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					           IFLR Web Seminar:
  The Impact of U.S. Regulatory Reforms
      on Foreign Banks and Issuers
                          August 3, 2010

             Barbara Mendelson, Morrison & Foerster LLP
                Anna Pinedo, Morrison & Foerster LLP
               Anthony Ragozino, UBS Securities LLC
             Adriaan Van Der Knaap, UBS Securities LLC




NY2-675850
Introduction
 The House and the Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection
  Act (“the Act”) on June 30, 2010 and July 15, 2010, respectively. President Obama signed the bill
  into law on July 21, 2010.

 While many provisions of the Act are still in the process of being interpreted by legal and
  regulatory experts, it is clear that the Act will have very broad application and a material impact on
  the financial industry.

 The Act is over 2,300 pages long, is extremely complicated and contains ambiguities. The
  summary of certain provisions of the Act contained herein is based on our own reading of the Act
  and our discussions with experts. However, it should be noted that certain provisions of the Act
  may be interpreted differently than as presented herein.

 In addition, many provisions of the Act require or suggest different regulatory bodies draft and
  enact rules over the course of the next several years to implement the Act, in many instances
  after detailed studies required to be conducted by the Act are completed. The scope and content
  of these new rules will add to the impact the Act will have on different financial companies.




                                                                                                       2
Key Provisions
     Capital Rules for Banks                                 Volcker Rule                             New Agencies

       More stringent capital rules                     Limits proprietary trading               Consumer Financial Protection
       Limits on leverage                               Regulates investments in hedge            Bureau
       Potential elimination of trust                    funds and private equity funds –
        preferred securities                              3% limit (3% of bank Tier 1 capital      Financial Stability Oversight Council
       Contingent capital                                cap / 3% of fund capital cap)
                                                         Banks may engage in “permitted”          Federal Insurance Office (Treasury)
                                                          activities
                                                                                                   New Office of Minority and Women
                                                                                                    Inclusion

                                                                                                   Investor Advisory Committee

            Derivatives                         Rules to Protect Consumers & Investors             Office of Investor Advocate (SEC)

       Central clearing and exchange                    Consumer Agency                          Office of Credit Ratings (SEC)
        trading                                          Deposit insurance permanently
       Swaps push-out provision                          increased to $250,000                    Credit Rating Agency Board (SEC)
       Capital and margin requirements                  Mortgage regulations
                                                                                                   Office of Financial Literacy
                                                         Investment advice standards of care
                                                         Requires hedge fund and private          Office of Financial Research
  Enhanced Prudential Standards
                                                          equity fund advisors to register with     (Treasury)
     Discourages excessive growth and                    SEC
      complexity                                         Securitization “Skin in the Game”        Office of Housing Counseling (HUD)
     Council can impose 15:1 debt-to-equity              Rules
      ratio                                              Regulations affecting Credit Rating      Office of Fair Lending and Equal
     Concentration limits for non-affiliates             Agencies                                  Opportunity (Fed)
     Living wills                                       Corporate governance and
                                                                                                   Office of Financial Protection for
     Risk committees                                     executive compensation restrictions
                                                                                                    Older Americans (Fed)
                                                         Insurance Office




                                                                                                                                         3
Impact Relative to Bank Size
                                           ¨ No phase -out of trust pref erred securities: ef f ectively grandf athered permanently
            $15BN                          ¨ Primary f ederal regulator is OCC (National Banks / Thrif ts) or FDIC (State Banks / Thrif ts)
         (Small Banks)
                                           ¨ No requirement f or “risk committees” if size is less than $10BN



           $15-50BN                        ¨ Trust pref erred securities will be phased - out1 beginning January 1, 2013
         (Medium Sized                     ¨ Primary f ederal regulator is OCC (National Banks / Thrif ts) or FDIC (State Banks / Thrif ts)
            Banks)

                                           ¨ Trust pref erred securities will be phased - out 2 (similar to medium sized banks)
                                           ¨ Costs of unwinding f ailing f irms will be borne by large banks
            >$50BN
         (Large Banks)                     ¨ Required to submit resolution plans (living wills)
                                           ¨ Regulated by Federal Reserve (holding companies) and OCC

                                           ¨ Financial Stability Oversight Council can impose 15:1 debt-to-equity ratio
                                                                                                         - -
         Systemically
                                           ¨ Requires stress testing
          Important
         Institutions                      ¨ Subject to new Orderly Liquidation Authority provisions
           (> … BN)                        ¨ Def inition of Systemically Important Institutions to be def ined


Notes:
1         Assumes Federal Reserve promulgates rule prohibiting inclusion in Tier 1 Capital.
2         No phase-out of trust preferred securities for Bank Holding Company subsidiaries of foreign banking organizations. Instead, they will receive full credit for inclusion in Tier 1 Capital for a 5
          year period, after which they will be excluded.




