iflr web seminar: the impact of u.s. regulatory reforms on foreign banks and issuers august 3, 2010...
TRANSCRIPT
IFLR Web Seminar:The Impact of U.S. Regulatory Reforms
on Foreign Banks and Issuers
August 3, 2010
Barbara Mendelson, Morrison & Foerster LLPAnna Pinedo, Morrison & Foerster LLPAnthony Ragozino, UBS Securities LLC
Adriaan Van Der Knaap, UBS Securities LLC
NY2-675850
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Introduction The House and the Senate passed the Dodd-Frank Wall Street Reform and Consumer
Protection Act (“the Act”) on June 30, 2010 and July 15, 2010, respectively. President Obama signed the bill into law on July 21, 2010.
While many provisions of the Act are still in the process of being interpreted by legal and regulatory experts, it is clear that the Act will have very broad application and a material impact on the financial industry.
The Act is over 2,300 pages long, is extremely complicated and contains ambiguities. The summary of certain provisions of the Act contained herein is based on our own reading of the Act and our discussions with experts. However, it should be noted that certain provisions of the Act may be interpreted differently than as presented herein.
In addition, many provisions of the Act require or suggest different regulatory bodies draft and enact rules over the course of the next several years to implement the Act, in many instances after detailed studies required to be conducted by the Act are completed. The scope and content of these new rules will add to the impact the Act will have on different financial companies.
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Key Provisions
Capital Rules for Banks
More stringent capital rules Limits on leverage Potential elimination of trust
preferred securities Contingent capital
Volcker Rule
Limits proprietary trading Regulates investments in hedge
funds and private equity funds – 3% limit (3% of bank Tier 1 capital cap / 3% of fund capital cap)
Banks may engage in “permitted” activities
New Agencies
Consumer Financial Protection Bureau
Financial Stability Oversight Council
Federal Insurance Office (Treasury)
New Office of Minority and Women Inclusion
Investor Advisory Committee
Office of Investor Advocate (SEC)
Office of Credit Ratings (SEC)
Credit Rating Agency Board (SEC)
Office of Financial Literacy
Office of Financial Research (Treasury)
Office of Housing Counseling (HUD)
Office of Fair Lending and Equal Opportunity (Fed)
Office of Financial Protection for Older Americans (Fed)
Derivatives
Central clearing and exchange trading
Swaps push-out provision Capital and margin requirements
Rules to Protect Consumers & Investors
Consumer Agency Deposit insurance permanently increased
to $250,000 Mortgage regulations Investment advice standards of care Requires hedge fund and private equity
fund advisors to register with SEC Securitization “Skin in the Game” Rules Regulations affecting Credit Rating
Agencies Corporate governance and executive
compensation restrictions Insurance Office
Enhanced Prudential Standards
Discourages excessive growth and complexity
Council can impose 15:1 debt-to-equity ratio
Concentration limits for non-affiliates Living wills Risk committees
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Impact Relative to Bank Size
Notes:1 Assumes Federal Reserve promulgates rule prohibiting inclusion in Tier 1 Capital. 2 No phase-out of trust preferred securities for Bank Holding Company subsidiaries of foreign banking organizations. Instead, they will receive full credit for inclusion in
Tier 1 Capital for a 5 year period, after which they will be excluded.
