This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.In today's financial system, complex financial institutions are connected through an opaque network of financial exposures. These connections contribute to financial deepening and greater savings allocation efficiency, but are also unstable channels of contagion. Basel III and Solvency II should improve the stability of these connections, but could have unintended consequences for cost of capital, funding patterns, interconnectedness, and risk migration.

This paper draws analogies between techniques used to reserve for, control and manage derivatives and techniques used by actuaries in other fields. It concentrates on equity derivatives. It also includes a review of the factors which significantly influence the appropriate size of reserves to hold for a derivatives portfolio. These include the likelihood of market jumps, uncertainty in future market volatility and the size of transaction costs, as well as on more obvious factors like position risk.

The Management Board of the UK Actuarial Profession is undertaking a thought leadership crosspractice research project on the use of discount rates by UK actuaries. The timing for this research is particularly appropriate as there is a convergence of interest in discount rates from within and outside of the Profession. Discount rates are at the heart of most actuarial calculations and are of significant public interest. As part of this project the Management Board wants a full and open debate on the significant issues and this paper is the next step in stimulating that debate, giving another opportunity to influence the future direction of the project. The Management Board set up a small cross-practice steering committee to drive the project. The Discount Rate Steering Committee identified five areas of work that would be needed to achieve the project's overall objectives:(1) A survey of current practices.(2) A survey of existing research and debate.(3) Developing a common language for communicating discount rates and risk.(4) Developing a common framework for the future where appropriate.(5) Considering the impact of any changes.Although the Profession does not set standards for technical work it still has a significant role for undertaking research in the public interest which supports the competence of its members and the furtherance of actuarial science. Chinu Patel and Chris Daykin were commissioned to undertake the first part of this work and they presented their preliminary output at a forum of thought leaders across the Profession and externally on 23 March 2010. Their report ''Actuaries and Discount Rates'' was subsequently published in May 2010 and presented the results of their initial research into past and current practice in the setting of discount rates in the UK, and a survey of existing research and debate. A summary of that report is included in Section 2 of this paper. Following consultation both within and outside the Actuarial Profession, this interim paper now takes forward the ideas and initial steps developed by Patel & Daykin and looks at developing a common language and framework for using discount rates in actuarial work. The Discount Rate

comprehensive understanding of correlations and interlinkages, as well as an understanding of macroeconomic feedback mechanisms. 6.Information availability: regulatory information should allow for prompt identification of contagion channels and pockets of vulnerability. Timely information enables policies to be implemented that react effectively to new developments, either by recalibrating or activating existing regulatory tools or by activating crisis management tools. 7.Non-regulatory discipline: the presence of regulatory discipline should not entail the removal of non-regulatory discipline. On the contrary, the discipline that derives from market players, effective governance structures and the prevalence of high ethical and personal responsibility standards in the management of financial institutions is complementary to financial regulation and may reduce its need to rely on complex rules.Reports of the Advisory Scientific Committee No 8 / June 2019 Introduction 5Arguably, these institutions contribute to harmonising regulatory and supervisory policies and practices in the EU, thus reducing the complexity associated with the heterogeneity in country legislations and practices. In practice, however, some of the new institutions have not wholly replaced the old ones, creating a more complex institutional landscape.

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