© Greenberg Traurig, LLP. Attorneys at Law. All rights reserved. Deep Impact: Trading and Hedging under Dodd-Frank in 2012 What You Need to Know © Greenberg Traurig, LLP. Attorneys at Law. All rights reserved. Sylvie A. Durham Shareholder, Corporate & Securities, New York December 8, 2011

1 Dodd-Frank Act ■ Imposes significant new requirements on corporate end users and private funds engaged in hedging activities and investment activities ■ Among new requirements are new swap rules ■ 12 rules effective as of today ■ Over 55 rules still pending

2 Dodd-Frank Swap Rules ■ What is a swap? » Virtually everything unless expressly excluded » FX, interest rate, credit default swaps, commodities and equities are swaps » Options, repos, convertible debt, warrants, forwards are swaps » Embedded derivatives are swaps ■ Exclusions » Insurance » Leases » Employment contracts » Loan Participations » Consumer and Commercial Agreements

3 Who is impacted? ■ Swap dealers ■ Major swap participants ■ Corporate end users ■ Private funds that are not swap dealers or major swap participants ■ Investment advisers ■ Managed accounts ■ Mutual funds

4 Who regulates? ■ Securities Exchange Commission (SEC) » Security-based swaps such as equity swaps and credit default swaps ■ Commodity Futures Trading Commission (CFTC) » All other swaps

5 What is major impact to corporate end-users? ■ Mandatory clearing unless end-user exemption applies ■ Negative accounting implications if end-user exemption does not apply ■ Higher margin requirements ■ Delivery of all swap transactions to regulators through swap repositories ■ Higher costs passed on by swap dealers

6 End-User Exemption ■ Current proposed rule is narrowly drafted and would not capture many legitimate hedging activities engaged in by finance companies of corporate end-users ■ Would exempt swaps from mandatory clearing requirements and higher margin requirements ■ Exemption is on a transaction-by-transaction basis ■ Could apply to inter-affiliate swaps although proposal in Congress to eliminate inter-affiliate swaps from Dodd-Frank

7 Main requirements of end-user exemption from mandatory clearing ■ Must be non-financial entity » Swap dealers, private funds excluded » Major swap participants excluded » Certain finance affiliates are included if they meet certain conditions » Must notify Registered Swap Depository of how it is meeting its “financial obligations” on its swaps » Must describe collateral or guaranty arrangements supporting swap transactions » Must describe how it is mitigating credit risk on swaps

8 Main requirements of end-user exemption from mandatory clearing ■ Must obtain Board approval or Board committee approval if company has securities registered under Exchange Act ■ Must not be purely hedging “commercial risk” » Swap must be “economically appropriate to reduction of risks in the conduct and management of commercial enterprise” where risks arise from assets owned or produced by end user, services provided by end user, commodities or other inputs utilized in manufacturing or production by end-user; FX risk, interest rate risk OR » Complies with hedge accounting treatment OR » Qualifies as “bona fide hedging” under position limits in commodities set by CFTC ■ Swap may not be used for speculation, investing or trading ■ Swap may not hedge another swap unless other swap also qualifies for end-user exemption

9 Who are swap dealers? ■ Market makers ■ Entity that determine pricing and terms ■ Entity that provide bid/offer spread ■ Entity that holds itself out as swap dealer ■ Only largest companies and hedge funds need worry about this designation

10 How are swap categorizations made? ■ Four classes of derivatives » Rate swaps (e.g., FX and interest rates) » Credit swaps (e.g., credit default swaps) » Equity swaps » Commodity swaps (e.g., anything that is not a rate swap or credit swap) ■ Determination of swap regulations applicable to companies and funds made for each class of derivatives

11 FX Exemptions ■ Department of Treasury exercised option to exclude FX swaps from Dodd-Frank ■ Exclusion applies to “plain vanilla” FX swaps ■ Exclusion does not apply to FX options and non- deliverable forwards (i.e., forwards that do NOT provide for the exchange of 2 different currencies on a specific future date at a fixed rate agreed at the inception of the contract covering the exchange)

12 What is Major Swap Participant? ■ Entities with “ substantial positions ” in swap in EACH of four swap categories ■ Entities which maintain swap positions that create “ substantial counterparty exposure ” that could impact financial stability of U.S. banking system ■ Entities that are “highly leveraged”

