Perspective of an international banker on the regulatory environment for doing business in the United States November 2012 Good morning, It is both an honor and a pleasure for me to speak today at this Conference sponsored by the IIB and the CSBS and I would like to thank Sally Miller and the IIB for organizing today s program and for giving me the opportunity to express my thoughts to you on the regulatory environment in the US. While generically there is a lot to say on this topic, especially regarding Dodd-Frank, I will focus my comments on the concerns and challenges we are experiencing at Natixis, as they relate to our size, businesses and the legal organizational structure of 1
our US operations. I will start by giving you some summary information on the Groupe BPCE/Natixis, both globally and in the US. Note BPCE and Natixis are both Financial Holding companies. Then, I will present to you our Enterprise-wide regulatory oversight process designed to ensure that all major risks and control issues across all Natixis units in the US are identified, reported to Head Office and acted upon, as appropriate for an FHC. I will follow with a review of what we view as the important factors in our interaction with US regulators and then discuss the challenges of the recent US regulatory developments, primarily Dodd-Frank, before concluding. 2
Natixis is the Corporate, Investment Management and Financial Services arm of Groupe BPCE, France s second-largest banking group via its two retail networks Banque Populaire and Caisse d Epargne. As of 12/31/2011, Groupe BPCE key figures were as follows: - 36 million clients - 8000 branches - 117.000 employees - Net revenues: Euros 23.1 bio - Net income (group share): Euros 2.6 bio With 22.000 employees in 68 countries, Natixis operates through three core businesses: - Wholesale Banking - Investment Solutions (Asset Management, Insurance, Private Banking) - Specialized Financial Services primarily working with the BPCE networks. 3
In addition, Natixis owns Coface, the world s thirdlargest credit insurance company. For 2011, Natixis key figures were as follows: - Net Revenues: Euros 6.7 bio - Net Income (Group share): Euros 1.6 bio - Core Tier 1 Ratio: 10.2% In the US, Natixis has three main business units: - Wholesale Banking based in New York City operating through a state licensed branch in New York, a Houston Rep. Office, 2 Broker Dealers (one of which is a BD light and several unregulated subsidiaries. - NGAM, an Asset Management business, based in Boston, a major international player with well-known affiliated firms such as Loomis Sayles, Harris Associates, Reich and Tang and AEW. 4
- Coface North America Insurance Company, part of the global Coface group, provides trade credit insurance to its clients, and is based in East Windsor, New Jersey and primarily regulated by the Massachusetts Division of Insurance. I) Enterprise-wide Regulatory Oversight Process So, as you can see, Natixis is a relatively diverse organization in the US with fairly different businesses. Mindful of this, a few years ago, we put in place an enterprise wide oversight structure to ensure that all major risks, regulatory issues and internal control issues were identified across ALL units and reported to Head Office for resolution if needed. We call this the FHC Supervisory process. Three times a year in the US, the US FHC Supervisory Committee meets to: - Review the reports of Business Heads regarding exceptional items, new business 5
initiatives, major organizational changes and any other items of note in the three main business units. - Review the reports of the key function committees: o Internal Audit o Compliance o Risk Management o Regulatory Reporting - Discuss the Regulatory topics (US Financial Reform and Dodd-Frank) of importance and their impact on Natixis operations. This meeting is attended by the Heads of the key business units (Wholesale Banking, NGAM and Coface) and as well as the Heads of the key Function Committees. Subsequently, a formal FHC meeting is held in Head Office to review and validate the recommendations of the US FHC Supervisory Committee ensuring full 6
integration of governance between the US and Head Office. We found this process all the more important now that US regulators, especially the NY Fed and DFS, visit our Head Office on a regular basis. It is then critical that the people they interact with in Head Office are fully informed about the key regulatory risks and control issues of Natixis US Operations. II) Relationship with US Regulators Natixis strives to maintain an open and constructive dialogue with our US regulators as well as all our regulators for that matter. As an institution, Natixis believes it is important to act in a responsible and transparent manner especially because the banking industry has shown that this was not always the case in the recent past. For a trustworthy relationship to be established with the regulators, it is important that the following conditions be satisfied: 7
- Engagement of the CEO with the regulators. The CEO must be actively involved in key meetings with the regulators. It may go without saying today but in my experience it was not always the case in the past. Today, in view of the importance and impact on the business of regulatory considerations, it is unthinkable to have a CEO not well informed about regulatory issues and actively engaged with regulators. This involvement also carries over to our Head Office executive management who make a point of meeting US regulators in France and in the US during their regular visits. - Keeping the regulators fully informed about developments in our organization not only in the US but also worldwide. This is important because our institution has become much more integrated than was the case a few years ago with the result that organizational changes in Head Office are likely to have ramifications for our US Operations. As US 8