                                                                                                                                                                                                              4
Timing of Implementation
                         ¨   Federal authority to seize systemically important firms that are near collapse
 Effective Immediately
                         ¨   Creation of Federal InsuranceOffice at the Treasury Department



      3 months           ¨   Financial Stability Oversight Council meets for first time



      6 months           ¨                     -binding shareholder votes on executive pay
                             Rules governing non



      9 months           ¨                    -retention requirements for securitized assets
                             Rules setting risk



                         ¨   Consumer Financial Protection B  ureau gets authority over consumer issues
                         ¨   Office of Thrift Supervision(OTS) merges with Office of the Comptroller of the Currency (OCC)
        1 year
                         ¨   Hedge funds and investment advisers must register with the SEC
                         ¨   Rules ensuringthat credit rating agencies are subject to enforcement and penalty provisions



                         ¨   Volcker Rule limiting proprietary trading andbanks’ ability to invest in hedge funds
                                                                                                                and private equity
                         ¨   Derivatives rules completed, including clearing and exchange   -trading requirements
                         ¨   10% rule limiting large institutions to no more than 10% of aggregated liabilities
                         ¨   Rules settingminimum risk                                           for
                                                         -based capital and leverage standards banks, including Basel III
                         ¨   Phase-out of disqualified instrumentsfrom 2013 to 2016
       > 1 year
                         ¨             u
                             Potential r les requiring banks to hold “contingent capital”
                         ¨   New streamlined mortgage    -disclosure forms
                         ¨   Swap push-out – banks to lose federal assistance if certainswap desks are retained
                         ¨   ABS secruitizers required to retainat least 5% of risk




                                                                                                                                     5
Key Impacts for Banks
The legislative changes will have a substantial impact on banking institutions

                       ¨   Higher capital requirements for systemically important banks (>$50bn) – Council can impose a 15:1 debt -to-equity
                           limit
Capital Requirements
                       ¨   No specific guideline on minimum capital levels or capital ratios (i.e. , Tier 1 Common vs. Tier 1)
                       ¨   Higher capital requirements for activities such as derivatives trading and securitization
                       ¨   Greater emphasis on common equity given desired focus on simpler, more transparent , loss absorbing capital
Mix of Capital         ¨   Elimination or phasing out of some non -common equity components of Tier 1 capital ; uncertainty about REIT
                           Preferreds and some convertible structures
                       ¨   Creation of the Consumer Financial Protection Bureau and the associated administrative burden / costs likely to result
Business Mix               in increased emphas is of commercial banking business going forward
                       ¨   Transition away from higher risk activities such as prop rietary trading and derivatives trading
                       ¨   Increased capital requirements, de -emphasis on risk-taking, and higher administrative costs ( Consumer Financial
Returns                    Protection Bureau , elevated FDIC assessments, etc.) will dilute shareholder returns
                       ¨   Impact on debit card interchange fee along with Reg E impact on overdraft fees will further impair profits

Valuation              ¨   Lower shareholder returns and growth profilewill result in banks trading at lower price/book multiple s

                       ¨   Will see increased divestitures of business es / investments that may ultimately receive unfavorable capital treatment
                           – Minority interests, financial firm investments, PE / he dge fund investments
M&A
                       ¨   Large cap M&A less prominent given heightened scrutiny on systemically important institutions; more likely to see
                           more regional / bolt -on acquisitions

                       ¨   Increased oversight given creation of Financial Sta bility Oversight Council, Consumer Financial Protection Bureau ,
                           Office of Credit Ratings, Office of Housing Counseling , etc.
Regulatory Oversight
                       ¨   Federal Reserve to have heightened regulatory power / authority
                       ¨   Legislation does not, however, address FNMA and FHLMC




                                                                                                                                                    6
    Specific Provisions in Detail
              Provision / Area                                                                                Details



