Dodd-Frank 2013 What You Need to Know 1
Derivatives will be cleared Securities requirements will abound Regulations will converge internationally 2
3 During today s presentation we ll be using a fictional company, BuckCo.
Derivatives will be cleared. Swap Dealer Security Based Swap Dealer Major Swap Participant Major Security Based Swap Participant Derivatives Clearing Organization Special Entity 4
Derivatives will be cleared. Swap Dealer 5
Derivatives will be cleared. Swap Dealer Security Based Swap Dealer 6
Derivatives will be cleared. Swap Dealer Security Based Swap Dealer Major Swap Participant 7
Derivatives will be cleared. Swap Dealer Security Based Swap Dealer Major Swap Participant Major Security Based Swap Participant 8
Derivatives will be cleared. Swap Dealer Security Based Swap Dealer Major Swap Participant Major Security Based Swap Participant Derivatives Clearing Organization 9
Derivatives will be cleared. Swap Dealer Security Based Swap Dealer Major Swap Participant Major Security Based Swap Participant Derivatives Clearing Organization Special Entity 10
Derivatives will be cleared. Swap Execution Facilities Designated Contract Markets Legal Segregation with Operational Comingling ( LSOC ) When in 2013? 11
Derivatives will be cleared. What category of swap counterparty is BuckCo.? 12
Derivatives will be cleared. What category of swap counterparty is BuckCo.? Category 1? 13
What category of swap counterparty is BuckCo.? Category 1. Category 2? 14
What category of swap counterparty is BuckCo.? Category 1. Category 2. Category 3? 15
16 What about the end-user exception?
Every derivatives trade must fall within the CFTC s definition of bona fide hedging 17
BuckCo. must file with the CFTC every year, or represent to each counterparty for each trade for which BuckCo. s claiming the exception 18
Best practice? Board or members should approve even if BuckCo. remains a private company. 19
BuckCo. Retirement Trust and BuckCo. Veterans Foundation 20
21 BuckCo. Retirement Trust and BuckCo. Veterans Foundation must each represent that it is, or a qualified independent representative that it has chosen is, independently assessing trades and trading strategy
22 Department of Labor guidance: - assets are its rights embodied in the swap contract
Department of Labor guidance: -assets are its rights embodied in the swap contract - ERISA plan s independent fiduciary must negotiate with an FCM 23
Department of Labor guidance: -assets are its rights embodied in the swap contract - ERISA plan s independent fiduciary must negotiate with an FCM - FCM is a party in interest with respect to a plan, so the plan needs a QPAM 24
Category 1 by March 11, 2013 Category 2 by June 10, 2013 Category 3 by September 9, 2013 What kinds of derivatives will be cleared? 25
What kinds of derivatives will be cleared? Interest-rate swaps Non-deliverable Forwards Credit Default Swaps 26
Department of Treasury 16 November 2012 Foreign Exchange Swaps and Foreign Exchange Forwards EXEMPT 27
Department of Treasury 16 November 2012 Foreign Exchange Swaps solely involve exchanging two different currencies on a specific date at a fixed rate agreed-upon at the trade s inception and the reverse 28
Department of Treasury 16 November 2012 Foreign Exchange Forwards solely involve exchanging two different currencies on a specific future date at a fixed rate agreed-upon at the trade s inception 29
30 FX Swaps and FX Forwards must still comply with:
FX Swaps and FX Forwards must still comply with: Trade-reporting 31
FX Swaps and FX Forwards must still comply with: Trade-reporting Anti-evasion 32
FX Swaps and FX Forwards must still comply with: Trade-reporting Anti-evasion Business Conduct Standards 33
What kinds of derivatives will be cleared? Interest-rate swaps Non-deliverable Forwards Credit Default Swaps 34
Specification Fixed-to-Floating Swap Class 1. Currency U.S. Dollar Euro (EUR) Sterling (GBP) Yen (JPY) (USD) 2. Floating Rate Indexes LIBOR EURIBOR LIBOR LIBOR 3. Stated Termination Date Range 28 days to 50 years 28 days to 50 years 28 days to 50 years 28 days to 30 years 4. Optionality No No No No 5. Dual Currencies No No No No 6. Conditional Notional Amounts No No No No 35
Specification Basis Swap Class 1. Currency U.S. Dollar Euro (EUR) Sterling (GBP) Yen (JPY) (USD) 2. Floating Rate Indexes LIBOR EURIBOR LIBOR LIBOR 3. Stated Termination Date Range 28 days to 50 years 28 days to 50 years 28 days to 50 years 28 days to 30 years 4. Optionality No No No No 5. Dual Currencies No No No No 6. Conditional Notional Amounts No No No No 36
Specification 1. Currency Forward Rate Agreement Class U.S. Dollar (USD) Euro (EUR) Sterling (GBP) Yen (JPY) 2. Floating Rate Indexes LIBOR EURIBOR LIBOR LIBOR 3. Stated Termination Date Range 3 days to 3 years 3 days to 3 years 3 days to 3 years 3 days to 3 years 4. Optionality No No No No 5. Dual Currencies No No No No 6. Conditional Notional Amounts No No No No 37
Specification Overnight Index Swap Class 1. Currency U.S. Dollar (USD) Euro (EUR) Sterling (GBP) 2. Floating Rate FedFunds EONIA SONIA Indexes 3. Stated Termination 7 days to 2 years 7 days to 2 years 7 days to 2 years Date Range 4. Optionality No No No 5. Dual Currencies No No No 6. Conditional Notional Amounts No No No 38
