Divergences in Key Regulatory Reforms among Jurisdictions

EFR Steering Group on the G20 Agenda Divergences in Key Regulatory Reforms among Jurisdictions Basel 2.5 Explicit G20 leaders Implementation / commitment to ensure trading book consistency of and Basel 3 Implementation Timing: Although the EU has delayed implementation of CRD3 until no later than 31 Dec 2011 to align it with the expected US timetable and the US Advance Notice of Proposed Rule-making (ANPR) has been presented, the broad scope of reforms under the Dodd-Frank Act (DFA) may cause further delays in US implementation of Basel 2.5. Provisions: Dodd-Frank requirements do not consistently conform with Basel 2.5, and some DFA rules are very different. In particular, the DFA stricture that regulatory capital requirements and other regulations should not explicitly refer to external ratings differs fundamentally from the Basel 2-3 rules. Timing: EU on track for CRD 4 legislation (legislative proposal expected for Q3/11) US has not yet published an ANPR on the Basel 3 package; DFA does not make transposition of Basel 3 mandatory in US. Global Timing and extent of implementation of Basel 3 in key EM countries (e.g. China) remain uncertain Leverage ratio: Potential disadvantage for EU banks / IFRS filers due to: (i) differences in hedge accounting (see below: accounting convergence); (ii) ability of US banks to shift prime mortgages to GSEs. Timing: Regulatory arbitrage from EU if US postpones implementation. Competitive disadvantage for EU banks. Shift of business volumes from EU to US. Provisions: Effect on competitive advantage is case-specific. Regulatory arbitrage. Inefficiencies in intermediation. Timing: Competitive disadvantage for EU banks Regulatory arbitrage Shift of business volumes from EU to other jurisdictions Substance: Bank credit in EU accounts for a far higher proportion of lending to private sector than in US. The implementation of the new capital requirement of Basel 3, including the leverage ratio, will therefore have a much bigger timing of implementation across key G20 jurisdictions; G20/FSB monitoring and peer review to ensure consistent timing and scope of implementation. G20 monitoring with active peer review to ensure consistent timing and scope of implementation across jurisdictions. EFR Steering Group on the G20 Agenda 1

impact on the volume and cost of lending in Europe than in the US. Basel 2 Implementation Bank levies Alternative Investments Basel 2 still to be fully implemented in the US. Conflict between US legislative provisions on external ratings and their role in Basel 2 needs to be resolved. Intra EU Bank levies imposed in UK, DE, FR, HU, BE, CY, AT, PT, DK and SE all have different tax bases and charges, creating risk of double-taxation and competitive distortions. Push by European Commission to establish a harmonised regime is not supported by EU member states. Dodd-Frank does not include a bank levy. However, President Obama (Jan 2010) proposed a financial crisis responsibility fee for all firms with >$50bn assets that had received US government guarantees/subsidies. Prospects for a levy imposed by the US appear to have diminished since mid-term elections. : US a registration requirement including prerogative of US FSOC to designate a hedge fund or other financial institution as systemically important, with associated obligations. EU: rules on governance, activities, marketing, depositories and capital / liquidity. Timing Basel 2 implemented in other jurisdictions from 2008. Provisions Higher compliance costs / complexity for firms operating in both EU and US. Intra-EU: Undermines ability of banks that face higher levies to build capital, thereby limiting their risk absorption capacity Regulatory arbitrage: Risk of migration of the most profitable and/or riskiest activities to jurisdictions that do not impose bank levies. : Regulatory arbitrage if US does not impose a bank levy similar to those in EU. Firms headquarters may be shifted to less regulated jurisdictions. Loss of business and competitiveness for EU-based banks and other financial services providers. US to implement Basel II and resolve external ratings issue. Agreement on harmonised tax base and effective measures to avoid double taxation Broad transatlantic consistency of EU/US policies with regard to levies. Near term: few remedies because legal revisions are unlikely in the near-term Medium term: Closer alignment of frameworks should be EFR Steering Group on the G20 Agenda 2

Market access to EU impeded for third-country suppliers. sought Remuneration Different approaches in EU vs US All G20 jurisdictions to EU introduced prescriptive remuneration standards in CRD3, effective 1 Jan 2011. New rules copied over impact relative attractiveness of particular locations and ability of apply Principles the for FSB Sound for non-ucits investment funds. CEBS consulted on firms to retain / recruit staff in those Compensation implementation guidance, which may be more locations: UK and other EU Practices in a restrictive than some EU regulators (e.g., UK FSA) countries seem likely to be harmonized way. proposed. DE has imposed stricter rules than adversely affected relative to US. Harmonize guidance CEBS/EBA guidelines. within EU. Unlike EU, US has not adopted a prescriptive EU: approach. Dodd-Frank Act introduces Say on Pay Lack of harmonization with EU provisions requiring firms to provide shareholders with: (1) a vote on executive compensation, (2) a vote, to determine whether say-on-pay votes are creates inefficiencies and incentives for regulatory arbitrage. held annually or every two or three years; and (3) a vote on golden parachutes in M&A transactions. EU/US: Securitisation : US Dodd-Frank Act: 5% retention requirements and disclosure requirement for quality of assets. US rules will have exemptions for qualifying mortgages, which are not currently recognised under EU rules, and will be implemented later than the EU rules. EU: at least 5% retention requirements; potential capital penalty charge if investor does not comply with due diligence rules; ongoing diligence / stress testing of exposures. Requires that originator / sponsor also provides all information investors need for their due diligence assessments. Art.122a has extra-territorial impact, since it imposes these rules on EU credit institutions no matter where originator / sponsor is located. Lack of harmonization. : Timing: EU provisions likely to be implemented sooner than US. Provisions: Rules largely equivalent, but scope of US rules is narrower Will impede growth of securitization markets in EU and US. This, in turn, will reduce banks ability to spread risk, (which could detract from financial stability) and will reduce amount of financing available to the economy Would require harmonization of relevant regulations between EU/US: Little short-term scope for further legal changes. EFR Steering Group on the G20 Agenda 3