13 What is “Substantial Position?” ■ Rate swaps » $3 billion in “daily average aggregate uncollateralized outward exposure” OR » $6 billion in “daily average aggregate uncollateralized outward exposure” PLUS “daily average aggregate potential outward exposure” ■ Credit swaps » $1 billion in “daily average aggregate uncollateralized outward exposure” OR » $2 billion in “daily average aggregate uncollateralized outward exposure” PLUS “daily average aggregate potential outward exposure”

14 What is “Substantial Position?” ■ Equity swaps » $1 billion in “daily average aggregate uncollateralized outward exposure” OR » $2 billion in “daily average aggregate uncollateralized outward exposure” PLUS “daily average aggregate potential outward exposure” ■ Commodity swaps » $1 billion in “daily average aggregate uncollateralized outward exposure” OR » $2 billion in “daily average aggregate uncollateralized outward exposure” PLUS “daily average aggregate potential outward exposure”

15 What is “Aggregate Potential Outward Exposure?” ■ Depends on whether swaps are cleared ■ Depends on whether daily mark-to-market ■ Multiply notional amount of swaps by various multipliers depending on type of swap and remaining term to maturity – » see Conversion Multiplier Table below for multipliers

16 Conversion Multiplier Table Residual Maturity Interest Rate Foreign exchange rate and gold Precious metals (except gold) Other commodities One year or less Over one to five years Over five years Residual maturity CreditEquity One year or less Over one to five years Over five years0.10

17 What is “Substantial Counterparty Exposure?” ■ $5 billion in “ daily average aggregate uncollateralized outward exposure ” OR ■ $8 billion in “ daily average aggregate uncollateralized outward exposure” PLUS “ daily average aggregate potential outward exposure ”

18 What if you are an MSP? ■ Will be regulated in similar manner as swap dealer ■ May have dual regulators in both CFTC and SEC ■ Additional margin, record-keeping, documentation requirements ■ Audits

19 What are other Dodd-Frank swap rule impact on private funds? ■ Margin ■ Clearing ■ New documentation requirements ■ Inclusion of swaps in CPO/CTA calculations ■ Counterparty risk exposure » “Push out provisions”

20 Repeal of CPO/CTA Exemption ■ Exemption typically utilized by private funds repealed ■ Private funds and advisers will need to register as CPO/CTAs with CFTC ■ Trading activities that require registration are futures contracts (including Treasuries); options on futures contracts; and, under Dodd-Frank, swap transactions ■ Registered investment advisers subject to more regulation by CFTC due to repeal of investment adviser exemption

21 What does registration as CPO/CTA mean? ■ Requires new disclosure obligations and filings re risks with CFTC and National Futures Association ■ Fingerprints on file ■ Required examinations of managers similar to Series 7 and 63 exams ■ Greater record-keeping requirements and audits ■ Audits by CFTC ■ New Form CPO-PQR and CTA-PR would need to be filed quarterly although same information as required in Form PF filings ■ Requirements of CPO/CTA registration could increase under Dodd-Frank

22 When are the requirements effective? ■ Exact timing uncertain ■ Depends on type of swap entity that a hedge fund is ■ Category 1 entities » Swap dealers, MSPs and hedge funds executing less than 20 swaps per month » Trading documentation and margin requirements effective 90 days after final rules » Clearing and trade execution requirements effective 90 days after final rules

23 When are the requirements effective? ■ Category 2 entities » Hedge funds executing more than 20 swaps per month » Trading documentation and margin requirements effective 180 days after final rules » Clearing and trade execution requirements effective 180 days after final rules ■ Category 3 entities » Category 2 entities which are sub-accounts » Trading documentation and margin requirements effective 270 days after final rules ■ Category 4 entities » Any entity that is not in Categories 1-3 » Trading documentation and margin requirements effective 270 days after final rules

24 What happens now? ■ Rules to be re-proposed for additional comment ■ Expected to be implemented in various stages in 2012 ■ Once implemented, CFTC will examine various categories of swaps for mandatory clearing and increased margin

25 What can clients do today? ■ Determine whether it will qualify under end-user exemption ■ Determine whether it will qualify as a “major swap participant” for each of four swap categories » Examine thresholds in CSA for uncollateralized exposure » Calculate total notional amount of swaps by Conversion Multiplier Table ■ Determine total swap exposure » Repos » Convertible bonds » Warrants » Other embedded derivatives