                                             In addition to current authority, the Fed would oversee large, systemically-important nonbank institutions, be responsible for setting and
                                                                                                                                                                           il
                                              enforcing stricter standards for disclosure, capital, and liquidity, and be authorized to break up large companies with Counc approval
                                             Covered BHCs and nonbank financial companies designated as Covered Nonbank Companies1 shall be subject to the Fed’s
      Federal Reserve Board (“Fed”)           heightened prudential standards
                                             The Senate agreed to the House provision authorizing the GAO to conduct a one-time audit of the Fed’s 2008 emergency lending
                                              program and to provide ongoing audits of discount window and open market operations with a two-year lag
                                             The President will not have authority to appoint the president of the New York Federal Reserve Board




                                             Led by the Treasury Department, the ten-member Council shall include regulators from the Fed, Securities and Exchange Commission
                                              (“SEC”), Federal Housing Finance Agency, Commodity Futures Trading Commission and other agencies. State securities, insurance
                                              and banking regulators and credit unions lobbied for and won non-voting seats.
                                             The Council shall determine whether a nonbank financial company be subject to stricter prudential standards for financial sta   bility
        Financial Stability Oversight         standards depending on a number of factors.
            Council (“Council”)
                                             With a 2/3 vote, the Council can impose higher capital requirements on lenders or place broker-dealers and hedge funds under the
                                              authority of the Fed
                                             The Council shall have authority to force companies to divest holdings if their structure poses a “grave threat” to U.S. financial stability
                                             The Council would be able to overrule the Consumer Financial Protection Bureau




                                             The Bureau, which serves as a consumer “watchdog,” shall be located within the Fed as an autonomous entity with an independen       t
                                              budget led by a presidentially appointed director
      Consumer Financial Protection          The Bureau shall write consumer-protection rules for firms that offer financial services or products and enforce those rules forbanks
           Bureau (“Bureau”)                                                                                                                                                 e
                                              and credit unions with more than $10 billion in assets. Bank regulators will continue to examine consumer practices at small r financial
                                              institutions
                                             The Bureau is authorized to regulate credit cards and mortgages, but not auto dealers who make auto loans


1   Covered BHCs are BHCs with $50 billion or more in total consolidated assets. Covered Nonbank Companies are nonbank financial companies whose failure would pose a
     grave threat to U.S. financial stability

                                                                                                                                                                                     7
Specific Provisions in Detail
       Provision / Area                                                                              Details

                                    The Act grants the FDIC, which already has authority to liquidate failed commercial banks, power to unwind large failing financial
                                     firms whose collapse would threaten U.S. financial stability
                                    The House agreed to Senate language that grants the FDIC a line of credit with the Treasury Department to pay for the up-front
       Too Big to Fail:              costs of breaking up troubled firms, but the government would have to establish a “repayment plan”
 Orderly Resolution Process
                                    The House dropped its bid to create a $150 billion resolution fund. Instead, conferees agreed to follow the Senate measure where
        and Funding
                                     the costs of unwinding failing firms will be borne by financial firms with more than $50 billion in assets through fees imposed after a
                                     collapse.
                                    The Act explicitly bars the use of taxpayer funds to rescue failing financial companies

                                    The Office of Thrift Supervision shall be abolished with its authority relating to Federal savings associations, State savings
                                     associations, and savings and loan holding companies will be transferred to the Office of the Comptroller of the Currency, th e
        Thrift Charter               FDIC, and the Fed, respectively
                                    The Thrift Charter has been preserved, thereby preventing insurance companies that own thrifts from being transformed into bank
                                     holding companies and subject to the Volcker Rule


                                    The Council will impose a 15-to-1 maximum leverage ratio on firms that pose a “grave threat” to the national economy where
 Capital Standards: Leverage
                                     imposition of such a leverage limit would mitigate risk


                                    Banks that package loans will be subject to a 5% risk retention requirement, thus affecting credit card debt, auto loans, mortgages,
                                     and other securitized debt
Risk Retention Requirements         Loans guaranteed by the Federal Housing Administration, U.S. Department of Agriculture, and the U.S. Department of Veterans
     for Securitized Debt            Affairs will be exempt from this requirement
                                    Regulators will have flexibility to tailor risk-retention rules to specific products (e.g., setting underwriting standards as a form of risk
                                     retention)

                                    The SEC will conduct a six-month study and then issue rulemaking under its existing authority
Broker-Dealer’s and Investment
                                    The SEC will implement rules within the parameters laid out in the House bill, which allows brokers to offer clients services
  Advisor's Standard of Care
                                     associated with principal trading


