Sea of Change Regulatory reforms – charting a new course Russia Derivatives 2013 – Global derivatives markets Chris Bates, Partner, Clifford Chance, London September 2013

Clifford Chance FSB members have made major progress correcting the fault lines that caused the crisis Building more resilient financial institutions/more robust markets by strengthened international standards Addressing too big to fail Working to prevent regulatory arbitrage Building a framework for robust market-based finance so that markets continuously open Our work is not yet completed … crucial that G20 stays the course Ending too big to fail Reforming shadow banking Making derivatives markets safer The G20s response will ultimately dictate the openness the global system and consequently the strength and sustainability of global growth Build institutions and co-operative cross-border mechanisms to realise full benefits of integrated and global financial system The G20 commitments – 5 years on

Clifford Chance Growth agenda Eurozone crisis: Banking Union EU market integration and EU-US competitive cooperation Regulatory institutional reform:: UK FSA split into PRA/FCA Tax-regulation intersection: FATCA, financial transactions taxes, bank levies LIBOR and benchmarks Short selling and sovereign CDS Retribution and redress Market development in BRICs, Asia, etc. (e.g. Renminbi) Etc. G20 not the only driver or agenda 3 Russia Derivatives 2013 – Global derivatives markets

Clifford Chance4 Russia Derivatives 2013 – Global derivatives markets More resilient financial institutions Achieved: Basel II.5 and III implementation advanced in many jurisdictions Consistency assessment programme Banks progress towards Basel III targets Reformed compensation structures Improved risk disclosures, accounting and data to regulators To do: Outlier jurisdictions: Turkey and Indonesia Uneven repair of bank balance sheets Differences in risk models and resulting risk weights Finalisation of leverage ratio Implementation of liquidity ratios Conflicts: Differential implementation e.g. EU wider CVA exemptions, remuneration, CCPs Super-equivalent capital measures, stress tests, etc.

Clifford Chance Ending too big to fail 5 Russia Derivatives 2013 – Global derivatives markets Identifying SIFIs across sectors Changes to resolution regimes Higher loss absorbency More intensive supervision Bail-in insurers Pari passu claims Alternative tier 1 Ring- fencing Co-cos Depositor preference Subsidiar isation Bank structure

Clifford Chance US Volcker rule: bans proprietary trading and sponsorship of private funds Push out rule: limits OTC derivatives in insured bank UK Mandatory ring fencing of retail deposit-taking activities Limits on derivatives activities of ring- fenced entities EU Mandatory subsidiarisation of trading activities Bank structural initiatives *G20 agenda item 6 Russia Derivatives 2013 – Global derivatives markets

Clifford Chance Regulation of shadow banking 7 Russia Derivatives 2013 – Global derivatives markets Bank exposures to shadow banks Money market and other funds Repo and securities financing Securitisation In Place Increased capital requirements Large exposure limits Consolidation CESR Guidelines and 2a-7 Transparency, EU risk retention requirements In Progress Requirements for bank investments in funds – Look through or deduct ESMA proposed restrictions on MMF Activities and new SEC rules Basel proposals – restriction of reinvestment of collateral and minimum haircuts US risk retention requirements To Come Restrictions on provision of liquidity to shadow banks Extend liquidity restrictions to non-MMF open-ended funds Liquidity and capital requirements for all Restrict use of client assets by non-banks Restrictions on liquidity mismatches within vehicles Limits on links between securitisations and banks

Clifford Chance Sea of Change Regulatory reforms – charting a new course All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non- centrally cleared contracts should be subject to higher capital requirements. G20 Pittsburgh, September 2009 Making derivatives markets safer – G20 commitments 8

Clifford Chance Mandatory clearing of eligible OTC derivatives using central counterparties Clearing Mandatory execution of sufficiently liquid OTC derivatives on trading platforms Trading Reporting of all OTC derivatives to trade repositorie Regulators access to data Reporting Minimum requirements for margining of uncleared OTC derivatives Margining Timely confirmation, portfolio reconciliation, portfolio compression, dispute resolution for uncleared OTC derivatives Risk mitigation Pre- and post-trade access to individual quote and trade data Transparency Key elements of the reforms

