Today, Knowledge Management today are not limited merely to : (A) 'knowing' or 'reading lots of books/scholarly articles' or (B) data mining, analysis, decision making, preventive actions, or (C) some Human Resources Management issue or (D) some ICT issue. Knowledge Management is about putting your knowledge, skills and competency into practice and most important IT WORKS! For you and your company or your business (Nik Zafri)

The information comprised in this section is not, nor is it held out to be, a solicitation of any person to take any form of investment decision. The content of the nikzafri.blogspot.com does not constitute advice or a recommendation by nikzafri.blogspot.com and should not be relied upon in making (or refraining from making) any decision relating to investments or any other matter. You should consult your own independent financial adviser and obtain professional advice before exercising any investment decisions or choices based on information featured in this nikzafri.blogspot.com can not be held liable or responsible in any way for any opinions, suggestions, recommendations or comments made by any of the contributors to the various columns on nikzafri.blogspot.com nor do opinions of contributors necessarily reflect those of http://www. nikzafri.blogspot.com

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Email: nikzafri@yahoo.com, nikzafri@gmail.com

Kelantanese, Alumni of Sultan Ismail College Kelantan (SICA), Diploma (Management), IT Competency Cert, Certified Written English Professional US. Has participated in many seminars/conferences (local/ international) in the capacity of trainer/lecturer and participant.

Affiliations :- Council Member of Gerson Lehrman Group NY, Institute of Quality Malaysia, Malaysian Institute of Management, Malaysian Occupational Safety and Health Professionals Association, Auditor ISO 9000 IRCAUK, Auditor OHSAS 18000 (SIRIM and STS) /EMS ISO 14000:2004 and Construction Quality Assessment System (CONQUAS, CIDB (Now BCA) Singapore),

* Possesses 26 years of experience/hands-on in the multi-modern management & technical disciplines (systems & methodologies) such as Knowledge Management (Hi-Impact Management/ICT Solutions), Quality (TQM/ISO), Safety Health Environment, Civil & Building (Construction), Manufacturing, Motivation & Team Building, HR, Marketing/Branding, Business Process Reengineering, Economy/Stock Market, Contracts/Project Management, Finance & Banking, etc. He was employed to international bluechips involving in national/international megaprojects such as Balfour Beatty Construction/Knight Piesold & Partners UK, MMI Insurance Group Australia, Hazama Corporation (Hazamagumi) Japan (with Mitsubishi Corporation, JA Jones US, MMCE and Ho-Hup) and Sunway Construction Berhad (The Sunway Group of Companies). Among major projects undertaken : Pergau Hydro Electric Project, KLCC Petronas Twin Towers, LRT Tunnelling, KLIA, Petronas Refineries Melaka, Putrajaya Government Complex, Sistem Lingkaran Lebuhraya Kajang (SILK), Mex Highway, KLIA1, KLIA2 etc. Once serviced SMPD Management Consultants as Associate Consultant cum Lecturer for Diploma in Management, Institute of Supervisory Management UK/SMPD JV. Currently – Associate/Visiting Consultants/Facilitators, Advisors for leading consulting firms (local and international) including project management. To name a few – Noma SWO Consult, Amiosh Resources, Timur West Consultant Sdn. Bhd., TIJ Consultants Group (Malaysia and Singapore) and many others.

* Ex-Resident Weekly Columnist of Utusan Malaysia (1995-1998) and have produced more than 100 articles related to ISO-9000– Management System and Documentation Models, TQM Strategic Management, Occupational Safety and Health (now OHSAS 18000) and Environmental Management Systems ISO 14000. His write-ups/experience has assisted many students/researchers alike in module developments based on competency or academics and completion of many theses. Once commended by the then Chief Secretary to the Government of Malaysia for his diligence in promoting and training the civil services (government sector) based on “Total Quality Management and Quality Management System ISO-9000 in Malaysian Civil Service – Paradigm Shift Scalar for Assessment System”