                                    To fund the cost of the Act, (1) the TARP Program shall end one year early to raise $10 billion, and (2) the FDIC premium ratio
        “Pay It Back”
                                     shall be increased to 1.35 from 1.15 to raise $9 billion

                                                                                                                                                                                    8
Mandated Studies Affecting Banks
          Study                                                                      Description


                                Due within 6 months – Council study on effective implementation of Volcker Rule
                                Due within 15 months – GAO study on proprietary trading
       Volcker Rule
                                Due within 18 months – banking agencies to consider additional restrictions for banking activities permitted under
                                 federal and state law


                                Due within 2 years
    Contingent Capital
                                Council study on feasibility, benefits, costs and structure of a contingent capital requirement


                                Due within 2 years
Credit Rating Agency Board
                                SEC study to create new mechanism preventing ABS issuers from selecting agency to gain the best rating


      Rating Agency             Due within 3 years
      Independence              SEC study on independence of rating agencies


 Conflicts of Interest for      Due within 18 months
 Securities Underwriters        GAO study on conflicts of interest between securities underwriting and securities analysts at the same firm


                                Due within 18 months
 Bank Holding Company           GAO study on Bank Holding Company Act exemptions for holding companies
      Exemptions                Potential impact on credit card banks, trust companies, industrial banks, industrial loan companies and thrift holding
                                 companies controlling banks




                                                                                                                                                          9
Mandated Studies Affecting Banks
       Study                                                   Description

 Holding Company        Due within   18 months
Capital Requirements    GAO and Federal   banking agencies study on inclusion of hybrid securities in Tier 1 capital

    Foreign Bank        Due within   18 months
Intermediate Holding
                        GAO and Federal banking agencies investigation on capital requirements for US bank or
 Companies Capital
    Requirements         thrift holding companies of foreign bank

                        Due within   18 months
    Small Banks         GAO and Federal banking agencies study on access to capital for small insured depository
                         institutions (<$5BN)

                        Due within 1 year
                        Review definitions and differences between core deposits and brokered deposits
                         conducted by FDIC
     Deposits
                        Resulting impact on Deposit Insurance Fund and on local economies should definitions
                         change
                        Calculation of insurance premiums for banks




                                                                                                                  10
Status




         11
Systemic Designation
 Many of the most significant changes affect entities designated as
  systemically important
 Bank holding companies with total consolidated assets equal to or
  greater than $50 billion will automatically be considered systemically
  important
 These may include non-U.S. institutions
 Otherwise, the Council will consider designating institutions that are
  systemically important (again, these may include institutions that are
  non-U.S. institutions)
    Systemically significant entities will be subject to requirements relating to:
        Credit exposure limits
        Capital
        Requirement to provide resolution plans, or living wills
        Limitations on acquisition transactions

                                                                                      12
Not Systemically Important
 Insured depositories and bank holding companies that are not
  systemically important also will be subject to more stringent
  requirements, including those related to:
    Regulatory capital
    Section 23A modifications
    If over $10b in total consolidated assets, then required to risk committees will be
     required, and must conduct internal stress tests
    Additional rule making to be adopted generally, including on source of strength
    Enhanced supervision and enforcement




                                                                                           13
Applicability to Non-U.S. Institutions
 It is not clear how the Federal Reserve will apply these standards
    Will the Fed defer to home country supervision if the home country rules do not
     provide for enhanced supervision?

       Likely the Fed will look at the size and the interconnectedness of the non-U.S.
        institution


 From a practical perspective, however, it is unclear




                                                                                       14
What are you?

              Banking Entity                                                 Nonbank Financial Company
Over $50b in TCA:                                                        Supervised
Systemically important                                                   Subject to capital and other requirements
15-to-1 maximum leverage                                                 Impacted by Volcker Rule
Under $15b in TCA:                                                       Intermediate holding company
Not subject to hybrid prohibition                                        requirement?
Over $10b in TCA:                                    All                 Not Supervised
Risk committee                                                           Not subject to the more onerous
                                    Subject to:
Internal stress tests                                                    restrictions associated with Dodd-Frank
                                    - Securitization restrictions
                                    - Derivatives (unless a commercial
                                    end user) requirements                       All Nonbank Financial
            All Banks
                                    - Mortgage provisions                              Companies
- Regulatory capital requirements
                                    - Corporate governance and             - Subject to Consumer Financial
- 23A/B restrictions                executive compensation provisions      Protection Bureau oversight
- Enhanced supervision and                                                 - May be subject to supervision by the
enforcement                                                                SEC or CFTC (depending on entity)
                                     Systemically Important (Bank
- Lincoln (push-out) provisions          and Nonbank) Entities             - Financial entity?
- Volcker Rule provisions           - Credit exposure limits
                                    - Living wills
                                    - Capital requirements
                                                                                                         15
                                    - Limitations on acquisitions
Regulatory Capital




