While you were away: An update on regulatory developments

September 2011 www.icffr.org

International Centre for Financial Regulation 2010. All rights reserved.

Agenda
Background: setting the scene Key recent actions Whos who? State of play US Europe Business Implications Conclusion and discussion

International Centre for Financial Regulation 2010. All rights reserved.

Background: Setting the Scene

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About the ICFR

The only independent, non-partisan organisation exclusively focused on best practice in all aspects of financial regulation internationally. Operating in developed and emerging markets, we deliver work through research, events and training, that seek to be practical and focussed on outcomes. We believe in the promotion of efficient, orderly and fair markets which offer appropriate protection for investors and retail consumers alike. Financial centres of the future should be based upon sound principles of regulation, with supervisors, regulators and participants who act in the interest of all stakeholders. The ICFR intends to play a crucial part in facilitating this.

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ICFRs Structure
Member Organisations ICFR Academic Panel ICFR International Advisory Council ICFR Board

ICFR
Research
The ICFR encourages, develops and supports non-partisan and innovative research into a wide range of topics on the regulation of financial services globally. We draw on a broad variety of sources and partners.

Events
ICFR events are designed to improve understanding, promote dialogue, and look to innovative solutions on subjects within international financial regulation. We hold a regular series of events ranging from breakfast briefings and knowledge sessions to invitation-only forums and large international conferences.

Training
The ICFR will train on regulation, compliance, risk management, and related knowledge and skills. We will help the financial sector and its regulators around the world to connect with relevant existing training offerings and to address gaps.

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Basel II, CRD I implemented

Recap of the Financial Crisis

Lehman files for bankruptcy AIG bailout $85bn

Madoff sentenced

Obama elected

G20 Pittsburgh

Global liquidity deteriorates Fannie Mae and Freddie Mac bailout:$110bn Northern Rock bailout Dow hits 12-yr bottom

G20 Washington

G20 London

CRD II adopted in Parliament

NOTE: the blue line is the Dow Jones Industrial Average

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The Regulatory Response

IMF and EU lend 110bn to Greece Dodd-Frank Consumer Protection Act

US AAA downgraded

ESRB created

Credit Rating Agencies (CRA) proposals EFSF created

AIFMD adopted

CRA changes adopted EBA, EIOPA, and ESMA created G20 Seoul CRD IV proposed

FSOC created G20 Canada

Basel III released

CRD III published SEC WhistleBlower provision

NOTE: the blue line is the Dow Jones Industrial Average

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The Way Forward?

FSB consultation deadline (SIFIs)
AIFM implementation deadline US presidential election NSFR implementation deadline Extra capital surcharge for SIFIs

G20 Cannes G20 Mexico Proposals for G-SIFIs Most CRD IV points in place Solvency II in effect LCR implementation deadline

Solvency II implementation deadline Basel III final implementation deadline

Sept

Nov

2012

2013

2014

2015

2016

2017

2018

2019

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Key Recent Actions

International Centre for Financial Regulation 2010. All rights reserved.

A Busy Summer
June July August
US downgraded to AA+
Fed to keep rates low for indefinite future US and EU stocks plummet EU bank concerns

Markets

ECB raises interest rates

Legislators

US: deficit debates UK: Osborne endorses ringfencing BIS: SIFI identification and surcharges EU: new capital rules EBA releases stress tests FSB: resolution plans for SIFIs

EU: Transaction tax mooted again

Regulators

IOSCO: Derivatives transaction data publication

Short-selling restrictions re-imposed and extended in select European countries

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Whos Who?

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Global Regulatory Architecture

G20

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European Regulatory Structure

Macroprudential Supervision ECB

EUROPEAN SYSTEMIC RISK BOARD (ESBR)

President ECB, Vice-President & 27 EU national Central Bank Governors Chairs of 3 authorities: EBA, EIOPA & ESMA

European Commission

Observers: National Supervisor Reps Chair of Economic & Financial Committee

ECOFIN: Early risk warnings & policy recommendati ons to governments

Micro-prudential information

Information on systemic risk

EUROPEAN SYSTEM OF FINANCIAL SUPERVISORS (ESFS)

Steering Committee

Microprudential Supervision

European Banking Authority (EBA)

European Insurance & Occupational Pensions Authority (EIOPA)

European Securities & Markets Authority (ESMA)

National Banking Supervisors

National Insurance & Pension Supervisors

National Securities Supervisors

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From Decision-Making to Implementation: Europe

Council L1 EBC EIOPC ESC FCC Commission Parliament

Legislation
Implementing details Convergence

L2

L3 L4

EBA

EIOPA
Enforcement
Commission

ESMA

EIOPA = European Insurance and Occupational Pensions Agency EBA = European Banking Agency EBC = European Banking Committee EIOPC = European Insurance and Occupational Pensions Committee ESC = European Securities Committee ESMA = European Securities Market Agency FCC = Financial Conglomerates Committee

Finance ministries Supervisors and Central Banks Supervisors

Source: Professor Kern Alexander

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US Regulatory Structure: A Simplification

OTS OFAC/ FinCEN

FINANCIAL STABILITY OVERSIGHT BOARD

CFTC OCC FEDERAL RESERVE

State Regulatory Authorities and AGs

SEC

OFFICE OF FINANCIAL RESEARCH

FDIC

FINRA CFPB

Investment Advisory

Derivatives

Consumer Lending

Commercial Lending

Brokerdealer

Retail Banking

Alternative Investment s

Investment Banking

Payment and Clearing Systems

Source: JP Morgan Chase & Co.