Clifford Chance EMIR: illustrative implementation timeline Estimated start dates for these obligations. 10 Russia Derivatives 2013 – Global derivatives markets MiFID2/MiFIR: transparency, platform trading, position limits, etc.* First CCPs authorised:* Clearing member obligations Frontloading Margining uncleared trades* 15 September 2013 Portfolio reconciliation Portfolio compression Dispute resolution 15 March 2013 Confirmations Daily valuation NFC+ reporting Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q Summer 2014 First clearing obligation starts* 3 year phase-in for NFC+s Risk mitigation for non-EU to non-EU trades* CRD4/CRR: capital rules Reporting OTC trades to TRs* Reporting ETD trades to TRs*

Clifford Chance BCBS-IOSCO final margin framework: universal two-way margin system 11 Russia Derivatives 2013 – Global derivatives markets Zero threshold for variation margin* All covered entities engaging in uncleared derivatives must exchange on a bilateral basis full amount of variation margin (i.e. zero threshold) on a regular basis (e.g.daily). Start date 1 December Maximum 50 million threshold for initial margin* All covered entities engaging in uncleared derivatives must exchange on a bilateral basis initial margin with a threshold not to exceed 50 million. Threshold applies at level of consolidated group to which the threshold is being extended and is based on all uncleared derivatives between the two groups (groups choose how to allocate among group entities) Start date 1 December 2015, but phased in over period to 1 December 2019 starting with largest users At the end of phase-in, a consolidated group will have to have a minimum level of OTC derivatives business (at least 8 billion total gross notional value) in order to be subject to initial margin requirements. Covered entities All financial entities and systemically important non-financial entities (defined by national rules). Excluding sovereigns, central banks, multilateral development banks and BIS. National discretion to exclude inter-affiliate transactions. Foreign branches of banks subject to home or host state rules. Group home state supervisor may choose to recognise.margin regime applicable to foreign subsidiaries if equivalent. Covered transactions All non-centrally cleared derivatives entered into between covered entities. Exclude physically settled FX forwards and swaps but these are included in calculating trigger levels for phase in of initial margin requirements and national discretion for supervisory guidance/rules on variation margin. Initial margin for cross-currency swaps do not apply to the fixed physically settled exchange of FX principal. *Margin transfers can be subject to a minimum transfer amount not exceeding 500,000

Clifford Chance Different pace of reform around the world US, EU, BRICs, Asia Clearing, reporting, margining vs. trading, transparency Scope issues Instruments: e.g. FX, physical commodities and securities Entities: e.g. treatment of end-users, intra-affiliate trades, pension funds, central banks Margining of uncleared trades Initial margin and collateral thresholds Extraterritoriality and overlapping, conflicting rules Different approaches to territorial nexus e.g. location of counterparties, arranger, transaction underlying Extra-territorial application of licensing rules Regulation of CCPs and trade repositories Points of difference

Clifford Chance Key techniques Recognition of non-domestic CCPs and trade repositories subject to equivalent regimes Relief from overlapping or conflicting rules by substituted compliance, equivalence Issues as to reciprocity, concerns as to creation of loopholes OTC Derivatives Regulators Group Equivalence assessments should be flexible, outcomes based approaches Stricter rule approach to address gaps in mandatory clearing or trading requirements Consultation on equivalence assessments and mandatory clearing determinations Aim to remove barriers to reporting to trade repositories and regulators access to data Transitional measures and reasonable transition period for foreign entities For further discussion: Authorities access to registrants information Treatment of guaranteed subsidiaries and foreign bank branches Resolution of cross-border conflicts 13 Russia Derivatives 2013 – Global derivatives markets

Clifford Chance Restriction on banks derivatives capacity Client and bank response may result in regional booking silos Reduction in product range Increased barriers to entry for smaller market participants Increasing importance of CCPs Focus on financial stability issues and market structure Possible new market entrants: shadow banks Winners and losers Market outcomes 14 Russia Derivatives 2013 – Global derivatives markets

Clifford Chance Sea of Change Regulatory reforms – charting a new course Contacts Chris Bates Partner Clifford Chance LLP London Russia Derivatives 2013 – Global derivatives markets

Clifford Chance, 10 Upper Bank Street, London, E14 5JJ © Clifford Chance LLP 2012 Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC Registered office: 10 Upper Bank Street, London, E14 5JJ We use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications