies available at SWX (Disciplinary Commission, Appeals Board) shall be exhausted before regress can be sought at the court of arbitration.
Assessment	Implemented.
Comments	The principle can be implemented at national level. However, limitation on the ability of the SFBC to exchange information about clients could affect proper supervision of other markets. See Principles 11 to 13 for remarks about international cooperation.
Principle 29.	Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.
Description	There are no specific rules for the supervision of large exposures of market participants and their clients. In particular, the exchange/SRO is not entitled to ask for the name of the customers. The rules of the exchange must include procedures for dealing with emergency situations and spell out default procedures. In cases of emergency, the SWX may take the necessary measures, including delaying the opening of trading in a given security, interrupting or suspending trading, as well as delisting securities. It may also decide to suspend rules or regulations in whole or in part, temporarily replace them, or suspend trading altogether. In the event of system failure, the SWX is responsible for providing mechanisms to continue trading until normal conditions are restored. Procedures for the deletion of orders in emergency situations are available. In special cases, participants must issue settlement instructions directly to the clearing organization. Similar provisions are applicable to Eurex. Market participants must join the market solidarity fund (i.e. the fund that covers monetary losses resulting from unfulfilled or only partially fulfilled obligations arising from transactions carried out on the market). In addition, each SWX participant must provide a collateral deposit of at least SwF 500,000 at SegaInterSettle AG (SIS). This collateral covers compensation for possible monetary damages and serves as a guarantee for fines imposed by the exchange.
Assessment	Implemented.
Comments
Principle 30.	Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.
Description	Trades on SWX are settled via SIS. SIS also acts as a central security depository (CSD) and as an international CSD (ICSD). SIS has been authorized as a bank, and there are no special rules for the licensing of the settlement system. Eurex Clearing House is supervised as part of the exchange authorization process. German competent authorities supervise all other aspects related to Eurex Clearing. SIS is a wholly owned subsidiary of the Swiss Financial Services Group (53 percent is owned by Credit Suisse and UBS). It is supervised by the SFBC as a bank. SIS also provides a trade matching service; exchange matched transactions are communicated to SIS and settled by SIS as “locked in trades.” OTC transactions of SIS participants can be matched and settled in the SECOM system of SIS. The SWX settles trades on a T+3 basis. SIS provides for a simultaneous, final, irrevocable delivery-versus-payment real time gross settlement for Swiss franc transactions. Cross-border securities transactions are settled through custodians in the corresponding countries. In the Swiss system, securities lending transactions are not restricted. Short selling is permitted. Rules of conducts have to be fulfilled when client money or securities are involved. There are rules on the use of collateral in Swiss law. However, financial collateral is not fully insulated from insolvency procedures.
Assessment	Implemented.
Comments	Swiss regulations could be improved by providing for full insulation of financial collateral from insolvency procedures. Proposed new legislation on bank reorganization and liquidation would provide for the immediate enforcement of financial collateral in case of insolvency. Special rules on the licensing of clearing and settlement systems could also be introduced, since the business performed by entities such as SIS is not a typical banking business. Special requirements on capital adequacy, operation and supervision could strengthen the ability of the system to handle financial distress. Limit on cooperation with foreign supervisors may however affect proper supervision.

View Table

Table 4.

Detailed Assessment of Observance of the IOSCO Objectives and Principles

Principle 1.	The responsibilities of the regulator should be clear and objectively stated.
Description	According to Article 23 of the Federal Law on Banks and Savings Banks, of November 8, 1934 (as subsequently amended), the Swiss Federal Banking Commission (SFBC) is responsible for the supervision of banks, securities dealers, investment funds, stock exchanges, the disclosure of significant participations, and public takeover bids. Details are provided in the Federal Law on Stock Exchange and Securities Trading (SESTA) of March 24, 1995 (as subsequently amended) and in the Federal Law on Investment Funds (IFL) of March 18, 1994. The above-mentioned laws do not include regulation of primary markets and of some asset management activities. A recently established commission of experts has a mandate to draft an oversight regime for asset managers.
Assessment	Partially implemented.
Comments	The law sets out the responsibilities of the regulator—the SFBC. The scope of securities legislation, however, does not include all types of securities transactions or financial intermediaries and, as required by the IOSCO Objectives and Principles, regulation of primary markets. In particular, the jurisdiction of the SFBC does not include the regulation of (i) primary markets (details under Principle 14); (ii) asset managers or investment advisors who manage the assets of third parties only on the basis of powers of attorney, that is, they do not maintain accounts or security deposits in their own name for the account of these third parties; and (iii) closed-end funds.
Principle 2.	The regulator should be operationally independent and accountable in the exercise of its functions and powers.
Description	The Federal Law on Banking and Savings Banks (Banking Act) as supplemented by the Implementing Ordinance on Banks and Saving Banks of May 17, 1972 (as subsequently amended), establishes the procedure for appointing the members of the SFBC Board (the Commission), the mandate, and the incompatibilities. The Commission may consist of 7 to 11 members, appointed by the Federal Council (the Government), whose term is four years. The Federal Council appoints the Chairman and the Deputy Chairman (or Deputy Chairmen). The members need to be experts, presumably in the banking and securities field. The law establishes special incompatibilities for SFBC members. They cannot perform management functions or be chairman, vice-chairman, a delegated member of a board with executive responsibilities (or member of the executive committee of the board) of a bank, a fund manager, a stock exchange, a securities dealer, or a recognized auditing firm. However, SFBC members are allowed to perform other professional activities. The Federal Council, in consultation with the SFBC, appoints the Director and the Deputy Director of the Secretariat, and may remove an appointee in case of serious misbehavior. The Commission appoints the other employees. The Chairman of the Commission is responsible for handling general policy matters, running the Commission's meetings and supervising the Secretariat. The Chairman, as a general rule, does not get involved in the examination of individual cases. The Commission may delegate competences to the Secretariat and, in minor cases, can instruct the Secretariat to take decisions in its place. According to the relevant laws, the Secretariat is responsible for administrative and staff matters. It prepares the files for the Commission, makes proposals and implements the Commission's decisions. It carries out investigations and may deal directly with supervised entities. The decisions of the SFBC are subject to judicial review. The SFBC communicates with the Federal Council via the Federal Department of Finance. The SFBC must report annually to the Federal Council on its activities and must submit an annual report addressed to the Federal Assembly. The annual report is published. The Federal Council and the Federal Department of Finance may obtain special reports on demand. The SFBC has no budgetary independence and it is part of the central government budget. The SFBC's expenses are entirely covered by fees that are charged to institutions under its supervision. Proposals are under examination to grant the SFBC full administrative and budgetary independence from the Government.
Assessment	Partially implemented.
Comments	The SFBC does not appear to be fully operationally independent from the Government. Effective separation between the regulator and the government could be strengthened. The law could list in detail the cases when removal of the members of the Commission is possible. Currently, the law does not regulate in detail the procedure for the removal of the members of the Commission. The Commission's budget (see Principle 3 below) is part of the Federal Budget and therefore the SFBC has no budgetary independence. The Commission cannot deal directly with the Federal Council, and the intermediation of the Federal Department of Finance is necessary. The SFBC staff stresses that de facto the SFBC is independent, and that the Government has no legal basis to interfere with policy matters or individual decisions. Comprehensive rules on incompatibilities with professional activities could be established. The list of the forbidden activities is limited to certain managerial functions in supervised entities, and allows Commission members to perform other professional activities. If a conflict of interest arises in a particular matter, the member involved must abstain from participating and voting (the Federal Act on Administrative Procedure applies).