                     16
Regulatory Capital
Generally, the Act imposes more stringent regulatory capital
 requirements on financial institutions
    Requires the Council to make recommendations to the Federal Reserve
     regarding the establishment of heightened prudential standards for risk -based
     capital, leverage, liquidity and contingent capital
Requires that the Federal Reserve, on its own, or with
 recommendations from the Council, establish prudential standards for
 supervised nonbanks and for bank holding companies with total
 consolidated assets equal to or greater than $50bn (these may
 include non-U.S. institutions), that include:
      risk-based capital requirements,
      leverage limits,
      liquidity requirements,
      overall risk management requirements,
      requirements for a resolution plan, and
      concentration limits


                                                                                      17
Regulatory Capital
The standards to be set by the Federal Reserve will include:
    a contingent capital requirement,
    enhanced public disclosures, and
    short-term debt limits

Includes other requirements, including:
    a risk committee requirement
    a stress test requirement
    for bank holding companies or a supervised nonbank with total
     consolidated assets equal to or greater than $50bn a maximum
     debt-to-equity ratio of 15-to-1



                                                                     18
Regulatory Capital
 Incorporates a revised Collins amendment
    Requires the establishment of minimum leverage and risk-based capital
     requirements
    Sets at the risk-based capital requirements and the Tier 1 to total assets
     standard applicable to insured depository institutions under the prompt
     corrective action provisions of the FDIA
        No deduction for investment in bank subsidiaries
    Sets current rates as a floor
        Effect on accounting issues and risk weights is unclear
 Limits discretion in establishing Basel III requirements (U.S. can
  adopt more onerous standards, but cannot adopt laxer standards)




                                                                              19
Regulatory Capital
 Raises the specter of additional capital requirements for activities
  that are determined to be risky
    Derivatives, securitized products, financial guarantees, securities
     borrowing and lending and repos
    Assets valued based on models
    Concentrations of market share
 These requirements become effective upon implementing
  regulations, which are required within 18 months of the passage of
  the Act




                                                                           20
Regulatory Capital
Effect on Hybrids

As discussed earlier, does not permit the inclusion of trust preferred
 securities or other hybrid securities in the numerator of Tier 1, subject
 to limited exceptions
    Mutual holding companies and thrift and bank holding companies with
     less than $15bn in total consolidated assets are not subject to this
    Intermediate U.S. holding companies of foreign banks have a five-
     year phase-in period
    For newly issued securities (hybrids issued after May 19, 2010), the
     requirement is retroactively effective
    For bank holding companies and systemically important nonbank
     financial companies, phase-in for hybrids issued prior to May 19, 2010
     will be phased in from January 2013 to January 2016



                                                                              21
Regulatory Capital
Currently, an intermediate BHC subsidiary does not have to comply
with the Federal Reserve’s capital guidelines (in accordance with
Federal Reserve guidance) if its parent company is a financial holding
company that has been determined to be well capitalized and well
managed based on its own home country standards




                                                                     22
Regulatory Capital
Study

Within 18 months of the Act’s passage, the Comptroller must conduct
 a study of the use of hybrid capital instruments as a component of
 Tier 1, which shall consider, among other things:
   the benefits and risks of allowing instruments to be used to comply with Tier 1
    requirements,
   the economic impact of prohibiting the use of hybrids, and
   possible specific recommendations for legislative or regulatory actions regarding
    the treatment of hybrids




                                                                                        23
Regulatory Capital
Contingent Capital

 Within two years of enactment, the Council must present the results
  of a study on contingent capital that considers, among other things,
  an evaluation of:
      the effect on safety and soundness of a contingent capital requirement,
      the characteristics and amounts of contingent capital that should be required,
       and
      the standards for a triggering requirement
 Following the study, the Council may make recommendations to the
  Federal Reserve to require a minimum amount