$15BN
(Small Banks)
No phase-out of trust preferred securities: effectively grandfathered permanently
Primary federal regulator is OCC (National Banks / Thrifts) or FDIC (State Banks / Thrifts)
No requirement for “risk committees” if size is less than $10BN
$15-50BN
(Medium Sized Banks)
Trust preferred securities will be phased -out1 beginning January 1, 2013
Primary federal regulator is OCC (National Banks / Thrifts) or FDIC (State Banks / Thrifts)
>$50BN
(Large Banks)
Trust preferred securities will be phased - out2 (similar to medium sized banks)
Costs of unwinding failing firms will be borne by large banks
Required to submit resolution plans (living wills)
Regulated by Federal Reserve (holding companies) and OCC
Systemically
Important Institutions
(> … BN)
Financial Stability Oversight Council can impose 15:1 debt-to-equity ratio- -
Requires stress testing
Subject to new Orderly Liquidation Authority provisions
Definition of Systemically Important Institutions to be defined
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Timing of Implementation
Effective Immediately
Federal authority to seize systemically important firms that are near collapse Creation of Federal Insurance Office at the Treasury Department
3 months Financial Stability Oversight Council meets for first time
6 months Rules governing non-binding shareholder votes on executive pay
9 months Rules setting risk-retention requirements for securitized assets
1 year
Consumer Financial Protection Bureau gets authority over consumer issues Office of Thrift Supervision (OTS) merges with Office of the Comptroller of the Currency (OCC) Hedge funds and investment advisers must register with the SEC Rules ensuring that credit rating agencies are subject to enforcement and penalty provisions
> 1 year
Volcker Rule limiting proprietary trading and banks’ ability to invest in hedge funds and private equity Derivatives rules completed, including clearing and exchange-trading requirements 10% rule limiting large institutions to no more than 10% of aggregated liabilities Rules setting minimum risk-based capital and leverage standards for banks, including Basel III Phase-out of disqualified instruments from 2013 to 2016 Potential rules requiring banks to hold “contingent capital” New streamlined mortgage-disclosure forms Swap push-out – banks to lose federal assistance if certain swap desks are retained ABS secruitizers required to retain at least 5% of risk
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Key Impacts for BanksThe legislative changes will have a substantial impact on banking institutions
Capital Requirements
Higher capital requirements for systemically important banks (>$50bn) – Council can impose a 15:1 debt-to- equity limit
No specific guideline on minimum capital levels or capital ratios (i.e., Tier 1 Common vs. Tier 1) Higher capit al requirements for activities such as derivatives trading and securitization
Mix of Capital
G reater emphasis on c ommon equity given desired focus on s impler, more transparent, loss absorbing capital E limination or phasing out of some non- common equi ty components of Tier 1 capital ; uncertainty about REIT
Preferreds and some convertible structures
Business Mix
Creation of the Consumer Financial Protection Bureau and the associated administrative burden / costs likely to result in increased emphas is of commercial banking business going forward
Transition away from higher risk activities such as proprietary trading and derivatives trading
Returns
Increased capital requirements, de- emphasis on risk- taking, and higher administrative costs (Consu mer Financial Protection Bureau , elevated FDIC assessments, etc.) will dilute shareholder returns
Impact on debit card interchange fee along with Reg E impact on overdraft fees will further impair profits
Valuation Lower shareholder returns and growt h profile will result in banks trading at lower price/book multiples
M&A
Will see increased divestitures of businesses / investments that may ultimately receive unfavorable capital treatment
– Minority interests, financial firm investments, PE / he dge fund investments Large cap M&A less prominent given heightened scrutiny on systemically important institutions; more likely to see
more regional / bolt- on acquisitions
Regulatory Oversight
Increased oversight given creation of Financial Sta bility Oversight Council, Consumer Financial Protection Bureau, Office of Credit Ratings, Office of Housing Counseling, etc.
Federal Reserve to have heightened regulatory power / authority Legislation does not, however, address FNMA and FHLMC
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Specific Provisions in DetailProvision / Area Details
Federal Reserve Board (“Fed”)
In addition to current authority, the Fed would oversee large, systemically-important nonbank institutions, be responsible for setting and enforcing stricter standards for disclosure, capital, and liquidity, and be authorized to break up large companies with Council approval
Covered BHCs and nonbank financial companies designated as Covered Nonbank Companies1 shall be subject to the Fed’s heightened prudential standards
The Senate agreed to the House provision authorizing the GAO to conduct a one-time audit of the Fed’s 2008 emergency lending program and to provide ongoing audits of discount window and open market operations with a two-year lag
The President will not have authority to appoint the president of the New York Federal Reserve Board
Financial Stability Oversight Council (“Council”)
Led by the Treasury Department, the ten-member Council shall include regulators from the Fed, Securities and Exchange Commission (“SEC”), Federal Housing Finance Agency, Commodity Futures Trading Commission and other agencies. State securities, insurance and banking regulators and credit unions lobbied for and won non-voting seats.
