s if ma collateral presentation

8/22/2019 s if Ma Collateral Presentation

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The New Regulatory Paradigm A barrage of rules, regulations and guidance from every angle

Regulators taking a hard-line stance Similarities and differences in reg. response across regions

E.g., capital vs. the Volcker Rule

Macroeconomic factors (e.g., European fiscal crisis) influencingregulatory outcomes

Bottom line: the regulatory reform process is far from over

The Market Response More resources devoted to compliance

Structural reform = potential competitive opportunity

Strategic positioning is key

Status of Reform Worldwide


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Dodd-Frank Act Implementation

300-400 rules required or contemplated (depending on how counted)

Finalized: roughly 40% Proposed: roughly 30%

Deadlines missed thus far: roughly 30%

U.S. financial regulatory agencies extremely busy

Likely 3-5 years (or larger) before full implementation

Status of Reform in the U.S.


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US EU

DoddFrank Act

CRD IV

Crisis Management DirectiveEMIR (Derivatives)

MiFID II and MiFIR

CRD III

Credit Rating Agencies Regulation

AIFMD / UCITS V

Implementation of G20 Commitments EU andUS


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1. Derivatives and Collateral Transformation

2. Capital / Basel III

Leverage Ratio

Liquidity

3. Shadow Banking and Securities Lending

4. Enhanced Prudential Standards

Single Counterparty Credit Limits

Lending Limits

Foreign Banking Organizations

5. European Bank Financial Transaction Reform

6. The Orderly Liquidation Authority

What We Will Cover Today


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Derivatives&

Collateral Transformation


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OTC Derivatives reform through

Regulatory capital

Clearing Regulation of CCPs

Trade repositories

Regulation of swap dealers and major swap participants

Dodd-Frank Regulatory Regime of OTC Derivatives


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Swap Dealers (SDs) and Major Swap Participants (MSPs) will be subject tonew capital requirements to be determined by their prudential regulator with

respect to the derivatives activities

All SDs and MSPs will be subject to capital and margin rules:

If they are subject to capital and margin rules of a prudential regulator,

then by such prudential regulator

If they are not subject to capital and margin rules of a prudentialregulation, then by the CFTC and/or the SEC

Dodd-Frank Regulatory Regime of OTCDerivatives (contd)


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Further, derivatives between SDs, MSPs and Financial Institutions will haveto be cleared (unless an exemption or an exception applies), and clearedderivatives will be subject to margin requirements to be determined by thederivatives clearing organizations

Both the CFTC and the SEC have proposed capital and margin rules fornon-bank SDs and MSPs

The SEC proposed rules were only released onOctober 18, 2012



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Under the CFTC proposed rules, the subsidiary of a US bank holdingcompany that is a SD or MSP will have to comply with the Feds regulatorycapital requirements as if it is a US bank holding company (i.e., minimumratio of qualifying total capital to risk-weighted assets of 8%, of which at

least half (or 4%) must be in Tier 1 capital (subject to a minimum of at least$20 million of Tier 1 capital)

The SEC proposed capital and margin rules for SDs are modeled after

existing broker-dealer capital and margin rules

There are differences in the CFTC and the SEC proposed capital andmargin rules



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Capital for SDs and MSPs that are FCMs, the greatest of:

$20 million

Capital amount required for FCMs acting as retail forex exchangedealers

8% of risk margin required for customers and non-customersexchange-traded futures and OTC swaps that are cleared

Amount of adjusted net capital required by a futures association ofwhich FCM is member

FCM that is a registered securities broker-dealer, SEC required netcapital

CFTC Proposed Capital Rules


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Capital for SDs and MSPs that are not FCMs:

Maintain tangible net equity (GAAP determination, minus intangiblessuch as goodwill) of at least $20 million, plus additional amounts for

market risk and over-the-counter derivatives credit risk.

To calculate the market risk and over-the-counter derivatives creditrisk amounts, firms could use internal models that are approved by theFed or the SEC can use their models. Otherwise, firms must use the

methodologies adopted by the CFTC, which are similar to those of theBasel Accord.