                                                                                        24
Regulatory Capital
Anticipated Effects

 Will likely require banks to raise more capital
    In the near-term, banks will consider whether to:
          redeem (for a Capital Treatment Event) outstanding trust preferreds;
           or
          undertake exchange offers
    Over the longer term, banks will consider:
          new issuances
          asset sales
    Financing costs likely will increase, unless more efficient products are
       introduced
    Overall, banks also will be required to address the other significant
       burdens imposed by the Act, including those arising out of the Volcker
       Rule, changes to Section 23A/B, and regulations affecting their
       derivatives business



                                                                              25
Volcker Rule




               26
Volcker Rule
Introduction

 The Volcker Rule provisions, named for former Federal Reserve
  Chairman Paul Volcker, are premised on the belief that speculative
  trading activities contributed in part to the financial crisis

 The Volcker Rule was changed and reshaped during the entire
  legislative process




                                                                       27
Volcker Rule
Volcker prohibitions

 There are important distinctions made between the activities that
  may be conducted by banking entities and those that may be
  conducted by nonbank financial companies supervised by the
  Federal Reserve
    Generally, a banking entity cannot engage in proprietary trading
    or own interest in or sponsor a hedge fund or a private equity fund
    A “nonbank financial company supervised by the Federal Reserve”
    that engages in proprietary trading or fund activities will be subject
    to additional capital requirements and quantitative limits, to be
    established by rule.


                                                                       28
Prohibition on Proprietary
Trading and on Fund Activities
 If a nonbank financial company engages in any permitted activities
  (i.e., any of the activities that a banking entity is permitted to engage
  in), the capital requirements or quantitative limits applied to the
  nonbank financial company for those activities will be the same as
  those applied to banking entities engaging in such permitted
  activities.




                                                                          29
Nonbank Financial Companies
 A nonbank financial company is:
   Any company (not including BHCs, exchanges, clearinghouses, swap data
    repositories) that is “predominantly engaged in financial activities”
      Annual gross revenues derived by the company and all of its subsidiaries from
       activities that are “financial in nature” and, if applicable, from the ownership or
       control of one or more insured depository institutions, represent 85% or more
       of consolidated annual gross revenues of the company; OR
      Consolidated assets of the company and all of its subsidiaries related to
       activities that are “financial in nature” and, if applicable, from the ownership or
       control of one or more insured depository institutions, represent 85% or more
       of the consolidated assets of the company




                                                                                             30
Nonbank Financial Companies
(cont’d)
 “Supervised by the Board” if systemically significant
    Test: Material financial distress at the company or the nature, scope, size, scale,
     concentration, interconnectedness, or mix of the activities of the company could pose a threat
     to the financial stability of the U.S.
          Determination based on 2/3 vote of the Financial Stability Oversight Council
    For foreign nonbank financial companies, consideration not limited to U.S. activities and
     subsidiaries
    Any BHC with total consolidated assets ≥ $50B as of January 1, 2010 that participated in the
     Capital Purchase Program under TARP and ceased to be a BHC will be treated as an NFC
     supervised by the Board
    Company may establish (or Board may require establishment of) an intermediate holding
     company for “financial activities” for purposes of Board supervision
          Financial activities:
               Activities that are financial in nature
               Includes ownership or control of one or more insured depository institutions
               Does not include internal financial activities conducted for the company or any affiliate,
                including internal treasury, investment, and employee benefit functions
          Nonfinancial activities not subject to Board supervision or prudential standards




                                                                                                       31
Key Terms
 Proprietary trading
    Engaging as a principal
    For the trading account of the banking entity or NFC supervised by the Board
    In any transaction to purchase or sell, or otherwise acquire or dispose of, any
     security, any derivative, any futures contract, an option on any such security,
     derivative, or futures contract, or any other security or financial instrument specified
     by rule
 Trading account
    Any account used for acquiring or taking positions principally for the purpose of
     selling in the near term (or otherwise with the intent to resell in order to profit
     from short-term price movements); AND
    Any such other accounts specified by rule




                                                                                          32
Fund Activities
 Hedge funds or private equity funds includes entities that would be
  subject to registration under the Investment Company Act but for
  Section 3(c)(1) (fewer than 100 owners) or for Section 3(c)(7) (those
  offered only to “qualified purchasers”)
 Sponsoring a hedge fund or a private equity fund includes controlling
  the fund (by virtue of being a general partner or a managing member,
  or through board control), or sharing a name with the fund




                                                                      33
De Minimis Investments
 A banking entity may make and retain an investment in a fund that
  the banking entity organizes and offers; provided, that:
    it seeks unaffiliated investors for the fund;

    within one year of a fund’s start date, the banking entity’s investments shall not
     exceed more than 3% of the total ownership interests in such fund; and

    the aggregate of investments in all such funds does not exceed 3% of the banking
     entity’s Tier 1 capital.