regulators have been taking an increasing interest in the operations and financial condition of our institution as a whole, they have developed a greater interest for what happens globally to our institution. - Professionalism and responsiveness of the key functional managers involved in the day to day contact with the regulators. The NY Fed, the DFS, FINRA and the SEC rely extensively on their interaction with and the input from the Chief Auditor, Chief Compliance Officer, CRO, COO and CFO. The managers responsible for those key control functions are the points of contact for the regulators with our institution. To a large extent, the key control functions shape the perception of an institution by the regulators. As a result, it is important that each of the managers for the control functions is an effective communicator, fully cooperative and well-informed about what is going on in the organization. 9
- The cooperation of business heads to business specific regulatory examinations. Recently, as the US regulators have expanded their focus to include the business side, and not just the control functions, they have begun to conduct business reviews focusing on specific businesses, requiring Front Office people to dedicate more time/resources than ever before to regulatory issues. It is important for business heads to be fully cooperative in that process even though the time spent on regulatory issues, in the view of some, detracts them from business development. - Strong and disciplined follow-up in the implementation of corrective actions in response to the regulatory recommendations. In my experience, assuming a normal regulatory situation, US regulators are generally reasonable in their expectations of what an institution can achieve to correct the noted deficiencies. However, once a set of corrective actions with corresponding 10
deadlines have been agreed to by an institution and the regulators, it is important to stick to them. Recent US Regulatory Developments My remarks will focus on the Dodd-Frank Act and more specifically Title VII, the Volcker Rule and Resolution/Recovery Planning. First and foremost, the most challenging aspect of the Dodd-Frank Act for a foreign bank is the extraterritorial application of the Dodd-Frank Act. The concerns raised by non-us regulators to the proposed regulation have been well documented and the subject of formal communication by non-us regulators and finance ministers as well as the IIB to the US regulatory authorities. The concerns revolve around: - The potential for overlap and duplication of US regulatory requirements with those of other jurisdictions combined with the broad scope of US regulatory requirements which is 11
manifested in the definition of US person for Title VII purposes. For example, as an EU dealer, Natixis could execute a single trade that would be subject to the European regulatory requirements (under EMIR, MIFID and CRD IV) and to CFTC requirements implementing the DFA. - The scope and manner the CFTC/SEC will handle examinations for compliance, with regard to our Head Office. The proposed regulations appear to give US regulators wide latitude in this regard. While we understand that US and foreign regulators are actively working to address examination and information sharing issues, we do not yet know how those issues will be resolved. - Global implementation issues such as the CFTC s so-called substituted compliance, which was not well-received by European regulators who have advocated an equivalency approach similar to that generally practiced in the past by bank regulators such as the FRB where deference 12
was given to home office regulators on many important topics. The original CFTC proposal for substituted compliance in its proposed cross border guidance was very prescriptive indicating a rule by rule approach for swap dealers in each jurisdiction and little deference to the home country regulator. In addition, the CFTC reserved the right to withdraw a favorable finding of substantive compliance at any time. Here too, it is our hope that cooperation among regulators will resolve the issues which have been brought up in formal communications by finance ministers, non-us regulatory authorities and the EU Commission to the CFTC. While the CFTC has not published revised cross border guidance, the language and tone of their public communications indicates a potentially more cooperative approach. - Conflict of some Dodd-Frank requirements with French laws as some of the reporting requirements are contrary to French Bank secrecy laws, while the completion of Form 8-R by Natixis principals also raises issues with 13
French privacy laws which prohibit French corporations from collecting and disclosing certain personal information from individual employees or directors. - The application of a one size fits all concept which could penalize medium size foreign banks operating in the US such as Natixis. More specifically, we are concerned about being lumped together with other very large foreign banks in the US since Groupe BPCE has been designated an international SIFI. The reason for our concern is the small size of our US banking operations relative to the size of Groupe BPCE and Natixis. Recall that the determining factor for application of a specific section of Dodd-Frank is generally based on the size of an institution s global assets and not just its US assets. I will mention two areas where this might be the case: 14
o Enhanced prudential standards where the FRB has mentioned that it is considering applying enhanced prudential standards under Section 165 to FBO s with global consolidated assets of $50bn or more. The size of our US CIB operations does not by any means constitute a threat to the US financial stability and we support the IIB s position that the FRB should take a more tailored approach in this regard. o The area of resolution/recovery planning where we are concerned that our US operations will be subject to the same complex, expensive, resource-intensive and time-consuming process as the large US and foreign banks. We hope to be permitted to present a simple plan heavily relying on the resolution/ recovery plan submitted to our French regulators. In the Wholesale Banking area in particular, our US activities do not stand on their own as autonomous 15
