Frequently Asked Questions for IAIS Financial Stability and Macroprudential Policy and Surveillance (MPS) Activities

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1 Updated 25 June 2015 Frequently Asked Questions for IAIS Financial Stability and Macroprudential Policy and Surveillance (MPS) Activities The International Association of Insurance Supervisors (IAIS) is participating in a global initiative, along with other standard setters, central banks and financial sector supervisors, and under the purview of the Financial Stability Board (FSB) and G20, to identify global systemically important financial institutions (G-SIFIs). The focus of IAIS analysis is in relation to potential global systemically important insurers (G-SIIs). To this end, the IAIS has developed an initial assessment methodology in July 2013 to identify any insurers whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity. Any such insurers should be regarded as systemically important on a global basis. Following assessments in accordance with the methodology by the IAIS, the FSB identified G-SIIs in July 2013 and November The IAIS has also developed a framework of policy measures for G-SIIs. The framework is based upon the general framework published by the FSB with adjustments to reflect the distinct features of the insurance sector. As with the assessment methodology, the policy measures framework reflects the factors that make insurers, and the reasons why they might be systemic, different from other financial institutions. In parallel to the work toward identifying potential G-SIIs, the IAIS has developed a framework for Macroprudential Policy and Surveillance (MPS) in insurance. This work builds on the foundation laid down in the Insurance Core Principles (ICPs) approved in October 2011 (and revised in October 2013), and in particular on ICP 24, which provides the principles and standards for MPS to be implemented by supervisors. In order to assist interested parties in better understanding the framework of policy measures for G-SIIs and the framework for MPS in insurance, the IAIS has prepared the following Frequently Asked Questions. G-SII and MPS FAQs Updated 25 June 2015 Page 1 of 14

2 Jump to Question: Glossary of abbreviations What is a Global Systemically Important Institution (G-SIFI)? What is a Global Systemically Important Insurer (G-SII)? What is a Global Systemically Important Bank (G-SIB)? Where can I find a list of G-SIIs? Where can I find a list of G-SIBs? Do insurers pose systemic danger? Why are G-SIFIs being identified? What is the IAIS role in the G-SIFI process? What is the Financial Stability Board s role in the G-SIFI process? What is the G20 s role in the G-SIFI process? What is an assessment methodology? What is the IAIS assessment methodology? What is a policy measure? What are the policy measures based on? What is the FSB s policy measure framework? What are the FSB Key Attributes? What are the main elements of the G-SII policy measures? What are the objectives of the G-SII policy measures? What is enhanced supervision? What is effective resolution? What is the role of a CMG? What is the initial basis for HLA for G-SIIs? What is Higher Loss Absorption (HLA) Capacity? What is a global insurance capital standard (ICS)? Will the BCR continue to apply after the ICS has been developed? What is the implementation timeframe for G-SII policy measures? What enhanced liquidity planning and management is required for G-SIIs? Is the G-SIFI designation process a one-time event or will it continue? Can a designated entity be removed from the list? Will the IAIS continue to be involved in the designation process? How did the IAIS develop the initial assessment methodology and policy measures and when will the initial assessment methodology be reviewed? Will jurisdictions have to do anything after G-SIFIs and policy measures are announced by the Financial Stability Board? How does the G-SII process fit with any domestic SIFI processes? Is an IAIG the same as a G-SII? What is the difference between ComFrame and policy measures for G-SIIs? What is the difference between the IAIS Insurance Core Principles, ComFrame and policy measures on G-SIIs? Why have decisions on the G-SII status of, and appropriate risk mitigating measures for, major reinsurers been postponed? Why have no financial guarantee insurers been designated as G-SIIs? What else is the IAIS doing in regard to financial stability? What is the IAIS Framework for Macroprudential Policy and Surveillance (MPS) in Insurance? What is MPS? How can the findings of the 2013 MPS report be reconciled with the current work on G-SIIs? How are the indicators of the G-SIIs assessment methodology reflected in the conceptual approach of low- and high-frequency risk indicators for MPS? What will the IAIS be doing next in regard to MPS? G-SII and MPS FAQs Updated 25 June 2015 Page 2 of 14