Principle 3	The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
Description	The SFBC has a staff of 115 (about 80 of which perform supervisory functions). There are no restrictions for SFBC staff to be employed by supervised institutions. The legal provisions applicable to Federal employees regulate the employment of SFBC staff, including their responsibilities. Civil liability claims cannot be addressed directly against the members of the SFBC or SFBC staff. The action must be brought against the Swiss Confederation. The private sector offers higher salaries, and SFBC staff is paid less than the staff of the SNB. The rate of staff turnover reached 18 percent in 2000. According to the law, the Commission, with the consent of the Federal Department of Finance, may deviate from the classification of a position in order to hire and/or retain particularly qualified personnel. The SFBC budget is part of the Federal budget; thus the use of resources must be approved by the Swiss Parliament. The SFBC, as part of the Federal Administration, is subject to audits by the Finance Control Office. The SFBC is funded through fees paid by supervised entities. The type and amount of fees are fixed in an ordinance issued by the Federal Council. Each authorized entity pays a basic fee and a turnover fee once a year. In addition, each time the SFBC issues a decision the concerned entity has to pay a decision fee. The SFBC is responsible for licensing securities dealers, investment funds, and exchanges. The SFBC powers can be summarized as follows. It can demand information and documents from (i) exchanges, institutions similar to exchanges, securities dealers, and investment funds; (ii) persons who hold a qualified participation in the capital of a stock exchange, a securities dealer or an investment fund; (iii) auditing firms; (iv) persons obliged to notify major holdings in listed companies; and (v) bidder and target companies subject to take-over regulations. The SFBC does not perform direct supervision on entities falling within its jurisdiction. Instead, it relies on external auditors, duly recognized, to perform front-line supervision of securities dealers, investment funds, and securities exchanges, that is, the SWX and Eurex Zürich. It maintains a list of auditors that are authorized to audit regulated financial intermediaries. The SFBC may issue supervisory orders requiring supervised entities to put an end to violations or other irregularities; suspend for a limited time all legal transactions and payments of (or due to) a securities dealer; bar the employees of a securities dealer from work (provisionally or for an unlimited duration). The SFBC may withdraw the license of a supervised entity. In cases where orders are not executed, the SFBC may take the necessary measures. The costs are born by the person or entity concerned. The SFBC, after having warned the concerned person, may publish its order and the fact that it was not complied with. According to the law, the SWX is responsible for regulating listed companies and supervising the market to detect market abuse practices. In case of suspicion, the exchange must inform the SFBC, which, in turn, can order the necessary investigations. The Takeover Board is responsible for administering takeover bids regulations. It refers violations and other irregularities to the SFBC.
Assessment	Partially implemented.
Comments	The independence of the SFBC in deciding about funding and resource allocation could be increased. The current process seems to be linked to decisions taken by the Government. Concerns have emerged about the ability of the regulator to retain skilled staff and reduce turnover. Furthermore, resources allocated to supervisory tasks seem to be inadequate given the size of the supervised securities and banking industry. The SFBC relies heavily on the front-line supervisory role played by external auditors. A more active involvement of the SFBC in direct supervision (including direct controls/on site inspections on the external auditors and their operations) would be advisable. The SFBC role in enforcing securities legislation could also be increased. Powers of investigation and enforcement in cases of market abuse (insider dealing and market manipulation) do not seem to be regulated in detail by the relevant legislation. The range of sanctions available to the regulator seems to be limited. The SFBC is working on a draft proposal (to be submitted to the legislator) that would broaden the set of available sanctions.
Principle 4.	The regulator should adopt clear and consistent regulatory processes.
Description	The SFBC consults extensively with the market before adopting new policies or new regulations. The legislation does not regulate formally this consultation process. Some regulations are drafted and proposed by professional associations (Swiss Bankers Association and Swiss Funds Association). If the SFBC approves the proposed regulation and endorses the proposed text, it makes the regulations binding. The decisions adopted by the SFBC are subject to judicial review. The SFBC does not organize investor education activities. The SFBC, however, publishes useful information on its website (http://www.ebk.admin.ch) and issues press releases, if necessary, to inform investors.
Assessment	Implemented.
Comments	It could be advisable, for the sake of transparency, to introduce formal rules on the consultation procedure with market participants and especially on the role played by professional associations. The issue of a possible conflict of interest when SROs and trade associations perform regulatory functions could also be addressed.
Principle 5.	The staff of the regulator should observe the highest professional standards including appropriate standards of confidentiality.
Description	The staff is subject to laws governing federal employees (including confidentiality obligations). Criminal provisions that punish misconduct by members of government agencies supplement these rules. The SFBC has also adopted a code of conduct that regulates financial transactions carried out by its members and employees. They must refrain from trading in securities issued by companies that are being supervised by the SFBC. There are no restrictions on future employment at supervised entities immediately after staff leaves the SFBC.
Assessment	Implemented.
Comments	Introducing restrictions on future employment, at least for senior officials, could be considered.
Principle 6.	The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, and to the extent appropriate to the size and complexity of the markets.
Description	According to the law, formally only securities exchanges can be SROs. However, there are other bodies with regulatory functions in Switzerland such as the Takeover Board. This organization, which is a Federal Commission, is in charge of supervising takeover bids. The trade associations can also play a role in regulating securities markets on a voluntary basis. According to the law, the exchanges/SROs are responsible for (i) regulating their members and admitting participants to trading (who have to be licensed broker dealers); (ii) supervising price formation, execution and settlement of transactions; and (iii) ensuring that the information necessary “to maintain a transparent market” is made public. Exchanges/SROs are also responsible for listing rules. The law (Article 9) requires the SRO to establish an independent Board of Appeal. The right of civil action is unaffected. However, the civil action may be undertaken only after internal procedures have been exhausted. Exchanges/SROs should refer to the SFBC any irregularities and breaches of laws or of exchange regulations. The SFBC shall order the necessary investigations. However, the SRO retains the power of sanctioning its members. Imposed fines are regulated by civil law (as part of the contractual agreement between the exchange and its members). Presently, the SFBC has authorized only the SWX Swiss Exchange (SWX) and Eurex Zürich AG to act as SROs. The SWX is a nonprofit organization established as an association (according to article 60 of the Swiss Civil Code). Members have no claims on the assets or profits of the association. The purpose of the association is to operate an electronic securities exchange, and it may carry out other activities with the goal of improving and promoting the Swiss financial market. The SWX Swiss Exchange is part of the SWX Group, which includes participation in Eurex (derivatives exchange); EEX (European Energy Exchange); Virt-X; STOXX (a joint venture that offers indexes based on industry groups) and EXFEED (financial data). The Takeover Board is in charge of administering the regulations on takeover bids. According to the law, the Board is an independent body, not a SRO. The Takeover Board is set up by the SFBC. The Board comprises representatives of securities dealers, listed companies and investors. The Board does not have the power to issue binding decisions but can make recommendations. If these recommendations are not complied with, the Takeover Board informs the SFBC, which has the power to issue decisions. The budget of the Takeover Board is financed by the Exchange. However, the Takeover Board “may levy fees on the offeror and the offeree companies.” The rules governing the activities of the SWX and of the Takeover Board must be approved by the SFBC. Professional associations—such as the Swiss Bankers Association (SBA) and Swiss Funds Association (SFA)—also play a role in drafting regulations and enforcing rules vis-à-vis their members. This role, however, is not formalized. Professional associations must report to the SFBC any serious irregularities committed by their members.
Assessment	Implemented.
Comments	The SFBC could play a more proactive and direct role in supervising the SWX, especially in the area of market surveillance and listing. In the area of admission to listing and supervision of listed companies, the role of the SFBC is to vet the rules (and the subsequent amendments) of the Exchange. On that occasion the SFBC may comment and ask for amendments. The SFBC is not responsible for the admission to listing of securities, nor for supervising the relevant disclosure obligations (initial, ongoing, and ad hoc disclosure obligations). The SFBC is still considering the regulatory treatment of ECNs or Alternative Trading Systems operated by authorized broker dealers or other entities for trading securities. For the sake of transparency and clarity in securities regulation, it might be advisable to regulate explicitly the regulatory functions performed by professional associations such as SBA and SFA.
Principle 7.	SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.