Among Nik Zafri’s clients : Adabi Consumer Industries Sdn. Bhd, (MRP II, Accounts/Credit Control) The HQ of Royal Customs and Excise Malaysia (ISO 9000), Veterinary Services Dept. Negeri Sembilan (ISO 9000), The Institution of Engineers Malaysia (Aspects of Project Management – KLCC construction), Corporate HQ of RHB (Peter Drucker's MBO/KRA), NEC Semiconductor - Klang Selangor (Productivity Management), Prime Minister’s Department Malaysia (ISO 9000), State Secretarial Office Negeri Sembilan (ISO 9000), Hidrological Department KL (ISO 9000), Asahi Kluang Johor(System Audit, Management/Supervisory Development), Tunku Mahmood (2) Primary School Kluang Johor (ISO 9000), Consortium PANZANA (HSSE 3rd Party Audit), Lecturer for Information Technology Training Centre (ITTC) – Authorised Training Center (ATC) – University of Technology Malaysia (UTM) Kluang Branch Johor, Kluang General Hospital Johor (Management/Supervision Development, Office Technology/Administration, ISO 9000 & Construction Management), Kahang Timur Secondary School Johor (ISO 9000), Sultan Abdul Jalil Secondary School Kluang Johor (Islamic Motivation and Team Building), Guocera Tiles Industries Kluang Johor (EMS ISO 14000), MNE Construction (M) Sdn. Bhd. Kota Tinggi Johor (ISO 9000 – Construction), UITM Shah Alam Selangor (Knowledge Management/Knowledge Based Economy /TQM), Telesystem Electronics/Digico Cable(ODM/OEM for Astro – ISO 9000), Sungai Long Industries Sdn. Bhd. (Bina Puri Group) - ISO 9000 Construction), Secura Security Printing Sdn. Bhd,(ISO 9000 – Security Printing) ROTOL AMS Bumi Sdn. Bhd & ROTOL Architectural Services Sdn. Bhd. (ROTOL Group) – ISO 9000 –Architecture, Bond M & E (KL) Sdn. Bhd. (ISO 9000 – Construction/M & E), Skyline Telco (M) Sdn. Bhd. (Knowledge Management),Technochase Sdn. Bhd JB (ISO 9000 – Construction), Institut Kefahaman Islam Malaysia (IKIM – ISO 9000 & Internal Audit Refresher), Shinryo/Steamline Consortium (Petronas/OGP Power Co-Generation Plant Melaka – Construction Management and Safety, Health, Environment), Hospital Universiti Kebangsaan Malaysia (Negotiation Skills), Association for Retired Intelligence Operatives of Malaysia (Cyber Security – Arpa/NSFUsenet, Cobit, Till, ISO/IEC ISMS 27000 for Law/Enforcement/Military), T.Yamaichi Corp. (M) Sdn. Bhd. (EMS ISO 14000) LSB Manufacturing Solutions Sdn. Bhd., (Lean Scoreboard (including a full development of System-Software-Application - MSC Malaysia & Six Sigma) PJZ Marine Services Sdn. Bhd., (Safety Management Systems and Internal Audit based on International Marine Organization Standards) UNITAR/UNTEC (Degree in Accountacy – Career Path/Roadmap) Cobrain Holdings Sdn. Bhd.(Managing Construction Safety & Health), Speaker for International Finance & Management Strategy (Closed Conference), Pembinaan Jaya Zira Sdn. Bhd. (ISO 9001:2008-Internal Audit for Construction Industry & Overview of version 2015), Straits Consulting Engineers Sdn. Bhd. (Full Integrated Management System – ISO 9000, OHSAS 1800 and EMS ISO 14000 for Civl/Structural/Geotechnical Consulting), Malaysia Management & Science University (MSU – (Managing Business in an Organization), Innoseven Sdn. Bhd. (KVMRT Line 1 MSPR8 – Awareness and Internal Audit (Construction), ISO 9001:2008 and 2015 overview for the Construction Industry), Kemakmuran Sdn. Bhd. (KVMRT Line 1 - Signages/Wayfinding - Project Quality Plan and Construction Method Statement ), Amiosh Resources - (1) Lembaga Tabung Haji - Flood ERP (2) WNA Consultants - DID/JPS -Flood Risk Assessment and Management Plan - Prelim, Conceptual Design, Interim and Final Report etc. (3) Tunnel Fire Safety - Fire Risk Assessment Report - Design Fire Scenario), Safety, Health and Environmental Management Plans leading construction/property companies/corporations in Malaysia. Timur West Consulting (1) Business Methodology and System (2) Information Security Management Systems (ISMS) ISO/IEC 27001:2013 for Majlis Bandaraya Petaling Jaya ISMS/Audit/Risk/ITP Technical Team