CFTC Proposed Capital Rules (contd)


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Between entities that are SDs and/or MSPs, there will be required paymentand collection of initial and variation margins

Between SDs/MSPs and a financial entity, the SDs and MSPs will berequired to collect (but not pay) initial and variation margins

There will not be required initial or variation margin required to be collectedfrom non-financial entities by SDs or MSPs

CFTC Proposed Margin Rules


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Minimum Net Capital Requirements for stand-alone SDs, not using internalmodels: $20 million + 8% of risk margin amount

Minimum Net Capital Requirements for stand-alone SDs, using internalmodels: $100 million of tentative net capital (net capital before haircuts),and at least $20 million + 8% of risk margin amount

Minimum Net Capital Requirements for SDs that are also broker-dealers,not using internal models: $20 million + 8% of risk margin amount + currentnet capital ratio required by broker-dealer regulations

Minimum Net Capital Requirements for ANC broker-dealers, using internalmodels: $5 billion of tentative net capital, and at least $1 billion + 8% of riskmargin amount + current net capital ratio required by broker-dealerregulations

MSPs are treated differently under SEC rules, they are only required tohave positive tangible net worth

SEC Proposed Capital Rules


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SDs are required to collect margin:

From other SDs, but the SEC proposes two alternatives: (A) SDsrequired to collect variation margin only, or (B) SDs required to collect

initial and variation margin, but initial margin must be held at a thirdparty

SDs are not required to collect margin from commercial end users, but willhave to take a capital charge for such unmargined swaps

MSPs are required to pay and collect variation margin to theircounterparties and calculate such margin amount daily

SEC Proposed Margin Rules


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As proposed, the CFTC margin rules require:

Initial Margin and Variation Margin:

From SD, MSP or financial entity: cash, US treasury, USagency, senior debt of FNMA, FHLMC, FHLB, FAMC, insuredobligations of a Farm Credit System bank

Initial Margin and Variation Margin:

From non-financial entity: assets with value that is reasonablyascertainable on a periodic basis

Rehypothecation of margin assets is severely restricted. The swap partiesare not permitted to rehypothecate the assets for swaps with SDs, MSPs, orfinancial entities

Collateral Management and Transformation


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Margin assets for swaps between SDs, MSPs and financial entities mustbe held under a tri-party custodial arrangement and the assets can only

be invested in assets eligible to used as collateral

As proposed, the SEC margin rules require:

Cash, securities and/or money market instruments as collateral

An SBSD under the SEC rules are required to treat collateral for clearedswaps as customer property

Collateral Management and Transformation(contd)


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An SBSD and MSBSP must permit their counterparties to requiresegregation of collateral

In addition, cleared swaps will be subject to initial and variation margins tobe posted to the central counterparty (CCP), directly or through a clearingbroker



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Mandatory swap clearing and proposed margin rules result in:

Increased demand for high quality collateral

Collateral being segregated and/or increased use of third-partycustodial arrangement

The Bank for International Settlements estimated that $470bn of collateralwill be necessary for interest rate swaps in a medium stress environmentand $700bn in a high stress environment

Collateral management and transformation will become important tools inthe new collateral space

Morgan Stanley/Oliver Wyman Report (April 11, 2013)

Revenue opportunities of $5-$8 bn

Global Custodians/Sell-side to be around 80%



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Enhanced Collateral Management:

CCPs will have to establish system to track, monitor and allocatecollateral

Some swap buy-side parties have turned to third-party collateral agentto help them monitor and manage collateral

Third-party custodial arrangement for swap collateral will continue togrow



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Collateral Transformation:

Assets that are ineligible swap collateral can be transformed, throughrepo/securities-lending like transactions, into eligible collateral

A number of banks (clearing brokers and custodians) are proposing tooffer collateral transformation services

Some pension funds or sovereign funds with large portfolio of high-quality assets will be able to provide the liquidity



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Risks of collateral transformation:

In time of market stress, collateral lenders tend to pull back theircollateral

Price fluctuation relating to the lower-quality assets in collateraltransformation transactions to have potentially important impact on therelated swap transactions

Banks and other intermediaries that offer collateral transformation

services will need to have prudent risk management on haircuts andrestrictions on the types of acceptable lower-quality assets



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Similarly, volatility in swap valuation will also have potentially importantimpact on the collateral transformation market resulting in:

Fluctuation on the price of eligible collateral (i.e., volatility in

funding costs) Stress on liquidity of collateral transformation market (i.e., risk of

loss of funding)

In times of market stress, volatility in swap valuation and in market

price of the lower-quality assets could lead to a vicious cycle



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Capital / Basel III

*** Comptroller Curry 3/28/13, Hope to finalizeall Basel elements by Summer


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Basel III international response to financial crisis

Substantially increases capital, procedural requirements onbanking institutions

Particular focus on counterparty activities, like securities financeand derivatives

Status (Basel Committee As of March, 2013)

Capital Finalized, in force 11 countries (Includes Switzerland)

Capital Finalized 3 countries

Capital draft regulations 10

Includes EU countries, U.S.

