NETHERLANDS - Joanne Kellermann, executive director at the Dutch central bank DNB, has brushed off criticism of the fair value accounting of pension liabilities, at the same time as the regulator becomes the latest to ban naked short-selling.

According to Kellermann, the recent heavy fluctuations in cover ratios of Dutch pension funds are not the result of fair value accounting - valuing the investments and liabilities on the basis of market value, or the amount at which these could be bought or sold in a current transaction between willing parties - but rather of an oversized mismatch risk.

Kellermann, who made the comments during a speech at a DNB pension event in Apeldoorn last week, said fair value accounting gives a "good insight into the real financial position of the fund."

She added the much-disputed fair value approach, already part of the current FTK assessment framework introduced in 2007, is a good basis for the policy decisions of pension funds.

"Given the market value, the volatility of the funding ratio is the result of not fully covering the risks mismatch," she argued, stating if the mismatch is larger, the funding ratio will show more volatility.

She continued: "Pension funds who limit the size of the mismatch risk have a relatively stable funding ratio."

A mismatch risk has its benefits, though a pension fund needs to show the DNB it can manage that risk with an updated actuarial and business memorandum (ABTN) - one of the most important tools for supervision.

"Sadly, in practice we often see out-of-date ABTNs, who sometimes even lack elementary items such as a statement of the investment principles or an explanation of the high of the cost-recovery premium," said Kellerman, who added DNB will step up its supervision in this area.

The news comes as DNB and its sister regulator Authority Financial Markets (AFM) have announced they have banned the practice of naked short-selling of financial stocks - the practice of selling a stock short without first borrowing the shares or ensuring the shares can be borrowed - for the next three months to increase the stability of financial markets.

The Netherlands is the latest of a number of European countries to have clamped down on the practice of selling borrowed shares in hopes of buying them back cheaper and pocketing the difference, as Belgium, France, Germany, Switzerland and the UK have all made similar moves.

Last week, the US Securities and Exchange Commission (SEC) banned all short selling in the shares of 799 financial companies until early October.

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