The Regulatory Environment. Anthony Kirby Executive Director Regulatory Reform and Risk Management

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1 The Regulatory Environment Anthony Kirby Executive Director Regulatory Reform and Risk Management

2 Indicative Scope of Global Regulatory Reform US measures Dodd Frank Act Title VI - Volcker Rule Title VII - OTC derivatives (with some carve-outs for FX) Title VIII Payments infrastructure/credit card interchange restrictions Title IX Investor protections Title X - Consumer protections FATCA disclosure of US FIs vs Foreign FIs Orderly Resolution Planning Basel III measures? FEDWIRE improvements Sarbanes-Oxley controls Global measures Basel III Recovery & Resolution Planning ( Living Wills ) FSB/Shadow Banking AML/OFAC ATF/ABC International Payments Framework Mobile Payments (m-payments) einvoicing egovernment Global Regulatory Reform The G20 summit commitments have led to a host of new regulatory requirements for banks worldwide to add to existing regulatory demand The impact will be particularly heavy form firms rich in banking products and cross border operations EU measures Bank Levy (UK, FR, DE) Living Wills (RRP) Basel III CRD III & IV PSD Amendments (Art 87/D+1) SEPA SCT & SDD migration for EU/non-EU clients EMIR (CCP) & DTCC GTR MiFIR/MiFID II EMIR (CSD) & TARGET II for Securities (T2S) ECB Internet security of payments Financial Transaction Tax? UCITS V & VI AIFMD Revisions to extant Directives e.g. Securities Law Directive? Banking Consolidation Directive? Asia-Pacific measures OTC Derivatives reform (JP/HK/SG/AU/KR...) DTCC GTR New Investor protections (HK/SG/esp. AU) Renmimbi as a settlement currency HK Multi-currency Clearing Note: Many regulations are still only at proposal, draft or consultation stage and some of the EU measures will appear as either regulation (single legal effect) or directive form (transposable through national legislations. Nevertheless, all are expected to reach final enactment, however much amended between now and then, and become enforceable law within the next 3-5 years. This is necessary to meet the commitments made by the G20 summit countries and thereafter. What is shown here are the major regulatory changes, and is not meant to be exhaustive. Page 2

3 Regulatory challenges Key new regulations impacting asset managers will present a significant burden on asset managers Solvency II Assess value of insurance segment Dodd Frank Im/vm models EMIR Loss scenarios Collateral Management for cleared/noncleared trades Staff training FX/FX Swaps/FX Forwards processes LEI data management Ensure product Segregation of compliance accounts Client money Update TPA SLAs Indep. price transparency/verifi cation Enhance client maintenance Enhance client on-boarding Repaper product prospectuses FATCA T2S Shortening Settlement Cycles Limit Setting CCP netting TDRs CSD Reform Securities Law Reform Develop asset liability strategy Complex products Data and Technology Enhanced risk management Product shifts Strategy Risk & Compliance Outsourcing due diligence Pre-trade transparency non-eq Best execution revisions Dark pools/ internal crossing Tied agent revisions Independent vs. restricted advice Suitability/appropri ateness Distribution Process/Opera tions Post-trade disclosure revisions non-eq Tracking commissions for legacy assets MiFID 2 Additional share classes Commission management Investment advice Distribution strategy review Master/feeder Inducements Unbundled valuations Synthetic Risk/Reward Indicator (SRRI) Notifications/ registration ManCo passport Valuations Leverage restrictions? RDR Merger framework Key Investor Document (KID) Third country arrangements Delegation Depository insurance AIFMD UCITS IV/V Note: The image on this page is not meant to be exhaustive, but seeks to highlight major impacts by regulation. Many regulations are still only at proposal, draft or consultation stage. Nevertheless, despite uncertainty and lack of finalisation in a number of areas, there is enough clarity that firms can begin to prepare for and respond to various regulatory challenges. The landscape of the proposed regulatory reform is demanding and even a single subset is complex and overlapping Page 3 3

4 Review of regulatory timeline for project management purposes Our analysis identifies regulations with overlapping time horizons that would facilitate consolidated action Regulations FATCA Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Gradual phase in of requirements until 2017 requiring impact assessment/implementation planning Q 1 Q2 Q3 Q4 Dodd Frank 2 Phase in of requirements under Titles IV, VI, VII per NPR EMIR Phase in of requirements under RTS confirmation/reporting/reconciliation/clearing AIFMD 3 Gradual phase in of requirements until 2018 UCITS IV 4 UCITS V Solvency II Potential to implement strategic options: Master /Feeder. X-border mergers, ManCo Passporting Content overlap with AIFMD, however UCITS V implementation date not yet decided Delays on account of EBU/RRP MiFID II/MAD II PRIPS Delays on account of EBU/RRP Delays on account of EBU/RRP? Impact assessment Implementation planning Regulation go-live date Time when a project should be initiated for the regulation Note: 1. Go-live date refers to FFI agreement date 2. Go-live dates refer to Title VII and Volcker respectively 3. Go-live date refers to date of transposition into national law 4. Go-live date refers to KIID for legacy funds Page 4 4