business units because of their relatively small size and their integration in global business lines managed out of Head Office. Therefore, a resolution/recovery plan for those activities can only make sense within the context of an overall resolution/recovery plan for Natixis Groupe BPCE. We hope that coordination among French/EU and US regulators will help address this issue. - Lastly, the Volcker Rule, which has farreaching implication for market making, sovereign debt trading and sponsorship of hedge funds by non-us banking entities. While there is recognition that activities conducted solely outside of the US are not subject to the Volcker Rule, we are hoping that there will be some relief from the strict interpretation of the proposed rules. As advocated by the IIB, what should matter for the trading solely outside of the US exception is that the mind, management, and risk is maintained overseas, 16
because the US taxpayers and banking systems would not be at risk. While I could mention other topics of concern, let me state however that our concerns are mostly with implementation, coordination among regulators and the narrow and sometimes overly prescriptive nature of the proposed regulations but not with the spirit and conceptual objective. Our executive management has already indicated privately and publicly that Groupe BPCE and Natixis should place the client at the heart of all our activities and not engage in proprietary trading or investing in Hedge Funds or PE Funds solely for financial return purposes. However, here too, we are concerned with how the Volcker Rule will be implemented or applied. Our concern, for instance, stems from the fact that some of our capital market businesses are in a start-up mode. In our view, Volcker Rule metrics relating to a capital 17
market business that is just starting should be interpreted differently than when applied to a mature business where the institution already has a sizeable customer flow. By definition, at the beginning of a new business, you do not have many customer flows If the metrics are interpreted strictly regardless of size of an institution or maturity of a business, it will be quite difficult for us or any other US or foreign institution, to develop businesses that are not already well established. We have not yet resolved how to apply the proposed metrics to our global books. Either they are applied to a sub-book consisting solely of transactions specifically covered by the Volcker Rule or they are applied to the entire global book. The former approach risks skewed metrics calculations because non- Volker off-setting or hedge transactions would not be included in the calculations of the metrics, while the latter approach means the 18
entire global book activity becomes subject to the Volcker Rule!!! Interestingly, from an internal organizational point of view, while Dodd-Frank generates additional IT costs short term, it has pushed us to centralize the booking of our trading activities in Natixis SA with the various branches of the bank throughout the world acting as agent. As we decided to register only Natixis SA as a swap dealer under CFTC rules, we have accelerated the migration of some trading businesses to Head Office systems and booking to avoid having to register other legal entities in the US and elsewhere. So, from an internal point of view, Dodd-Frank has contributed to the acceleration of a process already underway to simplify our organization, rationalize our IT/System infrastructure and optimize our costs. While this results in greater integration of our US operations with Head Office, it also produces new issues in the area of operational 19
risk due to the time difference between the US and Head Office, the significant unionization of our operations people in France and the difference in holidays between the US and France. Conclusion Presence in the US markets is a must for any foreign bank serious about its ambitions in the corporate and investment banking space. Additionally, as the development in our domestic markets is limited, we look to foreign markets like the US to pursue profitable growth. This being said, the higher costs of compliance combined with the capital implications of Basel III are pushing us to take a harder look at and/or exit marginally profitable businesses. More than ever, it will be important to focus on those US businesses where Natixis has developed a strong, profitable and competitive position. In such an environment, cost control and risk reduction also become critically important, especially for a medium size institution like 20
Natixis where the higher costs of compliance have to be absorbed by a smaller revenue base. Fundamentally, as an institution, Natixis business objectives are aligned with the goals pursued by the US regulators. We favor strong top down and bottom up governance and oversight regimes which we view as a business necessity in an integrated banking organization. Enterprise risk management and internal controls have been considerably strengthened in the last few years and we are committed to an open, transparent and collaborative dialogue with our regulators. However, we are concerned by how US regulations will be implemented and applied to Natixis US operations, which might fail to take into account our size and other specific characteristics, as well as the extraterritorial application of such US regulations to our Head Office businesses. In addition, we are concerned with the uncertainty of moving forward with initiatives, such as swap dealer registration and good faith efforts to comply with the 21
Volcker Rule, when the regulators have not issued final orders, exemptive relief or final regulations We are hopeful, however, that cooperation among US and non-us regulators will minimize the redundancies and reduce the added cost burden as it is our firm desire to remain a strong contributor to the US banking system in the future. Thank you very much for your attention. 22