* Has appeared for 10 consecutive series in “Good Morning Malaysia RTM TV1’ Corporate Talk Segment discussing on ISO 9000/14000 in various industries. For ICT, his inputs garnered from his expertise have successfully led to development of work-process e-enabling systems in the environments of intranet, portal and interactive web design especially for the construction and manufacturing. Some of the end products have won various competitions of innovativeness, quality, continual-improvements and construction industry award at national level. He has also in advisory capacity – involved in development and moderation of websites, portals and e-profiles for mainly corporate and private sectors, public figures etc. He is also one of the recipients for MOSTE Innovation for RFID use in Electronic Toll Collection in Malaysia.

Note :



Wednesday, July 13, 2011

Career Path, Challenges & Preparation for Future Accountants - Lecture in UNITAR - by Nik Zafri

13 July, 2011 - I was invited to become a guest speaker for UNITAR (also known as UniRazak and soon UNTEC) - Smart/Pintar Campus situated at Leisure Commerce Square PJ-Bandar Sunway for a group of students of Bachelor in Accountacy (Hons) at Block B1 L 10 to deliver a 3 hours lecture on Career Path, Challenges and Preparation for Future Accountants to face the current employment, corporate and business world.

(I was also feeling a little nostalgic as I was employed with SunCon (Sunway Group of Companies) in the early 2000 and used to have a good lunch at Jaring and Mentari Business Park)

I wouldn't really want to call it a lecture but rather a crash course or workshop geared towards seeking solutions that can be utilized in years to come. Although the event is not as 'big' as it sounds but I feel honoured to be invited to share my 2 1/2 decade experience, knowledge and skills.

This is the 4th University/Institution of Higher Learning that has called me up to deliver nothing academic but more towards competency. The first one was UITM Shah Alam.

I must say that I was impressed by the quality of students and the lecturers as well.

The questions being highlighted by the students and based on my discussion with the lecturer serves as a living proof that most leading universities and institutions of higher learning are seriously changing their modules to cope up with the real world.

The climax of the lecture are the real life domestic case studies and the applicability of accounting, audit, taxation,corporate governance, fraud detection, due dilligence and finance in different types of industry - namely construction, manufacturing and service industry. Some of the most interesting topics such as identifying intangible cost, cost of quality, safety and environment, contigency etc. - proving how these costs affect the industry greatly

i.e. Prevention and Appraisal Costs are actually INVESTMENT and without investment, the probability is very high that the organization will end up in bearing internal failure and external failure costs. Even safeguarding safety and health is now too important for an organization to ignore.

From what I have gathered, it is clear to me now that the local case studies need to be enhanced further. While foreign case studies are allowable in most accounting modules, still they are not as interesting as the domestic issues.

This is clear during my lecture where students are extremely attentive and participative. In a way, they feel the 'ownership' feeling (patriotic) towards 'local companies' - and the spirit of wanting to help has been unleashed.

Another topic that gained interest was the use of ICT application and system such as CRM and ERP, use of simulated projections vs actual etc.