Description	The rules issued by the SWX (and the changes thereof) must be approved by the SFBC. The law sets the conditions for granting authorization to stock exchanges. For example, it mandates an internal organization that ensures the separation of certain functions, such as admission to listing, supervision, and management. The department responsible for listing admission must include representatives of issuers and investors. The SWX is governed by a Board of Directors; the general assembly of its members has a role in the approval of financial statements; ratification of the appointment of the members of the Board of Directors; removal of members of the Board for legally justified reasons; appointment of the auditors; approval of the annual membership fees; and decision on mergers, “de-mergers,” and dissolution. At least four of the members of the Board are representatives of the major banks. The SWX has implemented the required separation of functions. The Admissions Board is responsible for issuing listing rules and for deciding on listing applications. It is composed of twelve members; five are nominated by the Swiss Federation of Trade and Industry, and seven by the SWX Board of Directors. The supervisory responsibilities entrusted to the SWX Swiss Exchange are discharged by the Supervisory Department, which is established by the Board of Directors. The appointment of the Head of the Supervisory Department is subject to prior approval by the SFBC. The Appeals Board is composed of three independent members and three substitutes (designated by the Board). The organizational structure, the rules of the procedure, and the nomination of the members are subject to approval by the SFBC. SWX employees and directors are subject to professional secrecy obligations. The rules adopted by the Takeover Board must be approved by the SFBC. The Takeover Board can issue recommendations. If the addressee does not comply, the SFBC has to be informed. There is the possibility to appeal to the SFBC. Incompatibility and obligations to abstain from participating in deliberations and voting are included in the rules approved by the SFBC.
Assessment	Implemented.
Comments	Given that the SWX is largely dominated by a few large private institutions, strong supervision by the SFBC may be needed to ensure adequate protection of end-users and investors, as well as the policing of possible market abuse practices. The SFBC's reliance on an external auditor may not be sufficient to ensure proper implementation of the Principle. In fact, according to the Principle, the regulator should be able to perform direct supervisory functions and to adopt directly relevant measures, when deemed necessary. The SFBC argues that it can exercise direct supervision whenever deemed necessary to enforce the Securities Act.
Principle 8.	The regulator should have comprehensive inspection, investigation and surveillance powers.
Description	According to the law, the SFBC has the legal power to demand information from supervised entities. It may carry out on-site investigations. According to the dualistic supervision model (see also Principle 3), the front-line supervision—both routine supervision and special examinations—is, however, performed by external auditors. The auditors must carry out at least one inspection per year on supervised entities and may perform interim audits if necessary. The external auditor has the duty to verify whether a securities dealer has fulfilled its legal duties and has complied with the licensing conditions. This verification is detailed in a report addressed to the SFBC. If, in the course of the annual or interim audit, violations or other irregularities emerge, the auditors must ask the securities dealer to put an end to the said irregularities and set a time limit. If the deadline is not respected, the auditor has to inform the SFBC. If violations or irregularities appear to be serious (or criminal activities are involved), the SFBC must be informed immediately. Exchanges and investment funds are supervised in a similar way (see Principles 6 and 7). The external auditors also play a role in examining licensing applications. Similarly, the regulations on takeover bids require external auditors to examine the conditions of the offer and the prospectus before the relevant documents are submitted to the Take-over Board. The SWX (acting as an SRO) must supervise trading in the market, including monitoring for insider dealing or price manipulation. The SWX, however, is not entitled to obtain information on securities dealers' clients (i.e., those who ordered the execution of the relevant transactions). Violations discovered by the SWX must be notified to the SFBC. The SFBC orders the required investigations. According to Article 11 of SESTA, it can instruct the stock exchange, an auditing firm, or other qualified individuals to conduct those investigations. The SWX is also responsible for the listing of securities and the disclosure of relevant holdings in listed companies. It can ask the respective external auditor to perform certain examinations of its members and of listed companies. The legislative framework does not clarify in detail which investigative powers are available to the SFBC concerning individuals and entities that are not subject to licensing requirements or obliged by law to report to the SFBC. The law (Article 51.b of the ordinance implementing banking legislation) authorizes the SFBC Secretariat and the members of the Commission to hear witnesses when necessary. This mechanism can be used to question individuals or entities, including those that are unsupervised. In this case, requirements set out in the Act on Administrative Procedure are applicable. Nevertheless, the scope of investigative powers vis-à-vis unregulated individuals/entities committing violations of securities is not clearly regulated. In performing its activities (including investigations), the SFBC must adhere to the rules set out in the Law on Administrative Procedure.
Assessment	Implemented.
Comments	The powers conferred to the SFBC could be strengthened. The SFBC relies heavily on the front-line supervision of external auditors or other bodies such as the SWX. In the first instance, it is up to the external auditors to decide how, if, and when on-site verifications should be carried out (apart from the general obligation to produce a report once per year). The fact that the front-line supervisory authority (the SWX) cannot directly investigate the person or entity that transmitted the order could delay market abuse investigations. It might be more effective to concentrate all the investigative activities directly in the SFBC. The legislative framework could also clarify expressly which direct investigative powers are available to the SFBC with respect to individuals or entities that are not subject to prudential supervision. The SFBC should be entrusted with formal surveillance powers on external auditors. At present, the only sanction available to the SFBC is to withdraw the auditor's recognition. According to the law, this measure can be adopted only when an auditor acts in violation of regulations (“grossly violates its legal duties”). There are no other intermediate measures available to the SFBC. The SFBC is considering how the independence of the auditor—who is paid by the supervised entity—could be reinforced, including by introducing a rotating mechanism for auditors. In Switzerland, there are currently 11 recognized auditors. However, only the major auditing firms are likely to be able to supervise large securities dealers (or the SWX). The Expert Commission on Bank Auditing has issued recommendations on the use of auditors. This Expert Commission emphasized the need of a more direct involvement of the SFBC in the examination process and a quality assurance program for the external auditors. External auditor reports should be closely examined by the SFBC even if they do not identify any violation by the supervised entity.
Principle 9.	The regulator should have comprehensive enforcement powers.
Description	The SFBC has the powers to order supervised entities to put an end to breaches of securities legislation, correct misbehaviors, and restore a sound organization. In case of non-compliance, the SFBC can decide, after having warned the concerned entity, to disclose to the public the relevant facts. The range of sanctions available to the SFBC includes (i) withdrawing the license from securities dealers, stock exchanges, and investment funds; (ii) imposing trading restrictions on securities dealers; (iii) ordering the suspension of payments by (or due to) a securities dealer when creditors (or debtors) may be damaged; (iv) appointing an observer if a securities dealer's or investment management company's governing body proves incapable of properly performing its functions; and (v) withdrawing the recognition of external auditors. In other cases, the SFBC must report to the authorities in charge of administrative and criminal prosecution (Federal Finance Department or cantons). Notably, this occurs when (i) securities activities for which a license is required are performed without a license; (ii) notification requirements on the acquisition or sale of relevant holdings in listed companies are violated; (iii) the takeover bid legislation is violated; or (iv) professional secrecy obligations are breached. Insider dealing and market manipulation are punished as criminal offenses. These offenses can be prosecuted directly by the SFBC under administrative law if regulated persons or entities are involved. Sanctions available in these cases are those described in general terms above (i.e., withdrawal of a license, and other sanctions). If the SFBC becomes aware of possible criminal acts (by regulated or non-regulated individuals/entities), it has the obligation to notify the competent criminal prosecutor. The SWX (as SRO) can enforce its rules and can fine its members or listed companies. The following measures are available: reprimands; suspension of participants or traders; imposition of fines up to SwF10 million; suspension of securities from trading (or delisting). These measures are classified as civil law measures. Entities affected by a SWX decision may appeal directly to the Appeals Board of the exchange.
Assessment	Partially implemented.
Comments	The type and quality of sanctions available in cases of securities legislation violations is relevant in evaluating the soundness of a supervisory system. The range of sanctions available to the SFBC is confined to supervised entities and does not provide for a sufficient ladder of available sanctions. The withdrawal of the license is a decision that, probably, would be adopted only when substantial violations have been committed. Violations of conduct of business rules probably will be punished by a simple order to avoid such misbehaviors in the future. Market abuse behaviors, such as insider dealing and market manipulation, if punished under criminal law require the prosecutor to be able to prove the intent to violate the law (as well as other elements of the criminal conduct). Since in many cases it is difficult to achieve such a level of proof, it can be difficult to sanction these illegal activities. The fact that certain violations can be sanctioned only under criminal law may make enforcement less efficient. In most jurisdictions, administrative sanctions are commonly used in those circumstances. The SFBC is working on a draft proposal aimed at broadening and strengthening the sanctions that can be imposed directly by the SFBC, including the power to impose monetary penalties. This project should be supported.