Leverage finalized 2013, NSFR/Large Exposure 2014

Initiating work on variation in RWA (Report in July)

Capital: Basel III Implementation


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Structure of U.S. Proposed Capital Framework

Proposed NewCapital Framework

Capital NPR

Denominator NPR

Advanced Approach NPR

Capital Ratios Capital Composition

Risk-weighting(significant changes)

Enhancements to Basel II

Comment period ended October 22, 2012*** FRB Gov. Tarullo 2/14/13 Speech LCR proposal due in 2013


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NPR 1 Capital NPR(Phase-In 2013-2019)

** Delay from January 1 implementation

announced on November 9, 2012


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Capital RatiosEnd-State Ratios

4.5%

1.5%

CommonEquity Tier1 Capital

7% total

Tier 1Capital

8.5% total

4.5%

1.5%

2.0%

10.5% Total

2.5%

CapitalConservation

Buffer

0% 2.5%Countercyclical

Buffer

4.5%

2.5%

CapitalConservation

Buffer

0% 2.5%CountercyclicalBuffer

AdditionalTier 1

Countercyclical Buffer: Starts at 0 butcould be as high as 2.5% upon agencydiscretion. Applies only to AdvancedApproaches institutions.

Capital Conservation Buffer:Additional buffer to avoid limitations oncapital contributions & certaindiscretionary bonuses.

3%4%

Supplemental LeverageLeverage

2.5%

CapitalConservation

Buffer

Supplemental Leverage: Tier 1 capital to total leverageexposure must be

3%. Applies only to AdvancedApproaches institutions. Incorporates certain off-balancesheet assets in the denominator (e.g., guarantees,financial standby letters of credit, forward agreements).

Treatment of securities finance under discussion.

Tier 2

March 2013 U.S. Senate votes 99-0 to end subsidies; May 2013 Tarullo Possible higher capital if not surplus liquidity


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April 2013 Hoenig suggests a minimum 10% leverage

Brown/Vittner bill

15% leverage for banks with assets >$500B

SNL estimates $900B shortfall

8% leverage for banks with assets >$50B

Tarullo May 3, 2013

The new Basel III leverage ratio does include off-balance sheetassets, but it may have been set too low

Focus on Leverage


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Current G-SIB Buckets(As of November 1, 2012)

Bucket Selected G-SIBs

5-3.5% 0

4-2.5% Citi, Deutsche, HSBC, JPM

3-2.0% Barclays, BNP

2-1.5% BAC, BNY, CS, GS, MUFG, MS, RBS,UBS

1-1% Bank of China, BBVA, Credit Agricole,ING, Santander, Soc Gen, StandardChartered, State Street, Wells

D-SIB designations for many others?

BIS finalized framework October 2012

More national discretion

FRB Gov. Tarullo 2/14/13 Speech US proposal to implement due this year


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NPR 2 The Denominator Standardized

Approach (Effective Date January 2015)


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Punishes non-cash, but correlated collateral

Overrides interpretive relief granted to banks?

Agencies considering simple VaR

Basel III permits

Collins Amendment creates intl competitive issues

Tarullo May 2013 Capital rules for community banks will be simpler thanproposed rules

Simple VaR and IMM Not Expressly Permitted


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NPR 3 Denominator Changes to AdvancedApproach

Ad d A h


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Tier 1 to total capital ratio of 3%

Proposal includes off-balance sheet items

But, does not currently include indemnification

Formal Requirement January 1, 2018

Advanced ApproachSupplemental Leverage Ratio

Advanced Approach


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5,000 trades

Extends holding period to 20 business days

Margin disputes

More than 2/two quarters doubles minimum holding period

F/X mismatch

1.25x exposure multiplier for large counterparties

Advanced ApproachOther Possible Burdens


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EU Implementation

CRD IV


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EU Progress

CRD II

In force:

31.12.2010

CRD III

CRD IV

1.1.2011

31.12.2011

April 16,

2013

Basel II, internal and external ratings based

approaches, operational risk charges, securitization

framework

Basel II.5, Incremental Risk Charge and stressed

VAR, introduction of remuneration principles, higher

risk weights for resecuritizations, prudent valuation offair value positions in the banking book, additional

disclosure requirements

Basel III plus move to single EU rule book, corporate

governance rules, etc.