National: 5% retention may rise to 10% in Germany after review of law at end-2014 Derivatives markets Liquidity regulation Some divergences are possible regarding the extent of central clearing, e.g. in US, non-systemic financials will be outside the rules, while in the EU they are included within EMIR Dodd-Frank Act, through S.724, requires banks operating in US to use a Futures Commission Merchant (and accompanying stringent capital and margin requirements) to clear US client business. DFA contains a specific power to carve out FX swaps and forwards if US Treasury Secretary decides to do so Differing views on CCP membership and relationship with CCP (Principal-Principla in EU vs agency approach in US) Global China and Japan have decided to impose mandatory CCP clearing UK FSA has been front-running Basel reforms with its own liquidity requirements. UK banks are already reporting metrics for stress scenarios as defined by FSA. Nevertheless, FSA recently announced that it will await the final Basel proposals before deciding how best to calibrate the UK regime. Divergent activities/ entities could be covered by new rules S. 724 of DFA has extraterritorial impact on EU swap dealers, which may need to restructure / recapitalise their US entities to clear client business (depends on their capitalisation, and final rules) Rules on swaps dealers arising from DFA will also require non- US entities dealing with US counterparties to register with CFTC for both capital and conduct of business purposes this could potentially lead to regulatory conflict where a European entity deals with a European branch of a US counterparty within a European jurisdiction. Currently the divergence is between UK banks and EU/US counterparts; longer-term, the extent of any discrepancies will depend on US implementation of Basel III and national goldplating of CRD4 requirements by EU member states Better coordination of measures to avoid inconsistencies and potential regulatory conflict. EFR Steering Group on the G20 Agenda 4

Volcker Rule Under DFA and recent FSOC recommendations UK banks could be No action required on EU banking entities in US are prohibited from acquiring disadvantaged vis-à-vis EU side (though US-based or retaining equity, partnership or ownership interests in or from sponsoring hedge funds or private equity banks, though possibly less so relative to US banks subsidiaries of EU banks will be affected) funds. Important exceptions: Certain specified investments in HFs or PEs that do not exceed 3% of the total ownership of the fund within one year of the investment, and 3% of the banking entity s Tier 1 Capital, plus other conditions. Regulators are also able to place limitations on permitted activities where they believe they create material conflicts of interest, material exposure to high risk assets / trading strategies, threats to safety and soundness of the entity, or threats to US financial stability No similar rules in EU, but under consideration in UK US swap push-put rule not mirrored in EU Accounting standards Short-selling EU/US convergence of accounting standards is crucial to work towards a single set of global accounting rules. EU / US convergence was hampered in June 2009 by differing views of FASB and IASB on accounting for financial instruments. The G20 has set a deadline of end-2011 for IASB/FASB convergence. This appears ambitious, although the SEC has said it will take a decision on whether to adopt IFRS during 2011 Different treatment of derivatives hedges under US GAAP and IFRS would disadvantage IFRS filers in calculation of leverage ratio. Since 2004, US SEC has brought in requirements for short selling, notably locate rule, flagging regime and close-out requirement for short positions. In Feb 2010, SEC adopted revised uptick / circuit breaker rule Different accounting rules increase uncertainty, especially in times of stress. Ongoing differences cause compliance burdens, hinder transparency, and inhibit market integration. Without harmonised accounting rules, leverage ratio would entail competitive disadvantage for EU banks. Differences may have competitive impacts where securities can be traded outside a home market by other firms Intensify FASB/IASB Convergence Project Need for internationally aligned regime on shortselling EFR Steering Group on the G20 Agenda 5

restricting short sales of a share whose price has not subject to the same rules fallen by more than 10% compared to previous day closing. Sep 2010 EU Commission proposals on Short Selling with five key issues: private-to-regulator disclosure and public disclosure of net short positions in shares according to thresholds, disclosure to regulators of significant short positions in sovereign debt and CDS, requirements to cover short sales (hard locate rule), flagging of short orders on trading venues, mandatory buy in and firm censor rules in the case of failed trades. Credit Rating Agencies Dodd-Frank Act requires removal of statutory references to ratings. EU Commission issued (on 5 Nov 2010) consultation on CRAs raising issue of over reliance on ratings CRAs required to be registered in and subject to regulation in EU under new directive passed in 2009. Amendments already introduced to reflect US SEC rule 17g5 about access to information provided by issuers. Expert liability exemption effectively repealed by Dodd-Frank (opening up CRAs to potential liability under disclosure documents). EU Commission in 5 Nov 2010 consultation note raised a similar question. Use of US ratings by EU banks subject to EU endorsement; otherwise severe disruption of rating methodology Linkage to debate on simultaneous enactment of Basel 3 in US and EU EFR Steering Group on the G20 Agenda 6