Potential Impact to Foreign Exchange Risk Management - Dodd-Frank Bill!

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1 Potential Impact to Foreign Exchange Risk Management - Dodd-Frank Bill! April 7, 2011 Presented by: Mary Ann Dowling, Principal 2011 Treasury Strategies, Inc. All rights reserved.

2 Dodd-Frank Act Passed and signed in response to the financial crisis - July 10, 2010 Requires ~243 new rules, 67 onetime studies, and 22 recurring reports to be completed in July !

3 Dodd-Frank Act Will cause significant change in American financial regulatory environment: Regulatory agencies consolidated - National thrift charter eliminated New oversight council for evaluating systemic risk Increased transparency of derivatives Consumer protection reforms Uniform standards for plain vanilla products Strengthening of investor protection Orderly winding down of bankrupt firms Various measures for increasing international standards Risk Committees required 3!

4 Banks / Corporations Enhanced Prudential Standards Volcker Rule Bank lending limits include credit from derivatives Increased Bank Capital OTC Derivatives Corporate governance of Foreign Financials 4!

5 Impact on Corporations Major Areas Affected by Dodd-Frank: Corporate governance and executive compensation Systematically important companies Regulation of OTC derivatives Regulation of securitization transactions Indirect effects through relationship with banks and rating agencies Consumer finance operations 5!

6 Regulation of OTC Derivatives Most of the $615 trillion (notional) derivative market will now be regulated by the SEC and CFTC through central clearing houses Swap instruments will become increasingly standardized Increased margin and collateral requirements Enhanced transparency of trades Probably increased cost 6!

7 Dodd-Frank Legislation - Derivatives Definitions: Swap Dealer Major Swap Participant End User Banks must spin off "riskier" swaps dealing activities Swaps dealers & major swap participants must register with the CFTC Margin requirements apply even if end user is a counterparty Unclear swaps trade SEC & CFTC will set margin & capital requirements All trades must be reported to regulators Goal of bill is to diminish the volume of bilaterally negotiated OTC trades 7!

8 Dodd-Frank Legislation - Areas of Impact Central clearing Exchange trading (OTC) Margin Requirements Stringent minimum margin requirements Minimum margin requirements for non-cleared (OTC) FX swaps Data collection and publication 8!

9 Highlights of Proposed Rules 5 dealers required to quote Agricultural & commodities swaps Position limits proposed Transfer derivative contracts Rights when counterparty defaults Minimum of 1 dealer quote Swap Execution Facilities must have: Limit order books Bids and offers Request for quote" Swap review committee Impartial access to SEFs CFTC rules have broader reach than SEC rules since CFTC has jurisdiction over interest-rate swaps, which is 60% of the market 9!

10 Cleared versus Non Cleared Non Cleared Derivative Requirements Board Approval Must qualified as a hedge Documentation for relevant commission Credit Mitigation Notification frequency Documentation to counterparty Cleared Derivative Requirements Execution Documentation Platforms Clearing Houses Margin 10!

11 OTC Derivatives Trade Flow Swap Dealer End User Major Swap Participant Clearing Member Yes Is Swap eligible for clearing No SEF Non Cleared Clearing House Electronic Paper Swap Repository 11!

12 Areas Requiring Change Dodd Frank Legislation could result in changes: Analytics and capital requirements Monitoring of limit structures Policies and procedures New product approval Internal reviews Reporting requirements Systems modifications 12!

13 Issues Budget Deadlines Layoffs New offices and units Workers Technology upgrades Debit-card fees $12 billion in banking revenue 13!

14 Timeline July 2010 Dec 2010 Jan 2011 July 2011 Legislation passed & signed SEC issues rules for comments CFTC issues rules for comments Derivative rules go into effect 14!

15 Questions Mary Ann Dowling Principal !

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