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Must be adopted by EC (expected by 9/30)

Expected to come into force by January 1, 2014

Same basic capital requirements as US proposal

EBA As of June, 2012 EUs biggest banks had US $147B shortfall

Also capped bankers bonuses

1:1 salary to bonus rate default

1:2 possible if approved by a least 66% of shares

CRD IV Key Facts


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Liquidity Ratios*** Tarullo 5/3/13 More work needed toaddress risks with wholesale funding (including via

SFT) higher liquidity likely appropriate for largestbanks

Liquidity Two New Rules under


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LCR Liquidity Coverage Ratio Basel III internal proposal:

store enough cash or liquid assets for expected net outflows over 30-day nightmare scenario

Test: 1 Jan 2012

Comply: Begin 1 Jan 2015

Amended in January 2013

NSFR Net Stable Funding Ratio:

illiquid assets must be funded safely

Test: 1 Jan 2012

Comply: 1 Jan 2018

TBD if to be amended

Liquidity Two New Rules underBasel III


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Amendments made to the December 2010 LCR Provisions in Basel III Framework,include:

Inclusion of Level 2B assets

at discretion of national authority

Widens range of high quality liquid assets (HQLA)

Unencumbered

Corporate bonds

RMBS

Equities

Right of use during periods of stress

Haircuts to apply

25% to 50%

Cap on Level 2 Assets at 40%

2B Assets capped at 15% of HQLA

LCR Relaxation of LCR


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LCR from 1 January 2015

Implementation in stages

HQLA of 60% in year 1

rising 10% per year

100% HQLA by 1 January 2019

LCR Timing

Intraday Liquidity


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Issued April 2013

Enhances Principle 8 of Principles for Sound Liquidity Risk Managementand Supervision

Supplements LCR (which does not cover intra day risk) Applies to internationally active banks

National supervisors determine other applicability

Results not required to be publicly disclosed

Intraday Liquidity Basel Committee Guidance Overview

Intraday Liquidity


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y q yBasel Committee Guidance Reporting

All Reporting Banks

Time Specific Obligations

Total (gross) via LVPS

Available at Start of Day

Daily Maximum Usage

Intraday throughout Intraday credit lines

Payments for correspondents

Ifdirectparticipant I

fcor

resp

onde

nt

Intraday Liquidity


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Stress

Own stress

Counterparty stress

Market-wide stress

Timing

Monthly basis from January 1, 2015

Coincides with LCR

y q yBasel Committee Guidance Stress/Timing


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Shadow Banking and

Securities Lending

FSB Shadow Banking Initiative: Five


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1)Banks interactions with shadow banking entities

2)Money market funds

3)Other shadow banking entities

4)Securitization

5)Securities lending and repos

gWorkstreams


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Nov. 2012

Proposals issued for public comment

End 2012 / Early 2013

Quantitative impact assessment

Sept. 2013 G20 Summit

Provide final set of recommendations

FSB Shadow Banking Initiative: Timeline

FSB Shadow Banking Initiative on Securities


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FSB April 2012 Interim Report on Securities Lending:

Discusses market regulation, transparency and other issues

Comment period closed May 25, 2012

Generally involves interaction of

Lending and Repos

Bank

BD

Less regulated

institutions


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Report states focus from a shadow banking system on

Securities Lending: FSB Areas of Concern

Maturity & LiquidityTransformation

Maturity Transformationand Leverage

Chain TransactionsCollateral

downgrades/upgrades

(Short term liabilities

vs. long term assets)

(Possible through

leveraged investmentfund financing)

Short sale cash (Often used by banks

to obtain repofinancing)

Securities borrowing collateral

Reinvested cash collateral intolonger term assets

Cash collateral to riskierinvestments

(AIG)

further lengthens

1 2 3 4


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1) Lack of Transparency (due to bilateral nature)

Macro-level market data

Micro-level (institution-specific) market data

Corporate (balance sheet disclosure)

Risk reporting (e.g., re-hypothecation) by intermediaries to clients

2) Procyclicality of system leverage/interconnectedness

Varies depending on: a) Value of collateral

b) Size of haircuts

c) Collateral velocity (rate reused)

3) Other Risks of Reuse of Collateral

Interconnectedness

Leverage

Financial Stability Issues


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4) Fire-Sale of Collateral Assets

Particularly with counterparties with large collateral pools

5) Agent Lender Practices

Lender Agent Bank Borrower

Indemnity eliminates lender concern of borrower risk

6) Cash Collateral Reinvestment AIG-Lending as short term funding for investment

Collateral Pools may promote rapid withdrawal

7) Cash Collateral Valuation Rigor

MBS collapse

Financial Stability Issues (cont.)