Principle 10.	The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
Description	As discussed under Principles 8 and 9 above, the SFBC does not normally perform direct supervision. Typically, it gets directly involved when complaints are lodged or information is received from the auditors that warrant its intervention. The auditors normally decide about the type of auditing activity they perform on supervised entities. The SFBC may give instructions. Particular attention is paid to the supervision of large banking groups, which are also active in the securities field. The SFBC does not publish supervisory programs.
Assessment	Partially implemented.
Comments	The implementation of this principle depends on the comprehensive evaluation of the supervision and enforcement system discussed under Principle 8 and 9. There are ongoing discussions between the external auditors and SFBC staff (at least in the case of the large internationally active financial institutions). The system, however, could be improved by more direct intervention by the regulator. The recommendations by the Expert Commission on the use of auditors were mentioned under Principle 9. Supervision could be more focused on compliance with investor protection rules. The core of the supervisory efforts appears to be addressed to verifying the financial soundness of the supervised entities more than their behaviors towards customers. Investor protection rules could be strengthened, for example through better disclosure. In the context of asset management (at least the regulated part), more attention could be paid to potential conflict of interest issues and suitability rules. The SFBC is in the process of drafting guidelines on market conduct.
Principle 11.	The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
Description	The law regulates the exchange of supervisory information, cooperation and mutual assistance (domestic and cross border). The relationship between the SFBC and the external auditors, or among the SFBC, the SWX and the Takeover Board, are regulated in detail by laws and implementing regulations. The banking law and implementing measures provide for some cooperation between the SFBC and the SNB. Cooperation with insurance and/or pension funds regulators is not regulated, but there is some of cooperation, especially in the supervision of financial conglomerates. Exchange of information with foreign regulators is governed in detail by legal provisions. The law distinguishes two cases: (i) confidential information concerning supervised entities, and (ii) confidential information on clients of Swiss intermediaries (banks, securities dealers, funds). In the case of confidential information concerning supervised entities, the information can be transmitted only if the foreign supervisor (i) “uses such information exclusively for the purpose of direct supervision of the exchange and the trading in securities”; (ii) is bound by official or professional secrecy; and (iii) does not, without the prior consent of the SFBC or by virtue of a general authorization clause in an International Treaty, forward such information to competent authorities and to other bodies, which carry out supervisory functions in the public interest. Forwarding information to criminal authorities is only permitted in the context of agreements on mutual assistance in criminal matters. The SFBC decides in consultation with the Federal Office for Police Matters if the recipient authority can use the information in the context of a criminal procedure. For the sharing of confidential information concerning clients of a Swiss intermediary, in addition to the above criteria, further requirements must be met. In particular, requirements established in the Federal Act on Administrative Procedure must be fulfilled. In accordance with that law, the SFBC must issue an order to the intermediary and to the client before it passes the information to the foreign regulator. If the client does not consent, he/she can appeal to the relevant Court, and the SFBC cannot communicate the information to the requesting regulator until (and if) the Court permits it.
Assessment	Partially implemented.
Comments	The Swiss legislation in this area is not fully in line with IOSCO standards and international practice. According to IOSCO standards, relevant information must be exchanged among regulators, domestically and internationally, without restrictions. Administrative cooperation among regulators should not be subject to restrictions and delays imposed by judicial cooperation, such as the need to wait for a Court decision. According to IOSCO standards the exchange of confidential information is a pre-condition for ensuring proper functioning of securities markets and effective law enforcement. The regulator should be able to communicate all types of confidential information in its own right without being obliged to wait for a Court decision. At the domestic level, the legislation does not provide for full freedom to exchange information with all concerned authorities (including those responsible for insurance and pensions), especially when individuals are involved. At the international level, for the exchange of confidential information concerning clients of Swiss intermediaries, an intervention of the Court is necessary. It is up to the Court to decide whether the information can be transmitted or not, and there have been cases when the Courts have ruled against such communication. The SFBC has publicly recognized that the Swiss law does not allow adequate cooperation with foreign regulators. It announced the intention to submit a proposal for amendment to the Federal Department of Finance. Swiss law can have other undesirable implications for cross-border investigations. The client of a Swiss intermediary must be informed of being under investigation by a foreign authority. If the individual goes to court, the investigation is publicly disclosed in the court proceeding. As a result, other targets of the investigation can adopt measures to avoid prosecution. The dual criminality requirement may also not be fully in line with international standards. According to Swiss law, information on supervised entities or on securities dealers' clients may be communicated by the regulator in the context of a criminal procedure only if the conduct is also illegal under Swiss criminal law. If the foreign definition of the illegal conduct is broader, the Swiss authorities may withhold their consent to use the information in a criminal procedure. Therefore, the foreign regulator who according to its legislation is responsible for assisting in criminal or administrative sanctioning proceedings, cannot use the information.
Principle 12.	Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.
Description	The conditions for exchanging confidential information are established by law. According to the SFBC, therefore, there is no necessity for concluding memoranda of understanding (MOUs) between supervisory authorities. The SFBC has obtained declarations from supervisory authorities in 15 countries in which the relevant authorities commit to fulfill the conditions set out in Article 38 of the Federal Law on Exchanges and Securities Trading. Information can be transmitted to authorities in other countries with the previous consent of the SFBC. Consent from the Federal Police Office is necessary for the information to be used in a criminal procedure. Special agreements have been signed with regulators that are responsible for supervising exchange alliances, such as Virt-X and Eurex, or in case of remote membership.
Assessment	Partially implemented.
Comments	The restrictions on the international exchange of information and the procedures described under Principle 11 are applicable, irrespective of existing MOUs. Notwithstanding the special agreements for Virt-X and Eurex, the restrictions explained above under Principle 11 fully apply. This implies that if the U.K. or German authorities responsible for supervising the said regulated markets need information about clients of Swiss intermediaries (which are market members), they are subject to the rules described above. Therefore there is the danger that they are unable to properly enforce legislation against market abuse.
Principle 13.	The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.
Description	The SFBC can provide information to foreign regulators on license holders, brokerage accounts, and disclosure of relevant holdings in listed companies (information on listed companies is available from the SWX). Other types of information on non-supervised entities or activities are available if it is verified through an investigation that Swiss law has been breached. The SFBC is under no obligation, however, to provide assistance to foreign regulators. Foreign regulators can only perform on-site inspections (or joint inspections) for the purpose of consolidated supervision.
Assessment	Partially implemented.
Comments	In addition to the legal restrictions examined under Principles 11 and 12, the ability of the SFBC to gather information on behalf of a foreign regulator could be limited by the fact that certain securities transactions and activities do not fall under securities regulations. As expressly recognized in the answers to the self-assessment questionnaires, the SFBC is not in a position to provide assistance in the case of boiler rooms activities, and in the case of information concerning individuals, since the restrictions explained under Principles 11 and 12 fully apply.
Principle 14.	There should be full, accurate and timely disclosure of financial results and other information that is material to investors' decisions.
Description	Public offers on the primary market are outside the scope of securities regulation. Few articles in the civil code regulate the matter. Remedies available are also limited to civil law. Therefore, the SFBC does not have the power to verify that the information published is accurate, and that all information material to investors' decisions is disclosed. There is no oversight of offering procedures, and the SFBC does not have the power to stop or delay offerings that may be prejudicial to investors. Investors have to rely on civil law remedies, for instance, bringing suit against the issuer. In case of public offerings for the subsequent admission to listing, the prospectus is to be drafted according to listing rules and once listed, the issuer is subject to supervision by the relevant SRO. The listing admission process falls within the jurisdiction of the exchange/SRO (the SWX). The rules are drafted by the SRO and must be approved by the SFBC (on the Admission Board of the SWX, see under Principle 7). Listing rules, which according to SFBC staff are in line with the European Listing Directives (79/279/EEC and 80/390/EEC), provide for initial, ongoing, and ad hoc disclosure requirements. Initial disclosure requirements include the obligation to publish a prospectus. However, the SWX allows securities to be listed without a Swiss prospectus if they have been previously listed on an official exchange recognized by the SWX. Under the listing rules the issuer must disclose all material information relevant to investors. The information must be presented in a way that is not misleading to prospective investors. However, the rules on the minimum content of the prospectus differ according to the type of securities (shares, bonds, derivative products), the type of issuer (large company, small cap, start up, high tech), and the segment of the market where the securities are traded. In case of small caps or start ups, additional information is required, as the SWX holds the view that more detailed information is necessary to allow investors to make informed investment decisions. As regards ongoing disclosure requirements, issuers of securities admitted to trading on the SWX must publish annual reports. Share issuers must also publish interim reports (on a semi-annual basis). Issuers listed in the SWX New Market segment have to provide quarterly reports. The SWX reviews the annual and interim reports. As regards ad hoc disclosure requirements, according to listing rules the issuer must inform the market of any not-publicly known fact that may result in “substantial” movements in the price of the securities. The issuer may postpone or omit disclosure if (i) the new facts are based on a plan or decision of the issuer, and (ii) its dissemination is liable to prejudice the legitimate interests of the issuer. Special rules deal with disclosure of shareholdings in listed companies. An owner who, directly, indirectly, or in concert with third parties, acquires or sells for his own account equities that represent certain threshold levels of the voting rights in a company listed in Switzerland must notify the company and the stock exchange where the company is listed. The SWX can refuse the admission to listing or can impose conditions that need to be met by the issuer before the securities can be traded. Sanctions can be imposed for violations, including reprimands, financial fines, suspension from trading, and delisting.
