Manufacturing and Managing Customer-Driven Derivatives. Qu Dong

industry. The Solvency II Directive is an EU Directive aiming to unify and harmonize the regulations for the EU insurers, and reduce their risks of insolvency. Solvency II will impose tough requirements on the amount of capital an insurer should hold, governance, quantitative risk measurement, risk management, reporting and disclosure. Indeed, some of the insurance products in real life (e.g. variable annuities) are quite complex and their embedded hybrid derivative risks can be a major source of instability if not measured and managed properly. Hence an appropriate regulation regime for the insurance industry can serve the purpose of raising general risk management standards and optimizing capital and asset allocation. To this end, insurers can learn from banks in terms of implementing internal models under regulatory directives, and balance sheet and business optimization as a result of regulatory compliance.

      Basel III Technical Requirements

      The evolution of regulatory regime impacts the banks in such a way that Basel III may determine whether some business is still viable. Banks must pay a great deal of attention to the regulatory changes and requirements of risks and capitals. Compared to the previous Basel accord, Basel III has broadened to a combination of measures including capital, liquidity and funding ratios, in addition to market risks. Banks will have to comply with all the measures and corresponding rules, as opposed to one single narrow measure, hence creating more balanced and stable financial environments and systems. Within this regulatory framework, banks need to optimize the capital usage and efficiency, and carry out appropriate infrastructure projects to comply with the rules.