I have also told the students of the significance of registering with institution of accountacy and/or being registered as a CPA. Furthermore :

"There is no law stopping you (students) to participate in national accounting conferences or the like despite your status as a student. There is also no law stopping you from learning the accounting standard. Effective now. You need to mingle round and network with professionals attending the conference. Do not be afraid to ask questions to the paper presenter. There are great challenges lie ahead for accountants. "

"Accountants nowadays are interelated to all departments and units - business development, R & D, procurement, logistics, operation, QA/QC, Safety, Environment etc. Accountants are no longer narrowed towards Accounting Department only"

To the lecturer :

"Thank you for trusting experienced professionals to come and update you what is there in the real world, trends that has changed which the academic modules need to keep up with. I hope that I can come again here to share my views and experience to all the students"


The Star – Business – Home: Business : News

Saturday July 16, 2011
Bank Negara, corporate sector in graduate training scheme
By JOHN LOH - johnloh@thestar.com.my

KUALA LUMPUR: Bank Negara and the corporate sector have joined hands in a corporate social responsibility (CSR) project to improve human capital and enhance graduate employability.

The Graduates Programme, now in its second phase, will involve the training of 200 unemployed graduates, particularly from low-income families, over a 12-month period comprising two months of intensive classes and 10 months of industrial attachment at one of 48 participating companies.

The participating companies include Dell Malaysia, Unilever Malaysia, Perusahaan Otomobil Nasional Bhd (Proton), Albukhary University and Top Glove Corp Bhd.
Bank Negara assistant governor Marzunisham Omar told a media briefing that the central bank had allocated RM20mil for the programme but had spent not more than half of that amount.

The move is part of a raft of short-term measures announced by the Government to reduce unemployment rate among graduates. It involves various government and government-related entities such as Khazanah, the Higher Education Ministry and Bank Negara.

Marzunisham said results from both batches of the programme had so far been positive.

“Ninety-eight percent of participants in the inaugural batch have secured jobs with their attached companies as well as other companies.

“Seven percent in the second batch secured permanent jobs one month into their attachment,” he said.

A Proton representative said the programme was a chance for companies to test graduates that would have otherwise been bypassed.

“Companies tend to take experienced hires, hence the thousands of unemployed graduates. Their strategy is usually to get a trained army to fight, rather than train the army to fight,” he said.


The Star : News : Home > News > Nation

Sunday July 17, 2011
The problem with fresh grads
By P. ARUNA - aruna@thestar.com.my

PETALING JAYA: Poor attitude -including asking for too much money - is the chief reason why employers shy away from hiring fresh graduates. Another common complaint is that many graduates are poor in English.

A survey by online recruitment agency Jobstreet.com showed that 55% of employers cited unrealistic expectations of salaries while 48% of them said poor English was the main reason why Malaysian fresh graduates from both public and private institutions remain unemployed.

“While previous surveys named poor English as the main cause for unemployment, bad attitude has now topped the list,” said its chief operating officer Suresh Thiru.

He said their attitudes were so bad that some did not even bother to inform the companies if they were running late or unable to attend scheduled interviews.

It was announced that the number of jobless graduates had increased from 65,500 to 71,600 although the overall unemployment rate had dropped from 3.4% last year to 3.1% during the first quarter of this year.

Another study by recruitment agency Kelly Services showed that fresh graduates asked for flexible working hours and expected their work to accommodate their personal life, not vice versa.

Its marketing director Jeannie Khoo said employers were also turned off by the lackadaisical attitude and lack of drive to improve among many of them.

“They have the misconception that they can earn high salaries at entry-level. They enter the banking industry expecting to earn RM3,000 while the market rate is only RM2,200,” she said.

PricewaterhouseCoopers Malaysia head of recruitment Salika Suksuwan said some candidates had many offers in hand but acted unprofessionally in rejecting job offers - by not turning up for interviews or the first day at work.

“We sometimes have to call them and remind them about a scheduled interview when they didn't turn up,” she said.