Assessment	Partially implemented.
Comments	According to the IOSCO Principles, securities regulation should include the primary market. The regulator should have the power to require (and enforce) the disclosure of all information material to investors' decisions. The regulator should also have the power to delay or stop an offer if investor protection is jeopardized. The relevant articles in the Civil Code do not require the issuer to comply with internationally accepted disclosure standards—see IOSCO Principles (chapter 10.4) and IOSCO International Disclosure Standards for Cross-Border Offerings and Initial Listing for Foreign Issuers. Since the primary market is not subject to supervision, the SFBC's (or the SRO's) powers do not extend to issuers that do not subsequently list on an exchange. From a legal viewpoint, also in the case of subsequent listing, the issuer will be subject to SRO obligations only in connection with listing. The SFBC does not have direct supervisory powers on listed companies. The responsible authority is the SRO (the SWX).
Principle 15.	Holders of securities in a company should be treated in a fair and equitable manner.
Description	Shareholders' rights are regulated under ordinary company law. According to company law, preferential voting treatment can be provided for certain categories of shares. There are no specific rules on corporate governance dealing with the rights of minority shareholders. The SWX has recently issued a consultative paper on good corporate governance practices, which focuses only on disclosure matters and proper conduct by board members, but does not cover rules on minority shareholders' rights (i.e., appointment of independent directors, members of the internal auditing committee of issuers) and collecting and exercising proxies. Only judicial authorities are responsible in case of appeals against decisions adopted at the shareholders' meeting. As described under Principle 14 above, there are rules obliging those who intend to acquire or to sell major holdings in a listed company to disclose their holdings. Also, rules exist on take-over bids applicable to Swiss companies whose shares are listed on a Swiss stock exchange. The law, however, applies only on a voluntary basis. In fact, according to Article 22 of the Federal Law on Stock Exchanges and Trading in Securities of March 24, 1995, a company may add to its by-laws, under specific conditions, even after having been admitted to listing, a provision that eliminates the obligation to launch a mandatory offer by those who intend to acquire the control of the company (the threshold is set at 33.3 percent). The only condition, in this case, is that the existing shareholders are not adversely affected. The Takeover Board may grant derogation in specific cases listed in the law. The offeror must publish the content of the offer and a prospectus containing all the relevant information. A recognized auditing firm must examine the bid prior to its publication to verify that the offer is in compliance with the relevant laws. The Board of Directors of the target company must issue a report on the proposed offer. After the publication of the offer and before the closing of the procedure, the Board of Directors of the target company must not adopt resolutions or acts that would significantly alter the assets and liabilities of the company. No restrictions are provided for decisions adopted by the shareholders meeting. These decisions may be executed irrespective of when they are adopted (prior or after the publication of the bid).
Assessment	Partially implemented.
Comments	The SFBC has limited competence in ensuring shareholder protection. The fact that a company may choose whether or not to be subject to takeover bid rules seems to be at odds with the IOSCO Principle, which requires that shareholders should be treated in a fair and equitable manner. The fact that it is stated in the by-laws that the law on mandatory take-over bids is not applicable does not ensure adequate investor protection. It simply means that the investor may know it. The legislative framework does not deal with the collection and use of proxies.
Principle 16.	Accounting and auditing standards should be of a high and internationally acceptable quality.
Description	The SFBC is not responsible for ensuring the quality of accounting or auditing standards. Professional bodies set accounting standards for issuers. The accounting standards employed in Switzerland are contained in the Swiss Accounting and Reporting Recommendations (ARR) drawn up by the Commission for Accounting and Reporting Recommendations. This Commission is an independent foundation. There is no supervisory body for the ARR. According to the Federal Law on Stock Exchanges and Trading in Securities, for listing purposes “the stock exchange shall take into account internationally recognized standards.” The SWX, via listing rules, can require supplementary information or the application of different standards. According to the existing listing rules, the SWX—depending on the market segment—accepts financial statements drafted according to FER/ARR, IAS, US GAAP as well as financial statements of foreign companies prepared in accordance with the standards of their home countries. The SWX, in performing its supervisory functions, is advised by a panel of experts. The SWX may sanction listed companies that fail to report properly (i.e., who omit material information in their reports). The sanctions available include reprimands, fines, public disclosure of the violation, or deregistration. Auditors are not required to follow a published set of generally accepted auditing standards. However, the Swiss Institute of Certified Accountants and Tax Consultants (SICATC) publishes a set of standards. Members of SICATC are required to follow its standards. Auditors do not need to be approved or licensed except if they audit banks or securities dealers. However, auditors of listed companies must possess professional qualifications as defined by federal regulation and have to be registered with the SWX. Accountants who have passed an examination by the SICATC can be considered as “specially qualified” for auditing listed companies. Ongoing professional educational requirements and reviews to ensure that audit standards are applied properly are provided by SICATC for its members. Affiliation with the Institute is voluntary.
Assessment	Partially implemented.
Comments	The legislation in this area does not provide for a direct involvement of the SFBC in mandating and enforcing the application of international accounting standards. The SRO (the SWX), which is responsible for listing, accepts financial statements drafted according to defined principles. It is not empowered to check the contents and the quality of the principles. It does not have any input in standard setting bodies and is not involved in direct supervision of the auditors (it cannot sanction the auditors). The possible use of different accounting standards may affect the capability of the investors to compare (and properly evaluate) financial results of listed companies. There are no general mandatory requirements for qualifying individuals as accepted auditors of listed companies. There is no general supervisory system. Different bodies and entities are involved. Various assessments, including on an ad hoc basis, seem to be possible. There is no mandatory affiliation to a professional body. Violations of rules may entail different consequences depending on whether or not the auditor belongs to a professional association. The SFBC should ensure that in all cases (not only for financial institutions) the relevant accounting and auditing principles are of high and internationally accepted quality. Improvements in the supervision and enforcement of auditing standards are recommended, including the strengthening of auditors' independence.
Principle 17.	The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.