5 Unexpected regulatory demand Defined and undefined regulatory requirements Peer analysis Agree strategic position Illustrative example of framework implementation Review regulatory timeline Review peer group approaches Identify overlaps Have adaptable and agile operating and business models Regulatory affairs governance Predict Scenarios Interpret Best case Worst case Scenario 1 Scenario 2 Scenario 3 Strategise Defensive In the pack Not negatively differentiated Proactive Influencers Plan Identify functional overlaps Assessed the key strategic and operational implications of each regulation in scope Developed a cross regulatory matrix to identify impact overlaps across operating model dimensions Identify cross-regulatory projects For each operating model dimension, identify projects that could be consolidated across regulations to minimise spend & effort Recognise reg specific initiatives that would still need to be run Deliver PMO Roadmap Projects Communication strategy Thought leadership publications Per regulation individual lead appointed Regulatory body individual identified Representation (chair groups?) communication strategy People and structures Technology and data Policy and processes Client segments Value propositions Channels Client relationships Revenue streams Key partnerships Success criteria: Governance. Strategy. Plan This approach seeks to consolidate projects across regulations to minimise spend and effort Page 5 Dig Up The Road Once 5

6 Sample Global Regulatory Framework This is designed to enable our clients to consistently identify, assess, govern and implement against its mandatory compliance requirements and the commercial opportunities that regulatory change can potentially deliver. The framework and the development process is intended to support our client s capability to respond to and take advantage of regulatory change effectively and in so doing manage key stakeholders and optimise its position. It is recommended there is an owner for each of the identified regulation who will be part of the Regulatory Community. The Community is designed to analyse mandatory regulatory compliance requirements (below the line) and investigate business and value-add commercial opportunities (above the line) for each regulation by utilising the filters below. It will produce reports on findings, recommendations and periodic publications to the Regulatory Affairs Committee (RAC), including a monthly summary update. Global Regulatory Framework Landscape Client Regulatory Community Executive Committee AiFMD EMIR Dodd Frank Basel III MiFID II ICSD FATCA VCF CSDR Shadow Banking COREP/FINREP FTT T2S SLD UCITS IV UCITS V PRIPS/ROR Solvency II Regulation owners Business analysts (Client/group wide) Access to specialist advisors Filters Investor Client IOO Clients Client Group Market Competitors Analysis Recommend Position Mandatory Growth Strategy and Positioning Group Stakeholders: Group Compliance Government & regulatory affairs Risk Legal Product and sales Head of change Operations Technology Executive Summary Regulatory Affairs Committee Go-to-market Position Execute Review Stakeholder management Communication strategy Client Regulator Government Industry Internal Industry bodies Implementation Product development Change function: Roadmap PMO Page 6

7 Regulatory challenges focus on AIFMD The AIFMD will, for the first time, introduce a harmonized European regulatory regime for managers of Alternative Investment Funds (AIF). Under the directive, existing EU AIF managers will need to apply for authorization in order to manage AIF. Non-EU AIFM will also need to apply for authorization in order to manage EU AIF. It is due to go live by mid-july The AIFM Directive covers hedge funds, real estate funds and private equity funds, as well as traditional asset management sectors where the fund products are not registered as UCITS. The Directive establishes new reporting requirements, sets restrictions on asset stripping in the first two years of ownership and dictates the manner in which European and foreign funds are marketed. AIFMD Level 2 Regulation (AIFMD Regulation) was issued on 19 December 2012 covering the rules on delegation and the responsibilities of the depositories (including reporting requirements and leverage calculation). As per a recent survey done by service provider Kneip across more than 130 asset managers, AIFMD is the regulation that firms expect to have the biggest impact and for which they are least prepared. A consultation paper published by the FSA in November 2012 estimates the cost of AIFMD implementation to be up to 4 million ( 4.9 million) per firm. Leverage Major holdings and control Reporting to regulator Disclosure to investors 6. Specific provisions 5. Transparency Scope Authorisation requirements Capital requirements 1. Authorisation 4. Functions and service providers 2. Marketing Valuation requirements Risk and liquidity management Depositary: Eligible entities Depositary obligations Depositary liability (Sub-)Delegation EU AIFM vs. non-eu AIFM: EU AIF Non-EU AIF EU passport 3. Conduct of business Remuneration guidelines Rules of conduct Conflict of interest Page 7

Regulatory challenges focus on AIFMD (cont d) Role of the depositary Eligible entities to act as depositary A credit institution having its registered office in the EU with a banking license An

8 Regulatory challenges focus on AIFMD (cont d) Role of the depositary Eligible entities to act as depositary A credit institution having its registered office in the EU with a banking license An investment firm having its registered office in the EU and with an investment firm license Depositaries to the UCITS IV Directive (2009/65/EC) Depositary light Functions and responsibilities Cash flow monitoring Safekeeping Custody of financial instruments Ownership verification of other assets Oversight Liability All losses of financial instruments held in custody The depositary needs to return a financial instrument of identical type or the corresponding amount to the AIF Depositary is not liable in case of a loss as a result of an external event beyond its reasonable control and could not have been avoided despite all reasonable efforts All losses suffered by the AIF or its investors resulting from negligence or intentional failure of the depositary to perform its obligations pursuant to the AIFMD Depositary liability is in principle not affected by delegation - Discharge of liability is permitted Page 8

AIFMD / UCITS and the Impact on Distribution

AIFMD / UCITS and the Impact on Distribution Sanjiv Sawhney Global Head of Fund Services Global Transaction Services, Citi Catherine Brady EMEA Head of Fund Services Global Transaction Services, Citi 1.