The Council shall determine whether a nonbank financial company be subject to stricter prudential standards for financial stability standards depending on a number of factors.
With a 2/3 vote, the Council can impose higher capital requirements on lenders or place broker-dealers and hedge funds under the authority of the Fed
The Council shall have authority to force companies to divest holdings if their structure poses a “grave threat” to U.S. financial stability The Council would be able to overrule the Consumer Financial Protection Bureau
Consumer Financial Protection Bureau (“Bureau”)
The Bureau, which serves as a consumer “watchdog,” shall be located within the Fed as an autonomous entity with an independent budget led by a presidentially appointed director
The Bureau shall write consumer-protection rules for firms that offer financial services or products and enforce those rules for banks and credit unions with more than $10 billion in assets. Bank regulators will continue to examine consumer practices at smaller financial institutions
The Bureau is authorized to regulate credit cards and mortgages, but not auto dealers who make auto loans
1 Covered BHCs are BHCs with $50 billion or more in total consolidated assets. Covered Nonbank Companies are nonbank financial companies whose failure would pose a grave threat to U.S. financial stability
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Specific Provisions in DetailProvision / Area Details
Too Big to Fail:Orderly Resolution Process
and Funding
The Act grants the FDIC, which already has authority to liquidate failed commercial banks, power to unwind large failing financial firms whose collapse would threaten U.S. financial stability
The House agreed to Senate language that grants the FDIC a line of credit with the Treasury Department to pay for the up-front costs of breaking up troubled firms, but the government would have to establish a “repayment plan”
The House dropped its bid to create a $150 billion resolution fund. Instead, conferees agreed to follow the Senate measure where the costs of unwinding failing firms will be borne by financial firms with more than $50 billion in assets through fees imposed after a collapse.
The Act explicitly bars the use of taxpayer funds to rescue failing financial companies
Thrift Charter
The Office of Thrift Supervision shall be abolished with its authority relating to Federal savings associations, State savings associations, and savings and loan holding companies will be transferred to the Office of the Comptroller of the Currency, the FDIC, and the Fed, respectively
The Thrift Charter has been preserved, thereby preventing insurance companies that own thrifts from being transformed into bank holding companies and subject to the Volcker Rule
Capital Standards: Leverage The Council will impose a 15-to-1 maximum leverage ratio on firms that pose a “grave threat” to the national economy where
imposition of such a leverage limit would mitigate risk
Risk Retention Requirements for Securitized Debt
Banks that package loans will be subject to a 5% risk retention requirement, thus affecting credit card debt, auto loans, mortgages, and other securitized debt
Loans guaranteed by the Federal Housing Administration, U.S. Department of Agriculture, and the U.S. Department of Veterans Affairs will be exempt from this requirement
Regulators will have flexibility to tailor risk-retention rules to specific products (e.g., setting underwriting standards as a form of risk retention)
Broker-Dealer’s and Investment Advisor's Standard of Care
The SEC will conduct a six-month study and then issue rulemaking under its existing authority The SEC will implement rules within the parameters laid out in the House bill, which allows brokers to offer clients services
associated with principal trading
“Pay It Back” To fund the cost of the Act, (1) the TARP Program shall end one year early to raise $10 billion, and (2) the FDIC premium ratio
shall be increased to 1.35 from 1.15 to raise $9 billion
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Mandated Studies Affecting BanksStudy Description
Volcker Rule
Due within 6 months – Council study on effective implementation of Volcker Rule Due within 15 months – GAO study on proprietary trading Due within 18 months – banking agencies to consider additional restrictions for banking activities permitted under
federal and state law
Contingent Capital Due within 2 years Council study on feasibility, benefits, costs and structure of a contingent capital requirement