Description	The Investment Funds Act of 1994 establishes the requirements for operating collective investment schemes in the form of the open-ended contractual type. Closed-end funds are not included in the scope of the law and are not subject to prudential supervision. However, if closed-end funds are admitted to listing, they are subject to disclosure obligations according to the relevant listing rules. This law is inspired by the EC Directive on UCITS (85/611/EEC), and it requires that the asset management companies be set up as independent entities whose sole business is to manage assets belonging to collective investment schemes. The assets belonging to each fund must be segregated and held in a bank (the custodian bank). Fund management companies are legally, personally, and functionally segregated from custodian banks, and their executive managers must be independent of each other. However, fund management companies are often subsidiaries of custodian banks. Custodians that check compliance with the fund's regulations normally belong to the same group (see below). The large financial institutions (UBS and Credit Suisse Group) dominate the fund business. The law is supplemented by the Investment Fund Ordinance and by the Code of Conduct of the Swiss Funds Association that has been endorsed by the SFBC. There are three type of funds: (i) securities funds (UCITS) with a traditional risk profile; (ii) other funds, including funds that have traditional risk profiles but that are not securities funds, and funds bearing special risks not comparable with securities funds' risks (including financial and commodity derivatives funds, and hedge funds); and (iii) real estate funds. Fund management companies must be authorized by the SFBC. A fund's rules, which must be submitted to the SFBC for approval, must contain, inter alia, provisions concerning investment policy (expressly mentioning special risks), calculation of issue and redemption prices, distribution of profits; managers' compensation, and fees and expenses. To be authorized, a company must fulfill capital adequacy requirements, and the executive management be fit and proper. Professional experience to perform the duties is required in all cases; but only in the case of special risk funds, at least two executive managers must possess thorough training in the field of the contemplated investments and have at least five years of business experience. The same persons cannot be managers of the fund management company and of the custodian bank. The names of those who, by virtue of the participation in the capital of the fund management company, are in a position to influence directly or indirectly the business activity of the company, must be notified to the SFBC. The management company must also possess an appropriate organizational structure. Termination or winding down of a fund must follow principles provided for in the law. Persons in charge of selling funds to the public must be authorized. Foreign funds must appoint a representative in Switzerland. The fund management company, the custodian bank, and affiliated parties and agents must operate in the exclusive interest of the unit holders. General principles have been established in the law and the implementing regulations. Detailed requirements are included in the Code of Conduct issued by the Swiss Funds Association and endorsed by the SFBC. The fund management company must maintain separate records for each fund it manages. Transactions must be recorded immediately after they are entered into in accordance with the principles of orderly book-keeping. There are no disclosure obligations concerning non-arms-length transactions. However, these transactions are allowed at market prices only, and best execution should be ensured. Securities lending activities are regulated in detail by the SFBC, may be carried out through banks, brokers, insurance companies or securities clearing organizations, and must always be settled through the custodian bank. The fund management company normally does not register the name of the unit holders, and the units are issued in bearer form. However, those in charge of marketing units issued by investment funds are obliged to fulfill the legislation on anti-money laundering and to identify the customer. The SFBC may withdraw the authorization if the fund does not comply with the relevant regulatory provisions. It may issue orders to correct irregularities and may appoint an observer (in the case the company is unable to fulfill its duties). Within one year, the observer must report to the SFBC. The supervision model for investment funds follows the same approach as for banks and securities dealers. External auditing firms examine compliance with the regulatory standards. They also examine whether the authorization requirements are fulfilled. Once the fund management company has been authorized, the auditing firm must verify compliance with the relevant legislation as well as with the Code of Conduct (including areas where conflict of interest may arise). There is no maximum term for the auditors. Breaches or irregularities must be notified to the SFBC, which, if necessary, will take further actions. The fund management company must, in any case, notify the SFBC of changes in (i) members of the board of directors or those who are responsible for managing the company; and (ii) persons possessing directly or indirectly at least 10 percent of the capital or voting rights or who can influence directly or indirectly the business activities of the fund (including persons acting in concert).
Assessment	Implemented.
Comments	Comments on the delegation of front-line supervisory responsibilities to external auditor apply (Principles 8, 9 and 10). In the case of collective investment schemes, however, the custodian bank, as an additional entity, has to verify that the fund managers behave correctly in the interest of investors. However, normally the custodian belongs to the same group as the fund management company. Improvements could be introduced in the area of disclosure of transactions that are not arms-length.
Principle 18.	The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.
Description	According to the law, the management company must be a limited company with its registered office and principal place of administration in Switzerland. The fund must be created as a contractual fund (i.e., unit trust type). As far as foreign funds are concerned, the definition is broader and includes any type of pool of assets or SICAV-type funds (money market funds). The assets of a fund have to be segregated and they must be entrusted to a separate entity (the custodian bank). It is the responsibility of the custodian bank to ensure proper segregation. The custodian must be a licensed Switzerland-based bank. It is required to appoint a special officer responsible for discharging the custody function vis-à-vis the SFBC and the external auditors. In addition to ensuring the safekeeping of the fund's assets, the custodian bank must perform certain control functions, including verifying compliance with the fund's by-laws and other regulatory requirements, in particular in respect of investment decisions, calculation of the value of the units, and appropriation of income. The segregation principle is observed also in the case of bankruptcy procedures. Creditors of the management company do not have a claim on the fund's assets. In case of misbehavior of the asset management company or of the custodian, the SFBC may order to appoint a new custodian bank or to wind down the fund. It may also refer the case to the Federal Ministry of Finance or to the public prosecutor. Investors may sue the fund for compensation. The SFBC may ask that in case of class actions, unit holder representatives be allowed to participate in the procedure.
Assessment	Implemented.
Comments
Principle 19.	Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor's interest in the scheme.
Description	The law requires the fund management company to publish a prospectus for each fund that it manages. The prospectus must contain the fund rules and all other information required by the standards issued by the Swiss Funds Association and endorsed by the SFBC. The prospectus should highlight the nature of the fund and the instruments in which it can invest. Special requirements are applicable to risky funds such as hedge funds and derivative funds. The prospectus (and the subsequent amendments) must be submitted to the regulator. The SFBC does not approve the prospectus prior to its publication but can veto its publication. The SFBC may ask for the publication of additional information or amendments. The prospectus must be offered free of charge to the investor prior to entering into an agreement. The fund management company, for each fund it manages, is also required to publish annual as well as half-yearly reports. Advertising material is not subject to the same disclosure requirements as the offering materials (prospectus), but it has to refer to the offering material and indicate where the prospectus is available. Changes to the fund rules must be submitted to the SFBC for approval. If approval is granted, the investors are notified and they have the right to raise objections. If this is the case, the SFBC must refer the matter to the relevant judicial authority.
Assessment	Implemented.
Comments
Principle 20.	Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.
Description	The Swiss Funds Association has issued “guidelines on the calculation of net asset values and the handling of valuations errors,” which have been endorsed by the SFBC. According to Articles 48 par.1 and 49 par. 2 and 3 of the Investment Funds Act, the assets must be valued at their market value. To ensure uniform implementation of this requirement, the Swiss Funds Association has issued the above guidelines. If the shares are listed, market value refers to the last price paid. The assets are marked to market at the end of the accounting year and at the end of each day in which units are issued or redeemed. External auditors monitor net asset calculations. The price is disclosed whenever fund units have been issued and/or redeemed, at least twice a month in at least one daily or weekly newspaper. In practice, most funds calculate and publish their prices on a daily basis. Moreover, data are published on the SWX website (http://www.swx.ch). The SFBC, exceptionally and in the interest of investors, may suspend the redemption of fund units. Funds may stipulate rules covering special circumstances such as the closing of relevant markets, restrictions on foreign currency transactions, or extraordinary high volumes of redemptions. Although there is no prior approval requirement, the management company must communicate its decision without delay to the auditors, the SFBC, and the investors.
Assessment	Implemented.
Comments
Principle 21.	Regulation should provide for minimum entry standards for market intermediaries.