Indemnity

Consultative Document on Shadow Banking and


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Background FSB issued November 2012 consultative document:

A Policy Framework for Addressing Shadow Banking Risks inSecurities Lending and Repos

Comment period closed January 2013

Industry comments / meetings with FSB personnel

Consultative document addresses: Financial stability risks in securities lending and repo markets

Policy recommendations related to:

Improvements in transparency

Regulation

Structural aspects of securities financing markets

Securities Lending

FSB Consultative Document:K P li R d i


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Improvements in transparency

Reporting of transaction-level data to trade repositories

Enhanced public disclosure requirements for securities lending activities

Enhanced reporting to fund investors

Tarullo (2/14/13) Specifically cites need for transparency in securitiesfinance

Regulation

Minimum haircuts (High level vs. Back-Stop approach)

Tarullo (5/3/13) speaks approvingly

Minimum standards for cash collateral reinvestment

Minimum standards for collateral valuation and management

Tarullo (5/3/13) Consider limiting re-hypothecation Market structure

Evaluation of central clearing in securities lending markets

Changes to bankruptcy law treatment of securities lending transactions

Key Policy Recommendations

I d t C t / R


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Key Commenters

IIF

ISLA

SIFMA

Key Issues

Regulatory reform incomplete need to see whole picture

One size fits all regulatory approach inappropriate

Exposure-based, rather than transaction reporting

Opposition to mandatory minimum haircuts

Support view that changes to bankruptcy law currently unworkable

Industry Comments / Response


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Enhanced Prudential Standards

US Proposed R les Process


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FRB Issued Proposed Rules on December 20, 2011

Statutory Authority: Sections 165 and 166 of Dodd-Frank

Applicable to banking organizations with > $50 B assets

Applicable to Nonbank SIFIs Comments were due April 30, 2012

Proposed Rules do not apply to foreign banks, but

FRB Separately Issued FBO Prudential Rules

FRB 3/28/13 Speech QIS starting shortly

Coordinate with Basel Committee?

US Proposed Rules: Process


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Basel Committee Limits on Large Exposures

Comment Period Ends June 28, 2013

Intended full Implementation January 1, 2019

Single-Counterparty Exposure Limits: BaselF k C t ti /Li it


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Places limits on consolidated exposure to counterparties daily limit/ monthly compliance reports

General limit of 25% of banking groups CET 1 or Tier 1 Capital and

of exposure to any single counterparty (and affiliates) E.g., December 31, 2012 Bank Tier 1 capital =

$150 B

Bank standard exposure limit $37.5 B

More stringent limit of 10% - 15% of net credit exposure of G-SIBsto other G-SIBs

Bank current exposure limit = $15 B

Note US proposal based on capital stock and surplus

Framework Counterparties/Limits

Counterparties Limit


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Exposures to a counterparty aggregated across the covered companyand all its subsidiaries

Subsidiary broadly defined as directly or indirectly controlled (50%of any class of voting securities) by covered company (systems issue)

25% voting or equity in US proposal

Counterparty includes:

Company and all its subsidiaries collectively

Unlike U.S. proposal, sovereigns excluded

Counterparties Limit

Single-Counterparty Exposure Limits:Framework Depicted


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Framework Depicted

BHC

BankBHC

Nonbank Sub

BHCForeign

Sub

Counterparty

CounterpartySub 1

CounterpartyForeignSub 2

Counterparty30% owned entity

All above exposures aggregated for test Note Q-CCP treatment in Basel unclear; appears covered in U.S.

Gross Credit Exposure; Haircuts


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Gross credit exposure. Gross credit exposure calculation varies bytransaction

Haircut Approach Securities lending and repo

Collateral haircuts (E.g., U.S. proposal) Sovereign debt: 0.005 to 0.06 depending on maturity, OECD Country

Risk Classification

Bank eligible corporate and muni bonds: 0.02 to 0.12 depending on

residual maturity

Main index equities: 0.15

Other publicly traded equities: 0.25

Mutual funds: Highest applicable haircut

Cash collateral held on deposit: 0

Substitution of credit provider also permitted

Gross Credit Exposure; Haircuts

Single-Counterparty Exposure Limits:Framework Calculation


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Aggregate net credit exposure

The sum of the following calculation for all transactions between a BHC anda counterparty and its affiliates:

Gross credit exposure for the transaction (calculated using anyapplicable haircuts)

Lessmarket value of eligible collateral (reduced by applicablecollateral haircut);

Lessvalue of any eligible guarantee;

Lessvalue of derivatives / other hedges

BUT: any adjusted value of collateral, guarantee, derivatives, etc. isshifted to count toward the credit exposure limit of the issuer /guarantor / etc.