Credit Rating Agency Board Due within 2 years SEC study to create new mechanism preventing ABS issuers from selecting agency to gain the best rating
Rating Agency Independence
Due within 3 years SEC study on independence of rating agencies
Conflicts of Interest for Securities Underwriters
Due within 18 months GAO study on conflicts of interest between securities underwriting and securities analysts at the same firm
Bank Holding Company Exemptions
Due within 18 months GAO study on Bank Holding Company Act exemptions for holding companies Potential impact on credit card banks, trust companies, industrial banks, industrial loan companies and thrift holding
companies controlling banks
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Mandated Studies Affecting BanksStudy Description
Holding Company Capital Requirements
Due within 18 months GAO and Federal banking agencies study on inclusion of hybrid securities in Tier 1 capital
Foreign Bank Intermediate Holding Companies Capital
Requirements
Due within 18 months GAO and Federal banking agencies investigation on capital requirements for US bank or
thrift holding companies of foreign bank
Small Banks
Due within 18 months GAO and Federal banking agencies study on access to capital for small insured
depository institutions (<$5BN)
Deposits
Due within 1 year Review definitions and differences between core deposits and brokered deposits
conducted by FDIC Resulting impact on Deposit Insurance Fund and on local economies should definitions
change Calculation of insurance premiums for banks
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Status
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Systemic Designation
Many of the most significant changes affect entities designated as systemically important
Bank holding companies with total consolidated assets equal to or greater than $50 billion will automatically be considered systemically important
These may include non-U.S. institutions Otherwise, the Council will consider designating institutions that are
systemically important (again, these may include institutions that are non-U.S. institutions)
Systemically significant entities will be subject to requirements relating to: Credit exposure limits Capital Requirement to provide resolution plans, or living wills Limitations on acquisition transactions
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Not Systemically Important
Insured depositories and bank holding companies that are not systemically important also will be subject to more stringent requirements, including those related to:
Regulatory capital Section 23A modifications If over $10b in total consolidated assets, then required to risk committees will be
required, and must conduct internal stress tests Additional rule making to be adopted generally, including on source of strength Enhanced supervision and enforcement
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Applicability to Non-U.S. Institutions
It is not clear how the Federal Reserve will apply these standards
Will the Fed defer to home country supervision if the home country rules do not provide for enhanced supervision?
Likely the Fed will look at the size and the interconnectedness of the non-U.S. institution
From a practical perspective, however, it is unclear
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Banking Entity Nonbank Financial Company
Systemically Important (Bank and Nonbank)
Entities
- Credit exposure limits
- Living wills
- Capital requirements
- Limitations on acquisitions
All
Subject to:
- Securitization restrictions
- Derivatives (unless a commercial end user) requirements
- Mortgage provisions
- Corporate governance and executive compensation provisions
All Banks
- Regulatory capital requirements
- 23A/B restrictions
- Enhanced supervision and enforcement
- Lincoln (push-out) provisions
- Volcker Rule provisions
All Nonbank Financial Companies
- Subject to Consumer Financial Protection Bureau oversight
- May be subject to supervision by the SEC or CFTC (depending on entity)
- Financial entity?
Over $50b in TCA:Systemically important15-to-1 maximum leverageUnder $15b in TCA:Not subject to hybrid prohibitionOver $10b in TCA:Risk committeeInternal stress tests
SupervisedSubject to capital and other requirementsImpacted by Volcker RuleIntermediate holding company requirement?Not SupervisedNot subject to the more onerous restrictions associated with Dodd-Frank
What are you?