3 Glossary of abbreviations BCR CDS ComFrame CMGs FSB ICS GIMAR G-SIBs G-SIFIs G-SIIs G20 HLA IAIGs IAIS ICPs MPS MPSWG NTNI RRPs SIFIs SRMP Basic Capital Requirements Credit Default Swap IAIS Common Framework for the Supervision of Internationally Active Insurance Groups Crisis Management Groups Financial Stability Board Insurance Capital Standard Global Insurance Market Report Global Systemically Important Banks Global Systemically Important Financial Institutions Global Systemically Important Insurers Group of Twenty Countries Higher Loss Absorbency or Higher Loss Absorption capacity Internationally Active Insurance Groups International Association of Insurance Supervisors IAIS Insurance Core Principles Macroprudential Policy and Surveillance Macroprudential Policy and Surveillance Working Group Non-traditional insurance and Non-insurance Recovery and Resolution Plans or Planning Systemically Important Financial Institutions Systemic Risk Management Plan G-SII and MPS FAQs Updated 25 June 2015 Page 3 of 14

4 1. What is a Global Systemically Important Institution (G-SIFI)? Global systemically important financial institutions, or G-SIFIs, are defined by the FSB as institutions of such size, market importance, and global interconnectedness that their distress or failure would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries. 2. What is a Global Systemically Important Insurer (G-SII)? Global systemically important insurers, or G-SIIs, are one class of global systemically important financial institutions (G-SIFIs). G-SIFIs are defined by the FSB as institutions of such size, market importance, and global interconnectedness that their distress or failure would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries. Another class of G-SIFI is a global systemically important bank, or G-SIB. 3. What is a Global Systemically Important Bank (G-SIB)? Global systemically important banks, or G-SIBs, are one class of global systemically important financial institutions (G-SIFIs). G-SIFIs are defined by the FSB as institutions of such size, market importance, and global interconnectedness that their distress or failure would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries. 4. Where can I find a list of G-SIIs? A list of G-SIIs, which are identified by the FSB, can be found at the FSB website 5. Where can I find a list of G-SIBs? A list of G-SIBs, which are identified by the FSB, can be found at 6. Do insurers pose systemic danger? Based on information analysed to date, for most lines of business there is little evidence of traditional insurance either generating or amplifying systemic risk within the financial system or in the real economy. Of course, empirical assessments about the systemic importance of insurers and insurance groups may change over time. A benign record in the past does not ensure the absence of a systemic risk potential in the future. The potential for systemic risk in insurance may become relevant where insurers significantly deviate from the traditional insurance business model and particularly where they engage in non-traditional insurance or non-insurance (NTNI) activities or as a result of interconnectedness. In November 2011, the IAIS published a report entitled Insurance and Financial Stability that describes the IAIS view of the relationship between the insurance sector and financial stability. This paper followed publication of a June 2010 position statement stressing the importance of the longer timeframe that applies to insurance liabilities and the importance of insurance techniques that rest on the pooling of insurance risks, including the notion of insurable interest. G-SII and MPS FAQs Updated 25 June 2015 Page 4 of 14

5 Definitions of NTNI activities have been refined over time and the most recent descriptions and explanations are included in the G-SII policy measures paper. The IAIS plans to conduct a public consultation in late-2015 on both the G-SII assessment methodology and the related definition of NTNI activities. 7. Why are G-SIFIs being identified? At the November 2010 Summit meeting in Seoul, the G20 leaders endorsed a report by the FSB on reducing the moral hazard posed by systemically important financial institutions by proactively identifying such firms and taking measures to lessen the impact associated with their failure. 8. What is the IAIS role in the G-SIFI process? The IAIS developed an initial assessment methodology that should be used to identify any G-SIIs and the policy measures that should be applied. G-SIIs are designated by the FSB following consultation with the IAIS and national authorities. 9. What is the Financial Stability Board s role in the G-SIFI process? The FSB developed the general policy framework for SIFIs and is co-ordinating the related work by the IAIS, the Basel Committee for Banking Supervision and others. G-SIIs will be designated by the FSB following consultation with the IAIS and national authorities. 10. What is the G20 s role in the G-SIFI process? The G20 provided the original mandate to the FSB regarding SIFIs and regularly reviews the work undertaken by the FSB on SIFIs. 11. What is an assessment methodology? An assessment methodology is the manner in which potential G-SIFIs are identified. 12. What is the IAIS assessment methodology? The IAIS has developed a methodology to assess the systemic importance of G-SIIs and tested that methodology using data collected from selected insurers through their respective national supervisors. The IAIS assessment methodology 1 involves three steps: 1. The collection of data; 2. A methodical assessment; and 3. A supervisory judgment and validation process. The initial assessment methodology is indicator-based and has similarities to the approach developed by the Basel Committee for G-SIBs. However, insurers vary significantly from banks in their structures and activities and, consequently, in the nature and degree of risks they pose to the global financial system. Thus, the particular indicators and the category weightings were selected for identifying G-SIIs to reflect different drivers of possible negative 1 Information on the methodology can be found on the Financial Stability & Macroprudential Policy & Surveillance section of the IAIS website. G-SII and MPS FAQs Updated 25 June 2015 Page 5 of 14