Specification 1. Reference Entities 39 Corporate 2. Region North America CDX.NA.IG 3. Indices CDX.NA.HY 4. Tenor CDX.NA.IG: 3Y, 5Y, 7Y, 10Y 5. Applicable Series North American Untranched CDS Indices Class CDX.NA.HY: 5Y CDX.NA.IG 3Y: Series 15 and all subsequent Series, up to and including the current Series CDX.NA.IG 5Y: Series 11 and all subsequent Series, up to and including the current Series CDX.NA.IG 7Y: Series 8 and all subsequent Series, up to and including the current Series CDX.NA.IG 10Y: Series 8 and all subsequent Series, up to and including the current Series CDX.NA.HY 5Y: Series 11 and all subsequent Series, up to and including the current Series 6. Tranched No
Specification European Untranched CDS Indices Class 1. Reference Corporate Entities 2. Region Europe 3. Indices itraxx Europe, itraxx Europe Crossover itraxx Europe HiVol 4. Tenor 5. Applicable Series itraxx Europe: 5Y, 10Y itraxx Europe Crossover: 5Y itraxx Europe HiVol: 5Y itraxx Europe 5Y: Series 10 and all subsequent Series, up to and including the current Series itraxx Europe 10Y: Series 7 and all subsequent Series, up to and including the current Series itraxx Europe Crossover 5Y: Series 10 and all subsequent Series, up to and including the current Series itraxx Europe HiVol 5Y: Series 10 and all subsequent Series, up to and including the current Series 6. Tranched No 40
41 What must BuckCo. do to clear by March 11, June 10, or September 9?
What must BuckCo. do to clear by March 11, June 10, or September 9? Obtain a CFTC Interim Compliant Identifier 42
What must BuckCo. do to clear by March 11, June 10, or September 9 once it has a CICI? Arrange to clear with an FCM 43
What must BuckCo. do to clear? Arrange to clear with an FCM Identify which existing trades will need to be renewed as cleared swaps 44
What must BuckCo. do to clear? Arrange to clear with an FCM Identify which existing trades will need to be renewed as cleared swaps Provide Swap Dealer and Major Swap Participant counterparties with information about BuckCo. and complete execution agreements with each 45
What must BuckCo. do to clear? Arrange to clear with an FCM Identify which existing trades will need to be renewed as cleared swaps Provide SD and MSP counterparties with information about BuckCo. and complete execution agreements with each Assess DCO collateral requirements and find collateral to post 46
Clearing requires collateral. 47
Lots and lots of collateral. 48
BuckCo. s existing ISDA Master Agreement Credit Support Annexes don t govern collateral required for cleared trades. BuckCo. will be required to post initial and variation margin for every cleared derivatives trade it executes. 49
BuckCo. s existing ISDA Master Agreement Credit Support Annexes uncleared swaps 50
Derivatives will be cleared Securities requirements will abound Regulations will converge internationally 51
52 BuckCo., as an ABS issuer - will be required to disclose loan-level information
53 BuckCo., as an ABS issuer - will be required to disclose loan-level information - will be required to retain an economic interest in any asset that it transfers to a third party
54 BuckCo., as an ABS issuer - will be required to disclose loan-level information - will be required to retain an economic interest in any asset that it transfers to a third party - must disclose repurchase requests received and repurchases made for outstanding ABS
55 BuckCo., as an ABS issuer - will be required to disclose loan-level information - will be required to retain an economic interest in any asset that it transfers to a third party - must disclose repurchase requests received and repurchases made for outstanding ABS - must disclose any differences between loans in the ABS and prospectus loan underwriting criteria
March 25, 2013 effective January 23, 2014 compliant - must search for lost securityholders 56
March 25, 2013 effective January 23, 2014 compliant - must search for lost securityholders - must send a notice within 7 months of sending a check that isn t negotiated by the securityholder (or its payee) 57
Ratings removed - 2a-7 ABS needn t be rated to be money market fund eligible 58
Ratings removed - 2a-7 ABS needn t be rated to be money market fund eligible - Form S-3 and Form F-3 59
Ratings removed - 2a-7 ABS needn t be rated to be money market fund eligible - Form S-3 and Form F-3 - No more Form F-9 60
Ratings revamped - Rule 17g-5 61
Ratings revamped - Rule 17g-5 - Investor-pay model 62
Ratings revamped - Rule 17g-5 - Investor-pay model - Section 15E(w) system 63
Ratings revamped - Rule 17g-5 - Investor-pay model - Section 15E(w) system - Investor-owned model 64
Ratings revamped - Rule 17g-5 - Investor-pay model - Section 15E(w) system - Investor-owned model - Stand-alone model 65
66 Ratings revamped
Rotating credit rating agencies 67
Derivatives will be cleared Securities requirements will abound Regulations will converge internationally 68
69 Basel 3
average risk weighting of trading assets varies from around 10% to nearly 80%, with most banks between 15% and 45%. 70
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Qualified Residential Mortgage 73
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76 Your mission, should you choose to accept it
77 Thank you.