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Regulatory Capital
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Regulatory CapitalGenerally, the Act imposes more stringent regulatory capital requirements on financial institutions
Requires the Council to make recommendations to the Federal Reserve regarding the establishment of heightened prudential standards for risk-based capital, leverage, liquidity and contingent capital
Requires that the Federal Reserve, on its own, or with recommendations from the Council, establish prudential standards for supervised nonbanks and for bank holding companies with total consolidated assets equal to or greater than $50bn (these may include non-U.S. institutions), that include:
risk-based capital requirements, leverage limits, liquidity requirements, overall risk management requirements, requirements for a resolution plan, and concentration limits
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Regulatory CapitalThe standards to be set by the Federal Reserve will include:
a contingent capital requirement, enhanced public disclosures, and short-term debt limits
Includes other requirements, including: a risk committee requirement a stress test requirement for bank holding companies or a supervised nonbank with total
consolidated assets equal to or greater than $50bn a maximum debt-to-equity ratio of 15-to-1
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Regulatory Capital Incorporates a revised Collins amendment
Requires the establishment of minimum leverage and risk-based capital requirements
Sets at the risk-based capital requirements and the Tier 1 to total assets standard applicable to insured depository institutions under the prompt corrective action provisions of the FDIA No deduction for investment in bank subsidiaries
Sets current rates as a floor Effect on accounting issues and risk weights is unclear
Limits discretion in establishing Basel III requirements (U.S. can adopt more onerous standards, but cannot adopt laxer standards)
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Regulatory Capital Raises the specter of additional capital requirements for activities
that are determined to be risky Derivatives, securitized products, financial guarantees, securities
borrowing and lending and repos Assets valued based on models Concentrations of market share
These requirements become effective upon implementing regulations, which are required within 18 months of the passage of the Act
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Regulatory CapitalEffect on Hybrids
As discussed earlier, does not permit the inclusion of trust preferred securities or other hybrid securities in the numerator of Tier 1, subject to limited exceptions
Mutual holding companies and thrift and bank holding companies with less than $15bn in total consolidated assets are not subject to this
Intermediate U.S. holding companies of foreign banks have a five-year phase-in period
For newly issued securities (hybrids issued after May 19, 2010), the requirement is retroactively effective
For bank holding companies and systemically important nonbank financial companies, phase-in for hybrids issued prior to May 19, 2010 will be phased in from January 2013 to January 2016
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Regulatory CapitalCurrently, an intermediate BHC subsidiary does not have to comply
with the Federal Reserve’s capital guidelines (in accordance with
Federal Reserve guidance) if its parent company is a financial holding
company that has been determined to be well capitalized and well
managed based on its own home country standards
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Regulatory CapitalStudy
Within 18 months of the Act’s passage, the Comptroller must conduct a study of the use of hybrid capital instruments as a component of Tier 1, which shall consider, among other things:
the benefits and risks of allowing instruments to be used to comply with Tier 1 requirements,
the economic impact of prohibiting the use of hybrids, and possible specific recommendations for legislative or regulatory actions regarding
the treatment of hybrids
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Regulatory CapitalContingent Capital
Within two years of enactment, the Council must present the results of a study on contingent capital that considers, among other things, an evaluation of: the effect on safety and soundness of a contingent capital requirement, the characteristics and amounts of contingent capital that should be required,
and the standards for a triggering requirement
Following the study, the Council may make recommendations to the Federal Reserve to require a minimum amount
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Regulatory CapitalAnticipated Effects
Will likely require banks to raise more capital In the near-term, banks will consider whether to:
redeem (for a Capital Treatment Event) outstanding trust preferreds; or
undertake exchange offers Over the longer term, banks will consider:
new issuances asset sales
Financing costs likely will increase, unless more efficient products are introduced
Overall, banks also will be required to address the other significant burdens imposed by the Act, including those arising out of the Volcker Rule, changes to Section 23A/B, and regulations affecting their derivatives business
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Volcker Rule
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Volcker Rule
Introduction
The Volcker Rule provisions, named for former Federal Reserve Chairman Paul Volcker, are premised on the belief that speculative trading activities contributed in part to the financial crisis
The Volcker Rule was changed and reshaped during the entire legislative process
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Volcker Rule
Volcker prohibitions
There are important distinctions made between the activities that may be conducted by banking entities and those that may be conducted by nonbank financial companies supervised by the Federal Reserve Generally, a banking entity cannot engage in proprietary trading or own interest in or sponsor a hedge fund or a private equity fund
A “nonbank financial company supervised by the Federal Reserve” that engages in proprietary trading or fund activities will be subject to additional capital requirements and quantitative limits, to be established by rule.