6 externalities and hence of the importance of insurers for the stability of the financial system. The IAIS plans to conduct a public consultation in late-2015 on both the G-SII assessment methodology and the related definition of NTNI activities. 13. What is a policy measure? A policy measure is a requirement imposed on a G-SII. 14. What are the policy measures based on? The IAIS published a framework of policy measures for G-SIIs in line with recommendations from the FSB, which include: Enhanced Supervision: Applying more intensive and co-ordinated supervision of SIFIs and supplementary prudential and other requirements as determined by the national authorities. Effective resolution: Improving supervisors ability to resolve SIFIs in an orderly manner without destabilising the financial system and exposing the taxpayer to the risk of loss. Higher Loss Absorbency: Requiring higher loss absorption (HLA) capacity for G- SIIs to reflect the greater risks that these institutions pose to the global financial system. The policy measures document can be found here. 15. What is the FSB s policy measure framework? The FSB has developed general policy measures for all SIFIs and is co-ordinating the related work by the IAIS, the Basel Committee for Banking Supervision and others. The framework can be found at 16. What are the FSB Key Attributes? The Key Attributes set out the core elements that the FSB considers to be necessary for an effective resolution regime. In October 2014 the FSB adopted additional guidance, including insurance sector-specific guidance, and incorporated it as annexes to the Key Attributes. No changes were made to the text of the twelve Key Attributes of October What are the main elements of the G-SII policy measures? The three main types of mandatory measures are: 1. Enhanced supervision, 2. Effective resolution, and 3. Higher loss absorption (HLA) capacity. G-SII and MPS FAQs Updated 25 June 2015 Page 6 of 14

7 18. What are the objectives of the G-SII policy measures? The G-SII policy measures are designed to reduce moral hazard and the negative externalities stemming from the potential disorderly failure posed by a G-SII. These policy measures should: Reduce the probability and impact of distress or failure of G-SIIs and thus reduce the expected systemic impacts which disorderly failure may cause, Incentivise G-SIIs to become less systemically important, and give non-g-siis strong disincentives from becoming G-SIIs, and Be linked to the drivers of the G-SII status of each individual insurer. 19. What is enhanced supervision? Enhanced supervision generally means specifically tailored regulation, greater supervisory resources and bolder use of existing supervisory tools compared to the supervision of nonsystemically important insurers. Enhanced supervision includes a direct approach to consolidated and group-wide supervision including direct supervision over the holding company, the development of a Systemic Risk Management Plan (SRMP) and enhanced liquidity planning and management in order to focus on the unique risk profile and possible risk concentrations of G-SIIs in order to lessen the probability and impact of failure. 20. What is effective resolution? Effective resolution for all SIFIs includes: 1. The establishment of Crisis Management Groups (CMGs), 2. The elaboration of recovery and resolution plans (RRPs), 3. The conduct of resolvability assessments, and 4. The adoption of institution-specific cross-border cooperation agreements. For G-SIIs, the following specificities of insurance are taken into account: 1. Plans and steps needed for separating non-traditional or non-insurance (NTNI) activities from traditional insurance activities, 2. The possible use of portfolio transfers and run off arrangements as part of the resolution of entities conducting traditional insurance activities, and 3. The existence of policyholder protection and guarantee schemes (or similar arrangements) in many jurisdictions. 21. What is the role of a CMG? The CMG s role is to enhance the preparedness for, and to facilitate the management and resolution of, a cross-border financial crisis affecting the firm. G-SII and MPS FAQs Updated 25 June 2015 Page 7 of 14