Talent Corp CEO Johan Mahmood Merican urged fresh graduates not to make demands on their salary.

“It is more important to join a company that can develop your skills and prepare you for future opportunities,” he said.

In a related development, Human Resource Deputy Minister Datuk Maznah Mazlan said half of the applicants who registered with the JobsMalaysia portal (www.jobsmalaysia.gov.my) had found employment.

Speaking when launching the Graduan Aspire 2011 employment fair yesterday, she said about 300,000 job applicants were currently registered with the website.

Thursday, July 07, 2011


Kajian : Nik Zafri (Januari, 2006)

Artikel berikut adalah kajian bebas pengarang dan bukanlah bertujuan untuk memberikan khidmat nasihat kepada pembaca. Pembaca digalakkan menghubungi pihak yang berwajib seperti institusi perbankan dan kewangan.

Mungkin ramai yang pernah mendengar frasa 'money laundering' atau 'pengubahan wang haram'. Aktiviti money laundering ini telah mengakibatkan kerugian jutaan ringgit kepada sesebuah negara. Setakat ini Malaysia mengamalkan dasar yang agak ketat bagi menangani masalah ini.

Money laundering dikatakan amat popular di peringkat antarabangsa terutamanya golongan pengedar-pengedar dadah, kongsi gelap, bookie, pemain judi dan kumpulan pengganas. Walaupun terdapat pelbagai undang-undang telah digubal di seluruh dunia, namun money laundering, amat sukar di kawal.

Dikatakan money laundering berasal daripada satu kumpulan kongsi gelap/penjenayah antarabangsa yang menggunakan duit hasil kegiatan jenayah untuk 'dilaburkan' atau 'dibersihkan' dengan menggunakan jalan-jalan yang berlandaskan undang-undang seperti menerusi aktiviti pembelian saham, stok, derivatif, futures, FOREX, insurans, pembiayaan industri/projek yang besar, terlibat dalam sektor hartanah dan sebagainya. Malah 'penjenayah' menggunakan wang berkenaan bagi 'membiayai' dan 'membeli' bank-bank tertentu (yang bermasalah) untuk diniagakan menerusi pelbagai skim pinjaman berfaedah termasuk segala potongan cukai bagi 'membersihkan' wang berkenaan dan mengikut 'lunas undang-undang' serta dianggap sebagai 'revenue'/hasil. - ('doing the wrong thing the right way' - pengarang)

Suatu laporan antarabangsa pernah dikeluarkan yang menyatakan bahawa kewujudan Money Laundering juga menandakan wujudnya operasi jenayah terancang (organised crime) dan transnasional. Money Laundering juga amat cepat evolusinya di mana penjenayah amat bijak menyesuaikan teknik 'pelaburan' agar sukar dikesan tambahan pula dengan adanya teknologi ICT yang mempermudah dan mempercepatkan lagi urusan 'perniagaan'. Apabila banyak keuntungan diperolehi dari 'pelaburan' money laundering, maka dengan sendirinya kekemungkinan 'keuntungan' ini digunakan pula untuk membiayai aktiviti jenayah adalah tinggi.

Antara cara-cara money laundering dilakukan ialah :

1) Pelaburan
Memandangkan money laundering melibatkan perniagaan 'tunai' yang besar, wang ini akan dilaburkan menerusi sistem kewangan atau ekonomi retail atau diseludup keluar dari sesebuah negara. Matlamat mereka ialah untuk 'melarikan' wang berkenaan daripada 'sumber asal' bagi mengelakkan dikesan oleh pihak berkuasa. Kemudian ianya akan ditukar dalam bentuk cek kembara atau wang pos dan sebagainya.