Description	The law as supplemented by the implementing ordinance establishes the main criteria for authorization of securities dealers. According to the law, there are five categories of securities traders: (i) securities traders for their own account (with gross turnover that exceeds SwF 5 billion per year); (ii) issuing houses, which offer securities on the primary market; (iii) institutions dealing in derivatives, which issue and offer derivative products to the public on the primary market; (iv) market makers, which trade on their own account and quote prices to the public for certain securities; and (v) securities traders on behalf of the customer. To be included in the latter category, additional criteria have to be met. For example, the trading must be done on a “professional basis” (meaning that it is an independent economic activity directed at achieving regular revenues—which is presumed if the trader directly or indirectly maintains accounts or securities deposits for more than 20 customers). Entities subject to prudential supervision, shareholders or partners with a significant participation in the securities dealer's capital, and other institutional investors are not considered “customers.” Therefore, securities dealers who provide services to these entities do not need to be authorized and supervised. The above-mentioned categories of securities dealers must obtain a license from the SFBC. The license—although by its nature universal—is granted for the proposed activity and category in order to meet the specific organizational set-up needed for that activity. Specifications on the activities carried out by the intermediary can be found in the by-laws. Amendments to the by-laws have to be submitted to the supervisory authority. Banks wishing to trade on securities markets must be licensed as securities dealers. A securities dealer license is always required to operate directly on stock exchanges (in Switzerland or abroad). Individual portfolio management is not considered as a regulated activity. It does not fall under any of the five above-mentioned categories and therefore no authorization from the SFBC is required. However, an asset manager must not maintain accounts or securities deposits in his or her name and on behalf of customers. Asset managers are only subject to anti-money laundering legislation and supervision. Licensing requirements are established in the law as supplemented by the relevant implementing ordinances and circulars. The SFBC may authorize as securities dealers individuals, partnerships, or corporations. A license is granted to the firm as such; employees are not individually licensed. However, during the licensing process, the SFBC assesses the fitness and propriety of senior management. Personnel authorized to trade on stock exchanges must fulfill the professional requirements contained in the rules of the exchanges. In case of corporations, the SFBC also assesses the propriety of major shareholders (above 10 percent of capital) and changes in major shareholding have to be notified to the SFBC. The securities dealer must demonstrate to possess an internal organization that ensures proper management. There is no deadline for the licensing process in the securities law. However, the general law on administrative procedures provides for a 90-day deadline. For the purpose of verifying the applicant's information, the SFBC does not carry out direct investigations, and relies on a detailed report by an external auditor. In practice, the formal licensing process (i.e., submission of a formal request) is normally preceded by an informal consultation between the applicant and the SFBC in order to ensure a smooth processing of the request. If the applicant fulfills the criteria spelled out in the legislation, the license is granted. The SFBC has the power to suspend or revoke the license and to impose remedial action on the intermediary. Denial of a license is subject to an appeal to the Swiss Federal Court. The SFBC publishes the list of authorized intermediaries on its website (http://www.ebk.admin.ch).
Assessment	Partially implemented.
Comments	Earlier comments on the lack of prudential regulation for asset managers (see Principle 1) and on the role of the external auditors are relevant (see Principles 8, 9 and 10). There seems to be a regulatory gap for dealers who trade on their own account (below the threshold of SwF 5 billion) or dealers who provide services to qualified professional investors only. According to the SFBC, these dealers do not constitute a threat for the stability of the system and do not raise investor protection concerns. Therefore, they do not warrant prudential regulation. However, these dealers must be authorized to trade directly on the SWX or on any other exchange. As mentioned earlier, an expert commission is currently drafting legislation for prudential oversight for asset managers and investment advisors.
Principle 22.	There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.
Description	All supervised intermediaries are required to possess a minimum initial capital. It is a flat amount applicable to all securities dealers and has to be paid in full. If the dealer is not incorporated or it is a partnership, the initial capital can be replaced by a guarantee on the private account of the dealer or partner (in this case a declaration by the owners of the account stating that their claims will be subordinated, is necessary). The SFBC may also authorize the intermediary to deposit collateral up to the amount of the required initial capital. Detailed requirements are provided for capital. The SFBC takes into account credit and market risk (mirroring requirements in the banking area). The SFBC has some discretion in modifying capital requirements in individual cases. Monitoring is carried out by external auditors. The securities dealers have to report to the SNB on a quarterly basis and have to provide consolidated semi-annual reports. External auditors are obliged to report as soon as losses reduce the capital by 50 percent. The SFBC may demand remedial measures from the firm concerned and can order the closure of the intermediary and its liquidation.
Assessment	Implemented.
Comments
Principle 23.	Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.
Description	Swiss regulation contains requirements on internal organization and Chinese walls. Measures to prevent conflict of interest and to ensure a proper management of conflict have to be in place. An internal audit function is required. However, small firms may outsource this function (normally to the internal auditor of the parent company). Record keeping and separation between customer assets and firm assets are required. The anti-money laundering law stipulates rules on the identification of the customer and, if required, the beneficial owner (see the assessment of anti-money laundering practices). It seems to be common practice to tape phone conversations between traders and customers. A written contract with the client is the normal practice. However, it is not mandated by law. Guidelines of the SBA require a written contract in the case of asset management, which, however, is not included under securities activities according to categories set out by SESTA (see Principle 23 above). The securities dealer must implement conduct of business rules, including, according to the law, a duty to provide information to the customer, a duty of care, and a duty of “loyalty.” The business experience and the specialized knowledge of the customer should be taken into account. The principles established by the law have been supplemented by the SBA rulebook. This Code has been endorsed by the SFBC and has become mandatory for all securities dealers. The comparison with the conduct of business principles listed in the IOSCO Principles shows that certain areas such as the obligation to ask customers for information on their financial situation and the investment objectives are not covered by the Swiss conduct of business rules. There are no special requirements concerning customer suitability tests. The risk profile of the customer seems to be analyzed only when the intermediary provides additional individual investment advice. There are no rules concerning the obligation to disclose conflict of interest situations (the code of conduct rule book provides only for an ex post disclosure). In the case of risky products, a risk disclosure statement must be offered to the client. The risk disclosure statement is drafted according to standard models. Furthermore, normally securities dealers use standard forms where the customer acknowledges that he/she is aware of the risks involved in the transactions. The conduct of business rules must be applied also in the case of online provision of services. There are no particular rules applicable to proprietary trading activities under securities dealer regulations. Electronic trading systems could be regulated by the SFBC as organizations similar to exchanges.
Assessment	Partially implemented.
Comments	Conduct of business rules could be supplemented by SFBC instructions to ensure a higher degree of investor protection (especially in the area of suitability tests and the disclosure of conflict of interest). The conduct of business rules could also include rules aimed at ensuring market integrity. Rules concerning the identification of clients and beneficial owners are discussed in the anti-money laundering assessment.
Principle 24.	There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.
Description	The SFBC may order an intermediary to take remedial actions; it may appoint an observer, or order the transfer of client assets to another intermediary. Winding down procedures for supervised institutions are regulated, except for few exceptional rules, by general bankruptcy law. The SFBC may order the liquidation of an institution, can withdraw its license and prohibit the making and receiving of payments. The SFBC, however, does not have the power to issue orders to protect the institution and insulate it from creditor actions. This power belongs to the cantonal courts. Winding down procedures involving international groups may involve coordination with responsible foreign regulators. However, the recognition of insolvency measures imposed by the foreign regulator will be decided by the relevant courts.
Assessment	Implemented.
Comments	A new draft bill is under consideration that would introduce more specific rules for regulating the failures of financial intermediaries (banks, securities dealers).
Principle 25.	The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.