8 22. What is the initial basis for HLA for G-SIIs? As an initial foundation for HLA requirements for G-SIIs, the IAIS has, as a first step, developed basic capital requirements (BCR) to apply to all group activities, including noninsurance subsidiaries. The BCR was endorsed by the FSB in and published on the IAIS website in October As stated in HLA Principle 5 and ICS Principle 3, it is intended to replace the BCR with the global Insurance Capital Standard (ICS) when the ICS is developed What is Higher Loss Absorption (HLA) Capacity? HLA capacity is intended to: 1. Reduce the probability of distress or failure and thus the expected impact of distress or failure; 2. Internalise some of the costs to the financial system and overall economy, which are otherwise externalities to the insurance group that occur as a result of a G-SIIs distress or failure by making G-SIIs more resilient to low probability, high impact events; 3. Allow for earlier supervisory intervention and more time to address emerging risks to the financial system; 4. Provide disincentives to carrying out activities that pose a threat to the financial system; and 5. Offset any benefit should it arise, such as lower funding costs, associated with the G- SII status. 24. What is a global insurance capital standard (ICS)? The IAIS has agreed to develop a risk-based global insurance capital standard (ICS) and to include it within ComFrame. The ICS will replace Module 2 Element 5 Capital Adequacy Assessment in the 2014 ComFrame Draft. The IAIS is committed to develop the ICS Version 1.0 by June Full implementation (ICS Version 2.0) is scheduled to begin in 2020 after testing and refinement with supervisors and IAIGs through confidential reporting. ICS Version 1.0 for confidential reporting (2017 ICS version): The goal for this milestone is the delivery of an ICS for confidential reporting purposes based on: the identified two valuation approaches a standard method for calculating the ICS capital requirement Upon completion of ICS Version 1.0, there will also be a plan to consider other methods of calculation of the ICS capital requirement including: the use of internal models (partial or full) external models variations of the standard method. 2 For more information on the ICS, please refer to the ICS Principles published on the IAIS website. G-SII and MPS FAQs Updated 25 June 2015 Page 8 of 14

9 ICS Version 2.0 for adoption within ComFrame (2019 ICS version): The goal for this milestone is the delivery of an ICS that is fit for implementation by supervisors: that will achieve an improved level of comparability compared to ICS Version 1.0 but possibly not the level of comparability envisaged by the ultimate goal may still include the two valuation approaches but aspires to reduce differences in valuation may allow for both the standard method for calculating the ICS capital requirement and other methods of calculation including: o the use of internal models (partial or full) o external models o variations of the standard method. The IAIS ultimate goal, by a date yet to be determined, is a single ICS that includes a common methodology by which one ICS achieves comparable, i.e. substantially the same, outcomes across jurisdictions. Ongoing work is intended to lead to improved convergence over time on the key elements of the ICS towards the ultimate goal. Not prejudging the substance, the key elements include valuation, capital resources and capital requirements. 25. Will the BCR continue to apply after the ICS has been developed? It is intended that ultimately the ICS will become the foundation for the HLA, at which point the role of the BCR will be reassessed. 26. What is the implementation timeframe for G-SII policy measures? Policy measure Systemic Risk Management Plan 4 Implementation deadline Cohort 2013 Cohort Cohort 2015 Cohort 2016 Cohort July 2014 n.a. December 2016 December 2017 December 2018 Liquidity Management and Planning 4 December 2014 n.a. December 2016 December 2017 December 2018 Basic Capital requirement End of June 2015 (via field testing) n.a Collected as part of 2016 field testing with corresponding deadlines for data submission Collected as part of 2017 field testing with corresponding deadlines for data submission Collected as part of 2018 field testing with corresponding deadlines for data submission 3 No new G-SIIs in 2014 cohort. Existing G-SIIs must make sure that they keep policy measures up to date. 4 To support the Supervisory Judgement and Validation Process during the next annual G-SII assessment, G- SIIs are encouraged to finalise work on the Systemic Risk Management Plan and Liquidity Management and Planning ahead of the stated deadlines. G-SII and MPS FAQs Updated 25 June 2015 Page 9 of 14