Framework Calculation

Single-Counterparty Credit Limits U.S.Examples


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Principal Reverse Repo Fixed Income Collateral

BHC transfers $100 in cash to Broker Dealer. Broker Dealer provides$102 in 10-year sovereign bond collateral (OECD country 0-1).

Credit Exposure to Broker Dealer

BHC Gross Exposure = $100 BHC Net Exposure = $100 $102*96%= $2.08

Credit Exposure to Foreign Sovereign

BHC Gross Exposure = $100 $2.08 = $97.92

Examples

The following examples show counterparty credit exposures calculated forrepurchase and reverse repurchase transactions:

Single-Counterparty Credit Limits U.S.Examples (contd)


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Indemnified Reverse Repo Equity Collateral

BHC acts as an agent for Mutual Fund as part of a securities lendingarrangement and transfers $100 in cash to Broker Dealer. BrokerDealer provides $105 in main index equity collateral.

Credit Exposure to Broker Dealer

BHC Gross Exposure = $100

BHC Net Exposure = $100 $105*85% = $10.75

Credit Exposure to Equity issuer

BHC Gross Exposure = $100 $10.75 = $89.25

Examples (cont d)

Single-Counterparty Credit Limits U.S.Examples (contd)


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Tri-Party Repo

BHC transfers $105 in main index equity securities to BNY Mellon asintermediary for Broker Dealer.BNY Mellon holds $100 in cash provided by Broker Dealer as custodianfor BHC.

BHC Credit Exposure to Broker Dealer

BHC Gross Exposure = $105+$15.75= $120.75

BHC Net Exposure = $120.75 $100 = $20.75 (eligible cashcollateral includes cash held on deposit by a third-party custodian)

Examples (cont d)

D/F 165 Other Issues


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Liquidity Requirements Prescriptive liquidity risk management requirements for boards,

management

Liquidity stress testing, liquidity buffer, contingency funding plan

Risk Management / Governance Provisions Risk Committee

Chief Risk Officer

Stress Testing Supervisory stress tests Company-run stress tests

Debt-to-Equity Limit

Early Remediation Requirements Focus on capital, liquidity, and strength of risk management framework

Potential restrictions on asset growth, acquisitions, capital distributions

/ 65 Ot e ssues

National Bank Lending LimitsBackground and Timing


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D/F 610 revised loans and extensions of credit to include derivativetransactions and securities finance transactions

OCC published interim rule in July 2012

Comment period ended August 6, 2012 Rule currently scheduled to become effective July, 2013

g g


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FRB FBO Proposed Prudential Rules

Reference Date July 1, 2014

Compliance Date July 1, 2015 But per Michael Gibson (FRBBS&R Director) 3/28/13 Not finalized before U.S. regulation

Compliance date may be delayed

FBO Proposed Prudential RulesData Points


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Morgan Stanley/Oliver Wyman Report (April 11, 2013)

Global Balkanization reduces RoE by 2-3 %

Need to duplicate infrastructure at local levels

US is a key global profit and growth driver

Americas in 2012

Represented 47% of global revenues

Represented 55 60 % of global profits

FBO > U.S. $50B Global;Combined U.S. Presence > U.S. $50B


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$

Based onFRY-7Q FBO

Liquidity

Certify/demonstrate to FRB meet BIII .212(c)Provide FRB relevant capital ratios with FRY-7Q .212(c)

Capital

US Liquidity Risk Cttee .222 Annual review /approval of liquidity risk tolerance for US .222 Consistent with enterprise-wide

Consider capital/risk profile/complexity/size/activities US Chief Risk Officer .222

Review liquidity rules with each new US business line/product Annual review of significant US products/business lines Annual review/approval of contingency funding plan [.228] Quarterly

Cash flow projection review [.225] Review liquidity stress testing practices [.226] Review liquidity stress testing results [.226] Approve size/composition of liquidity buffer [.227] Review specific limits [.229] Review sufficiency of liquidity risk management info

Review liquidity risk policies established by US operation management.223

Regularly report to US Risk Cttee Independent liquidity risk function .224

At least annually review US liquidity risk mgmt

Report issues for corrective action

Net credit exposure of US ops may not exceed 25% of FBOs cap and surplus .242 Lower limit if FBO exceeds $500 B global assets Generally like US SCCL, except treats home country sovereigns like US govts