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Prohibition on Proprietary Trading and on Fund Activities If a nonbank financial company engages in any permitted activities
(i.e., any of the activities that a banking entity is permitted to engage in), the capital requirements or quantitative limits applied to the nonbank financial company for those activities will be the same as those applied to banking entities engaging in such permitted activities.
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Nonbank Financial Companies
A nonbank financial company is:
Any company (not including BHCs, exchanges, clearinghouses, swap data repositories) that is “predominantly engaged in financial activities”
Annual gross revenues derived by the company and all of its subsidiaries from activities that are “financial in nature” and, if applicable, from the ownership or control of one or more insured depository institutions, represent 85% or more of consolidated annual gross revenues of the company; OR
Consolidated assets of the company and all of its subsidiaries related to activities that are “financial in nature” and, if applicable, from the ownership or control of one or more insured depository institutions, represent 85% or more of the consolidated assets of the company
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Nonbank Financial Companies(cont’d) “Supervised by the Board” if systemically significant
Test: Material financial distress at the company or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the company could pose a threat to the financial stability of the U.S.
Determination based on 2/3 vote of the Financial Stability Oversight Council For foreign nonbank financial companies, consideration not limited to U.S. activities
and subsidiaries Any BHC with total consolidated assets ≥ $50B as of January 1, 2010 that participated in the
Capital Purchase Program under TARP and ceased to be a BHC will be treated as an NFC supervised by the Board
Company may establish (or Board may require establishment of) an intermediate holding company for “financial activities” for purposes of Board supervision
Financial activities: Activities that are financial in nature Includes ownership or control of one or more insured depository institutions Does not include internal financial activities conducted for the company or any
affiliate, including internal treasury, investment, and employee benefit functions Nonfinancial activities not subject to Board supervision or prudential standards
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Key Terms
Proprietary trading Engaging as a principal For the trading account of the banking entity or NFC supervised by the Board In any transaction to purchase or sell, or otherwise acquire or dispose of, any
security, any derivative, any futures contract, an option on any such security, derivative, or futures contract, or any other security or financial instrument specified by rule
Trading account Any account used for acquiring or taking positions principally for the purpose of
selling in the near term (or otherwise with the intent to resell in order to profit from short-term price movements); AND
Any such other accounts specified by rule
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Fund Activities
Hedge funds or private equity funds includes entities that would be subject to registration under the Investment Company Act but for Section 3(c)(1) (fewer than 100 owners) or for Section 3(c)(7) (those offered only to “qualified purchasers”)
Sponsoring a hedge fund or a private equity fund includes controlling the fund (by virtue of being a general partner or a managing member, or through board control), or sharing a name with the fund
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De Minimis Investments
A banking entity may make and retain an investment in a fund that the banking entity organizes and offers; provided, that:
it seeks unaffiliated investors for the fund;
within one year of a fund’s start date, the banking entity’s investments shall not exceed more than 3% of the total ownership interests in such fund; and
the aggregate of investments in all such funds does not exceed 3% of the banking entity’s Tier 1 capital.