10 - - Reporting aligned Higher Loss Absorbency 5 with 2016 field testing mandatory and effective by January 2019 Reporting aligned with 2017 field testing mandatory and effective by January 2019 Reporting aligned with 2018 field testing mandatory and effective by January 2019 The IAIS policy measures requested, for the initial cohort of G-SIIs designated in 2013, that: (1) Crisis Management Groups (CMG) be established by July 2014; (2) recovery and resolution plans (RRPs) be developed by the end of 2014; (3) resolvability assessments be carried out; and (4) institution-specific, cross-border cooperation agreements be adopted. The FSB s November 2014 report Towards full implementation of the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions requests G-SII CMGs to report on the status of resolution strategies and plans for all G-SIIs by the end of 2015 and the results of Resolvability Assessment Process (RAP) by the end of What enhanced liquidity planning and management is required for G-SIIs? The group-wide supervisor is responsible for evaluating and monitoring liquidity management and planning on a group-wide basis. The group-wide supervisor should require the G-SII to conduct regular gap analysis of its liquidity risks and the adequacy of its available liquidity resources, under normal and stressed conditions. It should consider stress scenarios that are forward looking and not based entirely on historical data. Adjustments for expected behaviour of market participants and customers during stressed conditions, especially in relation to acceleration of liabilities, should be considered. Detailed guidance was published by the IAIS in November 2014 on the IAIS website. 28. Is the G-SIFI designation process a one-time event or will it continue? G-SIFIs will be designated on an annual basis, generally in each November. 29. Can a designated entity be removed from the list? Yes, as part of the annual review. 30. Will the IAIS continue to be involved in the designation process? Yes. We will continue to work with the FSB and with the respective national supervisors by refining our initial assessment methodology, as required, and conducting the annual data collection and analysis. 5 From 2019 BCR and HLA commence to apply to G-SIIs G-SII and MPS FAQs Updated 25 June 2015 Page 10 of 14

11 31. How did the IAIS develop the initial assessment methodology and policy measures and when will the initial assessment methodology be reviewed? The initial assessment methodology and policy measures were developed by the IAIS after a public consultation process and in close coordination with the FSB. The IAIS has committed to review the assessment methodology at least every three years. The first review commenced in 2015 and the IAIS plans to conduct a public consultation in late-2015 on both the G-SII assessment methodology and the related definition of NTNI activities. 32. Will jurisdictions have to do anything after G-SIFIs and policy measures are announced by the Financial Stability Board? Jurisdictions with G-SIFIs will be expected to apply the agreed upon policy measures to those G-SIFIs. The FSB is developing processes to foster consistency in this regard. 33. How does the G-SII process fit with any domestic SIFI processes? The IAIS' process of developing the assessment methodology is based on and embedded in the overall approach endorsed by the G20 and the FSB towards SIFIs. Domestic SIFI processes are or will be established under domestic regulatory arrangements and may follow different definitions and timelines. 34. Is an IAIG the same as a G-SII? What is the difference between ComFrame and policy measures for G-SIIs? ComFrame is concerned with the on-going supervision of large and complex IAIGs and is not focused on whether an insurance group presents risk to the global financial system, which is the focus of the IAIS work on G-SIIs. ComFrame provides as basis upon which the G-SII policy measures can be added. 35. What is the difference between the IAIS Insurance Core Principles, ComFrame and policy measures on G-SIIs? The IAIS Insurance Core Principles (ICPs) apply to all insurers and insurance groups, regardless of size or systemic importance, unless otherwise specified. ComFrame builds on and operationalizes the ICPs with regard to the cross-border supervision of IAIGs. IAIGs by definition create a need to foster supervisory cooperation and convergence of supervisory requirements in order to achieve effective supervision. Policy measures on G-SIIs will apply only to designated G-SIIs and will be appropriate for the risks that G-SIIs pose to the financial system, if any. G-SII and MPS FAQs Updated 25 June 2015 Page 11 of 14