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State of Play: Where are We?

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US Dodd-Frank Act: an Introduction

A. The Act 1. The nature of an omnibus act 2. The Act and the implementation of regulation 3. When is a deadline not a deadline? B. The Actorsor death by a thousand cuts 1. Congress 2. The impact of budget constraints 3. Internecine warfare

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Is Bigger Necessarily Better?

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US: Dodd-Frank Act

A. Volcker Rule
Prohibits investments in private equity funds or hedge funds It applies also to foreign banks with US branches and US bank holding companies However they can continue to make investments outside the US in proprietary trading, effectively pushing such business offshore The Fed may grant extensions for certain cases (1, 3, or more years) Exempt transactions: transactions on the behalf of the customer Transactions in the obligations of the US or US agencies(Freddie Mac, Fannie Mae..) Any hedge fund with at least $100m in assets will have to register with the SEC.

B. Hedge funds:

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US: Dodd-Frank Act(2)

Exemptions: Foreign hedge funds that do not have a place of business in the US, have fewer than 15 clients and have less than $25m in assets. Foreign fund managers of such funds must not serve as investment managers of an investment company registered under US investment company act. New rules to define swaps. End user exception to mandatory clearing on security-based swaps. Rule on registration and regulation of securities-based swaps. Rule on securities based swap clearing agencies. The Act prohibits insured US banks and branches of foreign banks from engaging in a variety of swaps businesses. Exemption: insured depository institutions are not subject if their swaps are limited to hedging and other risk mitigation activities or transaction involving rates. Foreign banks are not exempt.

C. Derivatives

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US: Dodd-Frank Act(3)

SEC or CFTC can ban a certain entities from engaging in swap transactions in the US for specific cases (undermines the stability of the US financial system) To help monitor systemic risk Overseen by Office of Financial Research with international support Securities industry to come up with a plan for creating and distributing them LEI to be developed and maintained by international voluntary consensus standards body CFTC issuing LEI standards around derivatives To report conduct which is believed constitutes a violation of federal law relating to financial, securities or shareholder fraud Whistle-blowers to get 10 30% of sanctions collected High-quality, original information required SEC must collect over US$1m in sanctions

D. Legal Entity Identifier (LEI)

E. Whistleblower provision

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US: Beyond Dodd-Frank

FATCA (Foreign Account Tax Compliance Act)
U.S. Treasury Code Sections 1471 through 1474 Effective for payments after December 31, 2012
All foreign financial institutions (FFIs) will be required to enter into disclosure compliance agreements with the U.S. Treasury, and all non-financial foreign entities (NFFEs) must report and/or certify their ownership or be subject to the same 30 percent withholding.
This new reporting and withholding regime will ultimately impact current account opening processes, transaction processing systems and know your customer procedures utilized by foreign banks. Chief compliance officers, tax reporting heads and other key players will need to evaluate the potential impact of these regulations and develop a plan for managing and remediating any potential risk associated with Foreign Account Tax Compliance Act (FATCA) non-compliance.

Source: Deloittes
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EU: Alphabet Soup

E I O P A

CRD

AIFMD

EBA
ESFS

ESMA

EMIR

MiFID II
MAD?
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ESRB

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EU
CRD IV = Capital Requirements Directive = Banking regulation Issued July 2011 Based on BCBS recommendations but less stringent Entry into force: Jan 2013; Full implementation: Jan 2019 AIFMD =Fund Management Directive=treatment of hedge funds Regulations on third-country issues due late summer Technical rules submission postponed to16 Nov 2011 EMIR =Market Infrastructure=CCPs and some OTC derivatives issues Current problems: coverage of derivatives & powers of ESMA Due for second hearing in Autumn 2011; Adoption possibly in Feb/Mar 2012 MiFID II = Securities = high speed trading, trade execution Proposal delayed from Jul to Oct 2011 Planned legislation: Late 2011/Early 2012 Transparency = Corporate Governance; Remuneration

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More Europe or Less Europe?

What are the issues? EFSF: European Financial Stability Fund Fiscal authority The Eurozone and the periphery

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Whats Missing?
Convergence Macroprudential tools SIFIs Cross-border crisis resolution and living wills Bank liability structures; tax deductibility of debt

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Business Implications and conclusions

Managing under uncertainty Growth and the impact of regulation on growth Future profitability by business line future structure and strategy of banks Costs of implementation, particularly where regulations differ by jurisdiction : Information technology Compliance Future ROE and impact on: Ability to raise equity Compensation Other?

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For further information

www.icffr.org
http://www.icffr.org/Research/Regulatory-Round-ups/2011/September-2011/While-YouWere-Away.aspx

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