SCCLStressTesting

Either comply with andprovide FRB info regardingreqd home county stresstests, or hold assets equal to108% of liabilities of USbranch and agency networkand engage in US non-IHC

sub operation stress tests.263

Risk Mgmt See IHC, may

be at FBO ifhas US Opsother thanthrough the

FHC

FBO Focus

Risk Mgmt

FBO Liquidity Requirement Detailed (FBO > U.S.$50B Global; Combined U.S. Presence > U.S. $50B)


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Cash Flow Projections .225

Update short-term daily

Update long-term monthly Must:

Project flows arising from assets/liabilities/off-balance sheet over short- andlong-term periods

Identify discrete/cumulative mismatches over time periods

Include flows arising from contractual maturities, etc.

Liquidity stress testing .226

At least monthly, conduct separately for

US branch/agency network US IHC

Done pursuant to policies and procedures

FBO Focus



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Use stress testing for liquidity buffer [.227]

Use stress testing for contingency funding plan [.228]

Stress scenarios = market stress, idiosyncratic stress, and both Overnight/30-day/90-day/1-year horizons

For 30-day scenario, only unencumbered, highly liquid assets may satisfyliquidity buffer

Cash/US govts, others with FRB approval

Report US stress tests/any home county stress tests to FRB within 14 days

FBO Focus (contd)



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Liquidity Buffer .227

Separately maintain for US branch/agency network and IHC Consist of highly liquid, unencumbered, sufficient for net stressed cash flow (internal and

external) over 30 days Location

IHC maintain 30-day level in US (not at branch/affiliate)

Branch at least 14 days in US (remainder of 30 days may be elsewhere)

Contingency funding plan .228

Establish/annually update plan Periodically testSpecific Limits .229

Must maintain limits on potential sources of liquidity risk

E.g., concentrations, maturities

Collateral Monitoring .230

Monitor assets pledged in connection with US operations Monitor intraday liquidity risk exposure Update at least weekly

FBO Focus (contd)

FBO > U.S. $50B Global;U.S. IHC Presence > US $50B


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Assets based on avgconsolidated assets ofUS top tier subs (asreported on FRY-7Q)

Reduce byintercompanyconsolidation IHC

Risk Mgmt

Capital

Must comply with stress testing requirements to same extent as US BHC withconsolidated assets of US $50B .262 Stress

Testing

Holds all US subsexcept 2(h)(2)

All capital requirements of US BHCs .212 Regardless of whether controls bank

Comply with 225.8 capital planning (CCAR) .212

Net credit exposure may not exceed 25% of cap and surplus Lower limit if exceeds $500B assets Largely tracks US SCCL

Except treats home country sovereigns like US govts

Must certify to FRB has US risk committee at IHC if IHC controls all US operations.251

Otherwise may be at FBO Must have at least 1 member with appropriate risk mgmt expertise Must review and develop policies .252 Must meet at least quarterly Must have at least 1 member who is not officer/director of FBO or its

affiliates Must have Chief Risk Officer .253 Must have a board of directors/operate like US corporation

SCCL

Reqd regardless ofwhether controls bank

May be formed with 30

day post-FRB notice

IHC Focus

FBOs > $10B but < $50B U.S. Assets


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FBO must meet home country:

capital requirements that are consistent with Basel framework

stress test requirements that are consistent with U.S. rules

FBO must establish and maintain U.S. risk committee

FBO must establish IHC to hold U.S. assets (other than branch/agencyassets)

IHC subject to: U.S. BHC capital requirements

Company-run stress tests

Liquidity stress tests

FBOs U.S. operations subject to early remediation triggers


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European Bank FinancialTransaction Reform

EU FTT Timing


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The Commission published its proposal for a FTT in the EU in September2011

Each financial institution party to a financial transaction is liable to pay thetax in its Member State of establishment

January 2013: ECOFIN resolved to use enhanced cooperation toimplement FTT in 11 countries Austria, Belgium, Estonia, France,Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain (the FTTZone).