                                                                                          34
Permitted Activities
 The following activities are “permitted activities”:
    transactions in U.S. government securities (including securities of the GSEs);
    transactions in connection with underwriting or market-making activities, to the
     extent designed not to “exceed the reasonably expected near term demands of
     clients, customers or counterparties”;
    risk-mitigating hedging activities in connection with a banking entity’s individual or
     aggregate positions, contracts or holdings that are designed to reduce the
     banking entity’s specific risks in connection with such positions, contracts or
     holdings;
    customer transactions;
    SBIC investments;
    the purchase or sale of securities and derivatives by a regulated insurance
     company engaged in the insurance business, subject to state insurance
     regulation and federal safety and soundness review;




                                                                                         35
Permitted Activities (cont’d)
  organizing and offering a private equity or hedge fund, if the banking entity ( the
   “fiduciary” exception):
        provides bona fide trust, fiduciary, or investment advisory services;
        provides trust or related services and offers interests in the fund only in
         connection with providing such services only to bank customers;
        does not acquire or retain an equity interest, partnership interest, or other
         ownership interest in the funds except for de minimis investments (see above);
        observes the restrictions on affiliate transactions;
        does not, directly or indirectly, guarantee or assume, or otherwise insure, the
         obligations or performance of the fund;
        does not share a name or derivation of a name or other marketing with the fund;
        does not permit any director or employee of the banking entity to take or retain
         an equity interest, partnership or other ownership interest in the fund, except
         for any director or employee who is directly engaged in providing investment
         advisory services to the fund; and
        discloses to prospective and actual fund investors that losses sustained by the
         fund are not borne by the banking entity;


                                                                                      36
Permitted Activities (cont’d)
    certain proprietary trading that occurs solely outside of the U.S. by a banking
     entity that is not directly or indirectly controlled by a banking entity organized
     under the laws of the U.S.;
    the acquisition or retention of an ownership interest or the sponsorship of a
     fund by a banking entity solely outside of the U.S. if interests in the fund are not
     offered or sold to a U.S. resident and the banking entity is not directly or
     indirectly controlled by a banking entity organized in the U.S.; and
    all other activities deemed appropriate by the applicable oversight agencies
     that would promote the safety and soundness of the banking entity.




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Limitations on Permitted Activities
 No transaction, class of transactions, or activity may be deemed a
  permitted activity if it would:
    involve a material conflict of interest (to be defined by rule) between the banking
     entity and its clients, customers, or counterparties
    result, directly or indirectly, in a material exposure by the banking entity to high-
     risk assets or high-risk trading strategies (to be defined by rule)
    pose a threat to the safety and soundness of the banking entity
    pose a threat to the financial stability of the U.S.




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Phase-In Period
 Generally, these provisions shall take effect on the earlier of:
    12 months after the date of the issuance of the final rules, or
    two years after the date of enactment of the Act.
 Bank entities and nonbank financial companies will have two years
  after the effective date (or two years after the date on which the
  entity becomes subject to Federal Reserve supervision as a bank
  entity or a nonbank financial company) to bring their activities into
  compliance.
 This phase-in period may be extended by the Federal Reserve for
  one year at a time, with extensions not to exceed an aggregate of
  three years.
 However, the Federal Reserve may extend the period in order to
  permit compliance with a contractual obligation that was in effect on
  May 1, 2010, in connection with illiquid funds


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     Milestones


July 2010         Jan 2011         Sept 2011                        July 2012             July 2014   2015    2016     2017
       6 months         9 more months
                                                                                                                              ?
 Enactment            Fed to issue          Actual rules       EFFECTIVE DATE           Last day Extension         Extension
                                                                                          if no
 of Dodd-            transition rules        Capital and           Ban on prop          extension          Extension
 Frank Act            Council to release   quantitative limits    trading
                     its study and          on prop trading         Additional capital
                     recommendations         Rules to limit       quantitative limits
                                            permitted activities
                                            for safety and
                                            soundness