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Permitted Activities
The following activities are “permitted activities”: transactions in U.S. government securities (including securities of the GSEs); transactions in connection with underwriting or market-making activities, to the
extent designed not to “exceed the reasonably expected near term demands of clients, customers or counterparties”;
risk-mitigating hedging activities in connection with a banking entity’s individual or aggregate positions, contracts or holdings that are designed to reduce the banking entity’s specific risks in connection with such positions, contracts or holdings;
customer transactions; SBIC investments; the purchase or sale of securities and derivatives by a regulated insurance
company engaged in the insurance business, subject to state insurance regulation and federal safety and soundness review;
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Permitted Activities (cont’d) organizing and offering a private equity or hedge fund, if the banking entity (the
“fiduciary” exception): provides bona fide trust, fiduciary, or investment advisory services; provides trust or related services and offers interests in the fund only in
connection with providing such services only to bank customers; does not acquire or retain an equity interest, partnership interest, or other
ownership interest in the funds except for de minimis investments (see above); observes the restrictions on affiliate transactions; does not, directly or indirectly, guarantee or assume, or otherwise insure, the
obligations or performance of the fund; does not share a name or derivation of a name or other marketing with the
fund; does not permit any director or employee of the banking entity to take or retain
an equity interest, partnership or other ownership interest in the fund, except for any director or employee who is directly engaged in providing investment advisory services to the fund; and
discloses to prospective and actual fund investors that losses sustained by the fund are not borne by the banking entity;
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Permitted Activities (cont’d)
certain proprietary trading that occurs solely outside of the U.S. by a banking entity that is not directly or indirectly controlled by a banking entity organized under the laws of the U.S.;
the acquisition or retention of an ownership interest or the sponsorship of a fund by a banking entity solely outside of the U.S. if interests in the fund are not offered or sold to a U.S. resident and the banking entity is not directly or indirectly controlled by a banking entity organized in the U.S.; and
all other activities deemed appropriate by the applicable oversight agencies that would promote the safety and soundness of the banking entity.
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Limitations on Permitted Activities
No transaction, class of transactions, or activity may be deemed a permitted activity if it would:
involve a material conflict of interest (to be defined by rule) between the banking entity and its clients, customers, or counterparties
result, directly or indirectly, in a material exposure by the banking entity to high-risk assets or high-risk trading strategies (to be defined by rule)
pose a threat to the safety and soundness of the banking entity pose a threat to the financial stability of the U.S.
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Phase-In Period
Generally, these provisions shall take effect on the earlier of: 12 months after the date of the issuance of the final rules, or two years after the date of enactment of the Act.
Bank entities and nonbank financial companies will have two years after the effective date (or two years after the date on which the entity becomes subject to Federal Reserve supervision as a bank entity or a nonbank financial company) to bring their activities into compliance.
This phase-in period may be extended by the Federal Reserve for one year at a time, with extensions not to exceed an aggregate of three years.
However, the Federal Reserve may extend the period in order to permit compliance with a contractual obligation that was in effect on May 1, 2010, in connection with illiquid funds
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Milestones
July 2010 Jan 2011 Sept 2011 July 2012 July 20146 months 9 more months
Enactment of Dodd-Frank Act
Fed to issue transition rules
Council to release its study and recommendations
Actual rulesCapital and
quantitative limits on prop trading
Rules to limit permitted activities for safety and soundness
EFFECTIVE DATE
Ban on prop trading
Additional capital quantitative limits
Last day if no extension
2015 2016 2017
?Extension
Extension
Extension
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Anticipated Effects
Generally, for market proprietary trading limitations (including derivatives activities)
will remove certain participants from the market will that impact liquidity? will hedge funds replace banks?
how will banks distinguish between market making and risk mitigating trades and proprietary trades?