EC published detailed proposal on February 14, 2013

FFT Zone countries expected to publish implementing legislation bySeptember 30, 2013

Implementation scheduled for January 1, 2014

EU FTT Transaction Application


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FTT Zone Member States free to set rates, subject to minimum levels: 0.1%for financial instruments (base on value) and 0.01% for derivatives (notionalamount)

Applies to all financial instruments and derivatives but NOT loans

Repos

Securities lending and collateral transfers

EU FTT Entity Coverage


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Financial Institution very broad, includes: Banks

Broker-dealers

Insurers Pension funds

Financial leasing companies

Exempt Member States

ECB

European Financial Stability Fund

European Stability Mechanism EU

No intermediary/intra-group exemption

How Could an ECP FTT Work?


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The FTT cascades across the parties to a transaction.

So, if everyone is within the FTT Zone:

VendorVendor BrokerBrokerClearing

member

Clearing

member

Clearing

system

Clearing

system

Clearing

member

Clearing

member BrokerBroker BuyerBuyer

0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%(exempt)

1%

This cascade effect is an intentional feature of most designs of

financial transaction tax



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Acting outside the FTT Zone may therefore only somewhat reduce the tax:


member

Clearing

memberClearing

system

Clearing

systemClearing

member

Clearing


0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%(exempt)

0.8%



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If a transaction is cleared through a clearance service in the FTT Zonethen the FTT will apply, even if all parties are outside the FTT Zone:


member

Clearing

memberClearing

member

Clearing


0.1% 0.1%(exempt)

0.2%Clearing

system

Clearing

system


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The Orderly Liquidation Authority

OLA Impact Overview


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1) Credit Rating / Funding

Immediate

2) OLA Designation of Failed Counterparty

Risk Generally with Economic Stress

3) Big Bank OLA Funding Requirement

Risk Generally with Economic Stress

4) FRB Director BS&R Michael Gibson (3/28/13)

Subordinated debt required for largest holding companies(particularly G-SIBs) to support FDIC top down approach?

On average OK with where G-SIBs are on debt

(1) and (3) largely unavoidable, (2) can be mitigated (to an extent)

OLA Designation of Failed CounterpartyGeneral Framework


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OLA is designed to combine elements of 2 existing regimes, and provide anovel approach to funding:

FDIA Receivership Rules Bankruptcy Code

Administrative ResolutionStreamlined Process

Funding/Maintenance of Key Systems

FDIC Recoveries&

Assessments

Treasury BorrowingRepaid By

Not

TaxpayerBailout

OLA

Creditor Rights& Protections

$

S P i ll li l i ll i U S

OLA Designation of Failed CounterpartyScope and Coverage


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Scope Potentially applies to almost any systemically important U.S.financial institution

Coverage Holding Company and Subsidiaries

U.S. FI Corp*(BHC, Nonbank

SIFI, 85% FI)

Bank(FDIA)

Insurance(state)

Broker(SIPA) except

QFCs*

* = Covered by OLAQFC = Qualified Financial Contract (e.g., Securities Finance)

OLA Designation of Failed CounterpartyThe Emerging Paradigm Conversion


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Holdco

Bank

Equity Debt

BD

Bridge

Debt Equity

Bank BD

$

*** FDIC (5/2/13) Possible Presumptive Path guidance dueout this Summer.

Single Point of Entr Approach

OLA Designation of Failed CounterpartyThe Emerging Paradigm Coordination


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Single Point of Entry Approach Holdco fails, others saved

FDIC 3/28/13 Preferred Approach

Only not used if insufficient bail-in debt @ Holdco International Acceptance to avoid local failure

UK 70% of U.S. offshore assets December MOU

Engaged with Switzerland positive

EU resolution strategy due this summer

Japan - staff level discussions

Hope for principles later this year

Tarullo (5/3/13) Clear need for a reqmt that large FIs have minimum amounts of

long-term unsecured debt

QFC includes many counterparty based arrangements:

OLA Designation of Failed CounterpartySpecial Case Qualified Financial Contracts (QFCs)


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QFC includes many counterparty-based arrangements:

E.g., securities finance arrangements/swaps

Timing (unlike bankruptcy)

Stayed for 1 business day (till 5pm Eastern Time Monday) if default basedon:

A) Insolvency, OR

B) (According to FDIC) failed funding performance

Note: May be better than SIPA timing

FDIC must

Repudiate (or not) all QFCs to a counterparty

Transfer to a bridge (or not) all QFCs to a counterparty

FDIC Virtually all QFCs in Bridge

Who is counterparty in securities finance?

Damages Calculated as of date of repudiation, and may include cost of cover


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Gregory J. Lyons

Ph# - 212-909-6566

Email - [email protected]

Emilie T. Hsu

Ph# - 212-909-6884

Email - [email protected]

s if ma collateral presentation

Documents