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Anticipated Effects
 Generally, for market
    proprietary trading limitations (including derivatives activities)
        will remove certain participants from the market
            will that impact liquidity? will hedge funds replace banks?
        how will banks distinguish between market making and risk mitigating trades
         and proprietary trades?
    passive investments in funds
        impacts banks that are sponsors or LPs
        impacts the private equity market as a whole
    activities involving funds will be subject to Section 23A/B
    banks and non-banks also may be subject to additional capital requirements




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 Regulation of
OTC Derivatives




                  42
    Lincoln Provision
(the “Swaps Pushout” Rule)




                             43
Prohibition on Federal Assistance
 Notwithstanding any other provision of law (including regulations), no
  Federal assistance may be provided to any swaps entity with
  respect to any swap, security-based swap, or other activity of the
  swaps entity
 Clarifies that insured depository institutions may have affiliates that
  are swaps entities, so long as the institution is supervised by the
  Federal Reserve and complies with sections 23A/23B of FRA
 Originally added in the Senate bill, §716 was diluted in the
  conference report
    Narrower definitions
    Added certain exclusions




                                                                       44
Key Terms
 Federal assistance
   The use of any advances from any Federal Reserve credit facility or discount
    window that is not part of a program or facility with broad-based eligibility
   FDIC insurance
   Guarantees
   In any case, for the purpose of–
        Making any loan to, or purchasing any stock, equity interest, or debt obligation
         of, any swaps entity
        Purchasing the assets of any swaps entity
        Guaranteeing any loan or debt issuance of any swaps entity
        Entering into any assistance arrangement (including tax breaks), loss sharing,
         or profit sharing with any swaps entity
 Swaps entity
   Only swap dealers and major swap participants
       Senate bill included exchanges and clearinghouses
   Excludes insured depository institutions that are major swap participants


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Exceptions to Prohibition
 Prohibition on Federal assistance does not apply to insured
  depository institutions that limit their swap activities to:
    Hedging and other similar risk mitigating activities directly related to the insured
     depository institution’s activities
    Acting as a swaps entity for swaps involving rates or reference assets that are
     permissible for investment by national banks
        CDS is permissible only if cleared
 Insured depository institutions still must comply with proprietary
  trading ban under the Volcker Rule




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Effective Date and Transition Period
 Prohibition takes effect 2 years after effective date of the Act
 To the extent an insured depository institution would be subject to
  the prohibition, the applicable Federal banking agency (in
  consultation with the CFTC and SEC) shall permit the institution up
  to 24 months to divest the swaps entity or cease the prohibited
  activities
    May extend transition period up to 1 year
 Prohibition only applies to swaps entered into after the end of the
  transition period




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Lincoln Provision (Swap Pushout Rule)
 Implication for Foreign Financial Institutions

  On its face, the exceptions for insured depository institutions do not apply to
   noninsured U.S. branches and agencies of foreign banks
  Colloquy related to § 716 between Senator Lincoln and Senator Dodd may
   explain Congressional intent regarding the treatment of uninsured U.S.
   branches and agencies of foreign banks
  Colloquy states that:
     There was a significant and clearly unintended oversight with regard to the
      treatment of uninsured U.S. branches and agencies of foreign banks
     Under the U.S. policy of national treatment, uninsured U.S. branches and agencies
      of foreign banks are authorized to engage in the same activities as insured
      depository institutions
     It was not intended to force U.S. branches and agencies of foreign banks to push -
      out all their swap activities
     U.S. branches and agencies of foreign banks should be treated the same as
      insured depository institutions under § 716, including the safe harbor language



                                                                                      48
Lincoln Provision (Swap Pushout Rule)
 What Does §716 Really Accomplish?

 On the exceptions to the prohibition
  Council may prohibit Federal assistance to swaps entities on an institution-
   by-institution basis upon a 2/3 vote
  Basis for determination – When other provisions established by Dodd-Frank
   Act are insufficient to effectively mitigate systemic risk and protect taxpayers

 On the “prohibition against Federal government bailouts of swaps entities”
  For purposes of § 716, the term “swaps entity” excludes any insured
   depository institution or covered financial company (large BHCs and
   nonbank financial companies supervised by the Federal Reserve) that is in
   conservatorship, receivership, or a bridge bank operated by the FDIC


                                                                                  49
Other Considerations




                       50
Other Considerations
 Other aspects of the derivatives provisions
 Restrictions on transactions with affiliates
 Corporate governance and executive compensation matters




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