Description	An exchange, according to Swiss law, is an organization which is set up for the purpose of securities trading and which enables the simultaneous exchange of offers of securities among a number of securities dealers, as well as the execution of transactions. The SFBC is responsible for licensing exchanges or for granting exemptions from the obligation to register as an exchange when certain criteria are met. It is up to the Federal Council to define such criteria. Exempted trading systems are not subject to prudential supervision. There is an ongoing debate within the SFBC about the type of treatment to be accorded to electronic communication networks (ECNs). A decision whether to grant ECNs an authorization as securities dealers or as organized trading markets has not been taken. So far, the SFBC has authorized as exchange the SWX Swiss Exchange and Eurex Zürich AG (which both act as SROs). An exemption from the obligation to register as an exchange has been granted by the SFBC to the International Securities Markets Association (ISMA), which has been authorized as an “institution similar to a stock exchange.” The SWX operates different market segments, including small caps and fast growing equities (New Market); investment funds; corporate and government bonds, including Eurobonds and warrants. Since the second quarter of 2001, the SWX is part of a joint venture operating the UK-regulated market Virt-X. As a result, the trading of Swiss blue chips (SMI segment) takes place exclusively on Virt-X. The SWX has maintained its responsibilities as a listing authority. Securities dealers admitted to trading on the SWX are automatically admitted to trade on Virt-X. Eurex, which is a 50-50 joint venture between the SWX Group and Deutsche Börse, is one of the largest derivatives markets in the world. The SFBC is responsible for the authorization of Eurex Zürich AG. Special arrangements are in place for the supervision of Eurex. There is continuous cooperation between the Swiss and the German market surveillance departments. In addition, the Eurex Zürich surveillance team and the SWX team cooperate within the same surveillance office in Zurich. Notwithstanding this close cooperation, exchange of confidential information must take place according to relevant rules on administrative assistance. To be licensed, an exchange must demonstrate that its rules and internal organization are appropriate for fulfilling its tasks. The managers responsible of the exchange are subject to a fit and proper test. Minimum capital requirements are not a condition for authorization. The exchange must submit its rules and any subsequent amendment to the SFBC for approval. The rules can be approved only if they guarantee transparency and equal treatment of investors, and ensure a smooth functioning of the exchange. There is no obligation to subject the owner of the system to a fit and proper test (such as for securities dealers and fund management companies). However, the SFBC interprets its mandate such that it is allowed to inquire about the ownership of an exchange (even if this is not formally provided for by law). Once authorized, an exchange is responsible for supervising compliance with its own rules. The stock exchange can admit members to trading only if they are licensed by the SFBC as securities dealers. The exchange notifies the SFBC in cases when it receives requests from foreign securities dealers. Foreign dealers may be admitted to trading on Swiss exchanges only if the responsible foreign regulator confirms to the SFBC that they do not object, that the foreign dealers are properly supervised, and that the foreign regulator is in a position to offer administrative assistance. The SWX distinguishes between members and participants. The members are also the associates and must be Swiss securities dealers. Participants, which include the members, are all dealers that are admitted to trade on the trading platform (including remote members). The exchange, in order to be authorized, must maintain separate functions for admission to listing and supervision (see Principles 7 and 8). Channeling of orders via order routing systems installed with third parties is possible only with the prior agreement of the SWX. The authorized exchange is responsible for maintaining relevant audit trails of all transactions carried out on its trading platform. Over-the-counter (OTC) transactions in listed securities must be reported to the SWX. According to its rules, the SWX may ask participants for information deemed necessary for its investigations, and it may require the auditors of the participant to verify compliance with SWX rules. However, the SWX is unable to ask for the name of the beneficial owner of a transaction carried out on its system. The SFBC can ask the intermediaries to provide that information without restriction, however the SFBC can communicate this information to foreign supervisory authorities only if the client agrees. If the client does not agree, a judicial procedure may be initiated (see Principles 10 and 11). Moreover, there are restrictions on the permissible use of information (see above).
Assessment	Implemented.
Comments	As far as the supervision of the exchanges is concerned, remarks on the use of external auditors (see Principles 7 to 10) apply. However, the SFBC can exercise direct supervisory functions whenever deemed necessary to enforce the Securities Act. Comments made earlier on the exchange of information under Principles 11 to 13 apply.
Principle 26.	There should be ongoing regulatory supervision of exchanges and trading systems, which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.
Description	The SFBC does not monitor a securities exchange directly. The authorized exchange must appoint an external auditor (chosen among those recognized for auditing securities dealers). The auditor must verify annually whether the stock exchange has fulfilled the relevant regulations. Every year, the auditor must submit a report to the Board of Directors, the surveillance department, and the SFBC. The SFBC may withdraw authorization of an exchange that no longer fulfills the authorization requirements, or has serious breached the rules. Before withdrawing the authorization, the SFBC may order the exchange to undertake remedial actions. The SWX is a fully electronic order-driven trading system. Orders are matched based on price-time-priority criteria. According to SWX rules, all traders are granted an equal treatment: all of them have the same access to the system; data transmitted by the system are available to all participants simultaneously; participants' entries are processed according to entry timing; pricing is made in accordance with the same SWX matching rules. In the main market segment, participants are free to act as market makers if they wish. In the New Market segment (small caps), the presence of a market maker for each listed security is mandatory, and it is a precondition for the listing.
Assessment	Implemented.
Comments	Earlier comments on external auditors discussed under Principles 8 to 11 apply.
Principle 27.	Regulation should promote transparency of trading.
Description	The Law on Exchanges and Securities Trading requires an authorized exchange to ensure proper transparency of trading. According to SWX rules, the following data must be published: prices, volumes and timing; best bid and ask prices (with the relevant quantities); and total volumes and data related to reported off-exchange transactions. The public must also be informed when relevant interventions (such as non-opening, interruption, and suspension of trading) have occurred. Market traders are entitled to receive, on a continuous basis, the following information: all bid and ask prices with the correspondent quantities, all reported off-exchange transactions, and all indications of interests.
Assessment	Implemented.
Comments
Principle 28.	Regulation should be designed to detect and deter manipulation and other unfair trading practices.
Description	Swiss law, including criminal law, prohibits market manipulation and other unfair trading practices. Responsibility for prosecution lies with competent criminal authorities. Guidelines of the SBA forbid certain practices such as front running. The SFBC is working on a circular on conduct of business rules for market integrity. The exchange/SRO must ensure continuous market monitoring. The Supervisory Department of the exchange reports relevant findings and ongoing investigations to the SFBC. The Supervisory Department may ask the participants' auditors to investigate on its behalf. In case of non-compliance or irregularities by a participant, the exchange/SRO may impose limitations on future trading, revoke trading privileges, and suspend the participant from trading. The court of arbitration settles disputes between participants and SWX, and disputes among participants arising from participation. Where appropriate, the internal remedies available at SWX (Disciplinary Commission, Appeals Board) shall be exhausted before regress can be sought at the court of arbitration.
Assessment	Implemented.
Comments	The principle can be implemented at national level. However, limitation on the ability of the SFBC to exchange information about clients could affect proper supervision of other markets. See Principles 11 to 13 for remarks about international cooperation.
Principle 29.	Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.
Description	There are no specific rules for the supervision of large exposures of market participants and their clients. In particular, the exchange/SRO is not entitled to ask for the name of the customers. The rules of the exchange must include procedures for dealing with emergency situations and spell out default procedures. In cases of emergency, the SWX may take the necessary measures, including delaying the opening of trading in a given security, interrupting or suspending trading, as well as delisting securities. It may also decide to suspend rules or regulations in whole or in part, temporarily replace them, or suspend trading altogether. In the event of system failure, the SWX is responsible for providing mechanisms to continue trading until normal conditions are restored. Procedures for the deletion of orders in emergency situations are available. In special cases, participants must issue settlement instructions directly to the clearing organization. Similar provisions are applicable to Eurex. Market participants must join the market solidarity fund (i.e. the fund that covers monetary losses resulting from unfulfilled or only partially fulfilled obligations arising from transactions carried out on the market). In addition, each SWX participant must provide a collateral deposit of at least SwF 500,000 at SegaInterSettle AG (SIS). This collateral covers compensation for possible monetary damages and serves as a guarantee for fines imposed by the exchange.
Assessment	Implemented.
Comments
Principle 30.	Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.
Description	Trades on SWX are settled via SIS. SIS also acts as a central security depository (CSD) and as an international CSD (ICSD). SIS has been authorized as a bank, and there are no special rules for the licensing of the settlement system. Eurex Clearing House is supervised as part of the exchange authorization process. German competent authorities supervise all other aspects related to Eurex Clearing. SIS is a wholly owned subsidiary of the Swiss Financial Services Group (53 percent is owned by Credit Suisse and UBS). It is supervised by the SFBC as a bank. SIS also provides a trade matching service; exchange matched transactions are communicated to SIS and settled by SIS as “locked in trades.” OTC transactions of SIS participants can be matched and settled in the SECOM system of SIS. The SWX settles trades on a T+3 basis. SIS provides for a simultaneous, final, irrevocable delivery-versus-payment real time gross settlement for Swiss franc transactions. Cross-border securities transactions are settled through custodians in the corresponding countries. In the Swiss system, securities lending transactions are not restricted. Short selling is permitted. Rules of conducts have to be fulfilled when client money or securities are involved. There are rules on the use of collateral in Swiss law. However, financial collateral is not fully insulated from insolvency procedures.
Assessment	Implemented.
Comments	Swiss regulations could be improved by providing for full insulation of financial collateral from insolvency procedures. Proposed new legislation on bank reorganization and liquidation would provide for the immediate enforcement of financial collateral in case of insolvency. Special rules on the licensing of clearing and settlement systems could also be introduced, since the business performed by entities such as SIS is not a typical banking business. Special requirements on capital adequacy, operation and supervision could strengthen the ability of the system to handle financial distress. Limit on cooperation with foreign supervisors may however affect proper supervision.