12 The following table illustrates the relationship between the ICPs, ComFrame, and policy measures applicable to G-SIIs: 36. Why have decisions on the G-SII status of, and appropriate risk mitigating measures for, major reinsurers been postponed? Postponing the decision on possible G-SII designation of major reinsurers will enable the particular features of reinsurers to be considered during the review of the initial assessment methodology during Additional time is also needed to identify policy measures that are targeted to mitigating financial stability risks associated with the major reinsurers business models. 37. Why have no financial guarantee insurers been designated as G-SIIs? Several financial guarantee insurers were considered in the supervisory judgment process, but no financial guarantee insurers were currently regarded as meeting the criteria for designation as a G-SIFI (see Question 1). These financial guarantee insurers will be retained in future annual reviews, until such time as the IAIS believes this is no longer necessary. The particular features of financial guarantee insurers will be considered during the review of the initial assessment methodology during What else is the IAIS doing in regard to financial stability? In parallel to the work toward identifying potential G-SIIs, the IAIS has developed a framework for Macroprudential Policy and Surveillance (MPS) in insurance. This work builds on the foundation laid down in the Insurance Core Principles (ICPs) approved in October 2011 (and revised in October 2013), and in particular on ICP 24, which provides the principles and standards for MPS to be implemented by supervisors. In addition to the framework, which will lead to a practical toolkit or handbook for supervisors, the IAIS activities include frequent monitoring of the macroeconomic and financial market environment impacting the insurance sector, a periodic survey of key insurance risks and trends, and the monitoring of broad developments in the global insurance market. This includes, for example, the annual Global Insurance Market Report (GIMAR). G-SII and MPS FAQs Updated 25 June 2015 Page 12 of 14

13 39. What is the IAIS Framework for Macroprudential Policy and Surveillance (MPS) in Insurance? The financial crisis has shown, in some cases, the inadequacy of past supervisory practices that relied exclusively on microprudential, individual firm-level policies. In response, the IAIS created what is now called the Macroprudential Policy and Surveillance Working Group (MPSWG). One of the key mandates of the MPSWG is to develop a framework for implementing macroprudential policies and surveillance in the insurance sector. This paper is the first step in the development process of that framework. It is set in the recent tradition of the IAIS work on insurance and financial stability and complements the on-going work on identifying G-SIIs. 40. What is MPS? The paper reviews issues and challenges facing insurance supervisors in the macroprudential area. It starts out by defining MPS for the insurance sector, turns to the role of systemic risk in the macroprudential analysis of insurance, reviews the existing approaches to insurance, and proposes a structure for macroprudential surveillance in insurance. The paper also develops a conceptual framework for macroprudential risk indicators and an understanding of their impact on insurers. 41. How can the findings of the 2013 MPS report be reconciled with the current work on G-SIIs? The comprehensive assessment of systemic risk is an integral element in the design and implementation of MPS, which should guide the choice of indicators of causes of material financial sector distress and suitable supervisory responses. MPS is focused on the system-wide impact of shocks via broad transmission channels whereas the SIFI policy measures framework aims at reducing the impact of failure of individual firms. Both approaches are highly complementary but more work will be needed to dovetail the MPS framework with the final version of the G-SII assessment methodology. 42. How are the indicators of the G-SIIs assessment methodology reflected in the conceptual approach of low- and high-frequency risk indicators for MPS? Some G-SII indicators form a sub-set of sector-specific indicators within the MPS framework. In terms of structural hierarchy, any G-SII approach is subordinated to MPS, whose scope is beyond readily identifiable institutional indicators and their implications on the functioning of individual and collective arrangements. G-SII and MPS FAQs Updated 25 June 2015 Page 13 of 14

14 43. What will the IAIS be doing next in regard to MPS? The MPSWG will continue to work on analysing key vulnerabilities of the insurance sector, develop indicators with an eye to understanding the potential impact on insurers as well as focus on policy instruments and coordination. Furthermore, the MPSWG plans to refine MPS by issuing guidance on the practical application of ICP 24. In addition, the IAIS has just released an internet-based toolkit to assist its Members in designing and conducting macroprudential surveillance. The toolkit includes basic and advanced macroprudential indicators and allows a Member to input data from its own jurisdiction for benchmarking against regional and worldwide data. The IAIS will continue to work with its Members to refine and supplement the toolkit so that it continues to meet identified needs and further the Association s strategic objectives. G-SII and MPS FAQs Updated 25 June 2015 Page 14 of 14

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