passive investments in funds impacts banks that are sponsors or LPs impacts the private equity market as a whole
activities involving funds will be subject to Section 23A/B banks and non-banks also may be subject to additional capital requirements
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Regulation of
OTC Derivatives
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Lincoln Provision (the “Swaps Pushout” Rule)
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Prohibition on Federal Assistance
Notwithstanding any other provision of law (including regulations), no Federal assistance may be provided to any swaps entity with respect to any swap, security-based swap, or other activity of the swaps entity
Clarifies that insured depository institutions may have affiliates that are swaps entities, so long as the institution is supervised by the Federal Reserve and complies with sections 23A/23B of FRA
Originally added in the Senate bill, §716 was diluted in the conference report
Narrower definitions Added certain exclusions
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Key Terms
Federal assistance The use of any advances from any Federal Reserve credit facility or discount
window that is not part of a program or facility with broad-based eligibility FDIC insurance Guarantees In any case, for the purpose of–
Making any loan to, or purchasing any stock, equity interest, or debt obligation of, any swaps entity
Purchasing the assets of any swaps entity Guaranteeing any loan or debt issuance of any swaps entity Entering into any assistance arrangement (including tax breaks), loss sharing,
or profit sharing with any swaps entity
Swaps entity Only swap dealers and major swap participants
Senate bill included exchanges and clearinghouses Excludes insured depository institutions that are major swap participants
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Exceptions to Prohibition
Prohibition on Federal assistance does not apply to insured depository institutions that limit their swap activities to:
Hedging and other similar risk mitigating activities directly related to the insured depository institution’s activities
Acting as a swaps entity for swaps involving rates or reference assets that are permissible for investment by national banks
CDS is permissible only if cleared
Insured depository institutions still must comply with proprietary trading ban under the Volcker Rule
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Effective Date and Transition Period
Prohibition takes effect 2 years after effective date of the Act To the extent an insured depository institution would be subject to
the prohibition, the applicable Federal banking agency (in consultation with the CFTC and SEC) shall permit the institution up to 24 months to divest the swaps entity or cease the prohibited activities
May extend transition period up to 1 year
Prohibition only applies to swaps entered into after the end of the transition period
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Lincoln Provision (Swap Pushout Rule)
Implication for Foreign Financial Institutions
On its face, the exceptions for insured depository institutions do not apply to noninsured U.S. branches and agencies of foreign banks
Colloquy related to § 716 between Senator Lincoln and Senator Dodd may explain Congressional intent regarding the treatment of uninsured U.S. branches and agencies of foreign banks
Colloquy states that: There was a significant and clearly unintended oversight with regard to the
treatment of uninsured U.S. branches and agencies of foreign banks Under the U.S. policy of national treatment, uninsured U.S. branches and agencies
of foreign banks are authorized to engage in the same activities as insured depository institutions
It was not intended to force U.S. branches and agencies of foreign banks to push-out all their swap activities
U.S. branches and agencies of foreign banks should be treated the same as insured depository institutions under § 716, including the safe harbor language
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Lincoln Provision (Swap Pushout Rule)
What Does §716 Really Accomplish?
On the exceptions to the prohibition Council may prohibit Federal assistance to swaps entities on an institution-
by-institution basis upon a 2/3 vote Basis for determination – When other provisions established by Dodd-Frank
Act are insufficient to effectively mitigate systemic risk and protect taxpayers
On the “prohibition against Federal government bailouts of swaps entities” For purposes of § 716, the term “swaps entity” excludes any insured
depository institution or covered financial company (large BHCs and nonbank financial companies supervised by the Federal Reserve) that is in conservatorship, receivership, or a bridge bank operated by the FDIC
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Other Considerations
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Other Considerations
Other aspects of the derivatives provisions
Restrictions on transactions with affiliates
Corporate governance and executive compensation matters
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UBS Disclaimer
This presentation has been prepared by UBS Securities LLC (“UBS”) for the exclusive use of the party to whom UBS delivers this presentation (together with its subsidiaries and affiliates, the “Client”) using information provided by the Client and other publicly available information. UBS has not independently verified the information contained herein, nor does UBS make any representation or warranty, either express or implied, as to the accuracy, completeness or reliability of the information contained in this presentation. Any estimates or projections as to events that may occur in the future (including projections of revenue, expense, net income and stock performance) are based upon the best judgment of UBS from the information provided by the Client and other publicly available information as of the date of this presentation. There is no guarantee that any of these estimates or projections will be achieved. Actual results will vary from the projections and such variations may be material. Nothing contained herein is, or shall be relied upon as, a promise or representation as to the past or future. UBS expressly disclaims any and all liability relating or resulting from the use of this presentation.
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