2) Pelapisan

'Pelapisan' merupakan konsep menjadikan wang haram menerusi proses pusingan pelbagai tingkat yang kompleks termasuk menyerap ke dalam sistem pengauditan. Tujuan utama 'pelapisan' dilakukan ialah untuk 'menidakkaitkan sejauh mungkin' wang berkenaan daripada 'sumber asalnya'. Pelapisan biasanya dilakukan dengan aktiviti simpanan dan pengeluaran secara berulang kali menerusi akaun di bank-bank offshore di mana akaun-akaun ini melibatkan syarikat-syarikat 'kosong' yang menggunakan kaedah Electronic Funds Transfer (EFT). Aktiviti ini amat sukar dikesan kerana wang berkenaan dibahagi-bahagikan kepada terlalu ramai individu dan 'syarikat-syarikat' dan lebih menyulitkan lagi, 'penjenayah' mengetahui bahawa apabila berlaku terlalu banyak transaksi harian di pihak bank-bank offshore, maka mereka akan mudah 'menyelinap masuk' tanpa dikesan. Selain itu, mereka juga membuat pembelian stok, komoditi, FOREX dan lain-lain yang juga sukar dikesan kerana transaksi harian yang terlalu tinggi.

3) Integrasi dan Penyerapan

Wang haram diintegrasikan atau diserap ke dalam sistem kewangan dan ekonomi yang sah dan menjadikan wang ini akhirnya seolah-olah 'dimiliki secara sah' oleh 'penjenayah'.

Contohnya :

a. Dengan menubuhkan syarikat di negara-negara tertentu di mana 'transaksinya terjamin dirahsiakan'. Kemudian, mereka akan kononnya 'diluluskan' pinjaman yang berasal daripada 'wang haram'. Cara ini juga memberikan ruang untuk mendapatkan 'potongan cukai' dan 'pembayaran kembali' wang berkenaan dengan 'faedah'nya sekali.

b. Cara yang lain ialah menghantar invois yang bersabit dengan perniagaan impot/ekspot yang memudahkan penjenayah ini memindahkan wang berkenaan dari satu syarikat ke satu syarikat yang lain atau dari satu negara ke satu negara yang lain.

c. Menggunakan kaedah EFT menerusi bank-bank yang 'dikuasai' oleh 'penjenayah' ini - (melalui pembelian, pelaburan, pembiayaan wang yang tinggi)

d. Membuka/menjalankan perniagaan menerusi syarikat-syarikat (berlesen) pemberi pinjam wang atau pembiayaan secara geran, pengurusan dana - malah pengurup wang.

Walaupun terdapat banyak undang-undang Anti-Laundering digubal di seluruh dunia seperti peruntukan menghadkan jumlah simpanan pada sesuatu masa, tempoh bertenang untuk pemeriksaan, tetapi penjenayah-penjenayah ini tetap pandai mengaburi mata pihak insitusi perbankan dan kewangan dengan hanya menerusi kaedah-kaedah menggunakan nama ramai individu, syarikat-syarikat yang menjalankan berbagai jenis perniagaan. Kita perlu menentang dengan apa juga cara untuk membasmi kegiatan ini kerana ianya mampu melumpuhkan ekonomi negara dalam masa yang sangat pantas.

This note is not representing the official views and regulations set by by the authorities related to the bourse or the like. It serves merely as a personal research and quick guide. The interested parties are advised to contact Bursa Malaysia Derivatives Clearing

May 25, 2011
by : Dr. Ben Steil

Thank you for the opportunity to present to you this morning my views on the important subject of derivatives clearing.

The collapse of Lehman Brothers and AIG in September of 2008 highlighted the importance of regulatory reforms that go beyond trying to prevent individual financial institutions from failing. We need reforms that act to make our markets more resilient in the face of such failures – what engineers and risk managers call “safe-fail” approaches to risk management. Well capitalized and regulated central derivatives clearinghouses to track exposures, to net trades and to novate them, to collect proper margin on a timely basis, and to absorb default risk have historically provided the best example of successful “safe-fail” risk management in the derivatives industry.

Compare the collapse of the large hedge fund Amaranth in 2006 with the collapse of AIG in 2008. Both were laid low by derivatives exposures. Yet whereas the failure of Amaranth caused barely a ripple in the markets, owing to its exposures having been in centrally cleared exchange-traded natural gas futures contracts, the failure of AIG precipitated justifiable concerns of widespread market contagion that ultimately required a massive and enormously controversial government intervention and bailout to contain. Had AIG been building derivatives exposures on-exchange rather than in the OTC markets, its reckless speculation would have been brought to a halt much earlier owing to minute-by-minute exposure-tracking in the clearinghouse and unambiguous mark-to-market and margining rules. The long, drawn-out wrangling between AIG and Goldman Sachs over the collateral required to cover AIG’s deteriorating derivatives positions would never have been possible had a clearinghouse stood between the two.

Furthermore, AIG’s net exposures in the marketplace would not have been the subject of rumor or surmise, but a simple matter of record at the clearinghouse.

Encouraging a shift in derivatives trading from OTC markets without central clearing to organized, government-regulated markets with central clearing is challenging, however, for two major reasons.

First, the dealers that dominate the OTC derivatives business have no incentive to accommodate such a shift. Dealers earn approximately $55 billion in annual revenues from OTC derivatives trading. Some of the largest earn up to 16% of their revenues from such trading. The movement of such trading onto exchanges and central clearinghouses has the potential to widen market participation significantly, to increase the transparency of prices, to reduce trading costs through the netting of transactions, and in consequence to reduce the trading profits of the largest dealers materially. It is natural, therefore, that dealers should resist a movement in trading activity onto exchanges and clearinghouses. Where compelled by regulation to accommodate it, dealers can also be expected to take measures to control the structure of, and limit direct access to, the clearing operations. The use of measures such as unnecessarily high capital requirements in order to keep smaller competitors or buy-side institutions from participating directly as clearinghouse members are to be expected.

Indeed, trading infrastructure providers organized as exclusive mutual societies of major banks or dealers have a long history of restricting market access. For example, in the foreign exchange markets, the bank-controlled CLS settlement system has long resisted initiatives by exchanges and other trading service providers to pre-net trades through a third-party clearing system prior to settlement. Such netting would significantly reduce FX trading costs for many market participants, but would also reduce the settlement revenues generated by CLS and reduce the trade intermediation profits of the largest FX dealing banks. Other settlement service providers such as DTCC have no incentive to offer competition to CLS, as they are owned by the very same banks. There are therefore solid grounds for regulators to apply basic antitrust principles to the clearing and settlement businesses in order to ensure that market access is not being unduly restricted by membership or ownership limitations that cannot be justified on safety and soundness grounds.

Second, some types of derivatives contracts do not lend themselves to centralized clearing as well as others. Customized contracts, or contracts which are functionally equivalent to insurance contracts on rare events, are examples. Since it can be difficult for policymakers or regulators to determine definitively whether given contracts - new types of which are being created all the time - are well suited for central clearing, it is appropriate to put in place certain basic trading regulations in the OTC markets that will serve both to make such trading less likely to produce another AIG disaster and to encourage the movement of trading in suitable products onto central clearinghouses. Two such measures would be to apply higher regulatory capital requirements for non-cleared trades, in consequence of the higher counterparty risk implied by such trades, and to mandate trade registration and collateral management by a regulated third party, such as an exchange.

In establishing the regulatory standards for the clearing of derivatives transactions, it is imperative for lawmakers and regulators to be fully conscious of the fact that the derivatives market is effectively international, rather than national, and that it is exceptionally easy for market participants to change the legal domicile of their trading activities with a keystroke or a simple change of trading algorithm. In this regard, I would highlight two important areas of concern.

First, the three major world authorities controlling the structure of the derivatives clearing business – the SEC, the CFTC, and the European Commission – each take a very different view of the matter. Historically, the SEC has applied what I would term the “utility” model to the industry, the CFTC has applied what I would term the “silo” model, and the European Commission has applied what I would term the “spaghetti” model. The broad benefits of each are depicted in the matrix below.

The SEC’s utility model favors institutions operated outside the individual exchanges; in particular the DTCC in the equity markets and the OCC in the options markets. This approach has generally performed well in terms of safety and soundness, and in encouraging competition among exchanges. It performs poorly, however, in terms of encouraging innovation in clearing and settlement services.

The CFTC’s silo model allows the individual exchanges to control their own clearinghouses. This approach has also performed well in terms of safety and soundness. The recent decision of the CME to raise margin requirements on silver trading is evidence of the model working well, in terms of the exchange placing a premium on the integrity and solvency of its clearing operations rather than trying to maximize short-term speculative trading volumes. The CFTC’s model also encourages innovation in product development in a way in which the SEC’s model does not. This is because CFTC-regulated futures exchanges can capture the benefits of product innovation in terms of generating trading volumes, whereas SEC-regulated options exchanges risk seeing trading volumes in new products migrate to other exchanges, all of which use clearing services provided by the OCC. The CFTC model, in consequence, does not promote competition from new trading venues in the same way that the SEC model does. It does, however, promote wider direct market participation in clearing systems, as demutualized exchanges have a commercial interest in expanding such access to buy-side institutions that dealers normally want to exclude. This reduces trading costs and expands market liquidity.

The European Commission’s spaghetti model, enshrined in its so-called “Code of Conduct” for the industry, compels the EU’s clearinghouses to interoperate with each other. It also encourages both exchanges and clearinghouses to compete against each other. Like the SEC’s model, however, it can be expected to dampen incentives for product innovation, as clearing competition makes it more difficult for exchanges that own clearinghouses to maximize their trading and clearing revenue returns on new product development. More importantly, this model, I believe, is not conducive to ensuring safety and soundness, as it encourages clearinghouses to cut margin requirements and other prudential measures as a way to attract business from, or prevent business from moving to, other clearinghouses. It also injects a major element of operational risk into the business, in consequence of each clearinghouse being vulnerable to failures of technology or risk management in others.

On balance, I believe that the CFTC’s model is the most appropriate for the derivatives industry, and I believe that the unworkability of the European Commission’s spaghetti approach will ultimately oblige it to move back in the CFTC’s direction. Although the CFTC’s approach does not promote inter-exchange competition as directly as the SEC’s model, it is important to note that new competitors are, in fact, entering into the futures business. ELX, founded in 2009, and NYPC , a recent joint venture between the NYSE and the DTCC which facilitates cross-margining of multiple products, are now competing with the CME in the financial futures space.

The second point I would like to make regarding the global nature of the derivatives trading industry is that certain measures to curb speculative activity being debated here in Washington are highly likely to push trading activity “off exchange” – precisely the opposite of Congress’s intent. For example, a so-called Tobin Tax on futures transactions at the level being discussed last year, 2 basis points (0.02%), would be equivalent to over 400 times the CME transaction fee on Eurodollar futures. It should go without saying that a tax this large, relative to the current transaction fee on the underlying contract, would push all of this trading off the CME and into alternative jurisdictions.

Likewise, commodity market position limits, if not harmonized with UK and other national authorities, will merely push such trading outside the CFTC’s jurisdiction. There is already an active regulatory arbitrage on oil and natural gas futures between the CME’s Nymex exchange, which trades such contracts under CFTC regulation, and the Intercontinental Exchange (ICE), which trades such contracts under FSA regulation in London. We have seen indications of movement in trading from Nymex to ICE in line with market perceptions of the likelihood of such limits being imposed in the United States. In short, we must be extraordinarily cautious not to undermine Congress’s worthy goal of bringing more derivatives trading under the purview of US-regulated exchanges and clearinghouses by inadvertently providing major market participants incentives to do precisely the opposite.

Thank you for the opportunity to present my views today on this important issue.

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