1. Regional Legal and Regulatory Issues
March 2014

2. Agenda EU's too big to fail initiatives OTC Reforms in Europe
Agenda and status
Extra-territoriality impact
CRD IV
OTC Reforms in Europe
Status / upcoming
Extra-territoriality of EMIR
Documentation Projects
Hong Kong – Securities and Futures Amendment Bill
Status of HK OTC Derivatives Reforms
Margin for uncleared swaps
EU Resolution Directive
Status
Bail in
Hong Kong Resolution Proposals Consultation Process
Regional Legal and Regulatory Issues
Clifford Chance

3. Agenda (continued) EU securities depository directive
EU shadow bank reforms update
EU MiFID2/MiFIR
AsiaPac OTC reform
Hong Kong
Australia
China
Japan
Korea
Singapore
Regional Legal and Regulatory Issues
Clifford Chance 3

4. Ending Too Big to Fail – the Global Plan1
Reducing probability of distress
Basel III capital rules and stress tests
Capital surcharge for globally systemically important banks
Controlling size of banks
Improved supervision 2
Reducing adverse consequences of distress
Recovery and resolution planning
Structural changes to banks
New resolution powers as alternative to conventional insolvency process
Deposit guarantee reforms 3
Reducing transmission of distress
Basel III charges on intra-system exposures
Derivatives reforms (central clearing and collateral)
Robust financial market infrastructure
Regional Legal and Regulatory Issues

5. Overview of CRD IV Basel III CRD Passporting CRR Remuneration
Governance
Regional Legal and Regulatory Issues

6. CRD IV Timeline
CRD IV package (Regulation (CRR) and Directive (CRD)) published in the Official Journal on 27 June 2013
CRD entered into force on 17 July 2013 and needs to be implemented by EU member states (with the exception of new rules regarding capital buffers which come into effect on 1 January 2016) by 31 December 2013
Net Stable Funding Ratio to be introduced from 2018
27 June 2013
28 June 2013
17 July 2013
1 January 2014
2015 – 2018
2018
CRR entered into force on 28 June 2013 and will apply from 1 January 2014
Firms to report from 1 January 2014 on Leverage Ratio, Liquidity Coverage Ratio and Net Stable Funding Ratio
Liquidity coverage ratio to be phased in between
Leverage ratio to be introduced from 2018
NB: Any frontrunners?
Regional Legal and Regulatory Issues

7. Status of EMIR

8. Timeline for European OTC Derivatives Reform
EMIR (August 2012)
AIFMD (July 2013)
CRD IV / CRR (1 Jan 2014)
Margin requirements for uncleared swaps (from 2015)
MiFID2 / MiFIR Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2012
2013
2014
2015
2016 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Short Selling Regulation (November 2012)
FTT (2014?)
Proposed regulation on CSDs (2015)
MAD 2 (expected to be applied at the same time as MiFID2)
Regional Legal and Regulatory Issues 8

9. EMIR Timeline
EMIR regulates OTC derivatives, CCPs and trade repositories and came into force on 16 August However, many obligations require secondary legislation in order to become effective. The first of these obligations became effective in March 2013 and September 2013.
15 March 2013
NFC+ notification, timely confirmation, daily valuation 
15 September 2013
Portfolio reconciliation, compression, dispute resolution 
12 February 2014
Mandatory Reporting Obligation 
Summer 2014?
Mandatory Clearing Obligation
Expected December 2015
Margin requirements for uncleared OTC derivatives
Regional Legal and Regulatory Issues

10. EMIR FAQs for Asia Based Market Participants
EMIR FAQs for APAC
Clearing
Why is my counterparty asking me what my status is under EMIR?
What is Article 25 and how does it impact on clearing of all derivatives overseas?
Reporting
Do I, and if so, where do I have to report?
What are my global confidentiality, data privacy and other regulatory issues?
Risk Mitigation
My bank / client wants me to sign up to the ISDA EMIR Protocols. What do these documents do?
Branches
Is there any difference if I face a non-EU branch or an APAC subsidiary or an EU bank?
Non-EU trades
Neither my counterparty nor I are EU entities. Can EMIR still apply?
Regional Legal and Regulatory Issues 10

11. EMIR Obligations for Different Entities
FCs
NFC+s
NFC-s
TCEs
Clearing   *
Reporting
Risk Mitigation:
Confirmations
Portfolio Reconciliation, Portfolio Compression and Dispute Resolution
Daily Valuation
Margining
Capital
* On 17 July 2013, ESMA published a consultation paper on the draft RTS on contracts having a direct, substantial and foreseeable effect within the Union and non-evasion of provisions of EMIR (i.e. application of EMIR to non-EU trades). The draft TRS is due to be delivered by ESMA on 15 November 2013.
Regional Legal and Regulatory Issues 11

12. EMIR – Risk Mitigation Timely confirmation†
Appropriate procedures and arrangements for confirmation
Via electronic means where available
As soon as possible, by T+1 (or T+2 for trades with non-financial counterparties)
Deadlines phased in by counterparty and asset class in stages from 15 March 2013 to 31 August 2014
Financial counterparties to have procedures to report to regulator monthly number of trades unconfirmed for > 5 business days
Portfolio reconciliation†
Counterparties must agree portfolio reconciliation arrangements
Covering key trade terms and mandatory valuations
Frequency varies by counterparty type and portfolio size: daily, weekly, quarterly, annually
Portfolio compression
Financial counterparties and non- financial counterparties with portfolio ≥ 500 trades
Must address portfolio reconciliation opportunities on six monthly basis
**Dispute resolution†
Counterparties must agree detailed procedures and processes for:
Identification, recording, monitoring of disputes
Timely resolution of disputes
Financial counterparties to report to regulator disputes > €15m outstanding for ≥ 15 business days
Daily valuation
Financial counterparties and non- financial counterparties over clearing threshold must carry out daily mark to market/model valuations of transactions
† Applicable even if only have one swap with counterparty. No de minimis exemption * * On 12 August 2013 the U.K. regulation (the Financial Conduct Authority “FCA”) published a webpage about notifications and exemptions under EMIR. The webpage explains that the FCA are developing a web portal for notifications and exemptions required to ensure EMIR compliance.
Regional Legal and Regulatory Issues 12

13. Regulatory Technical Standards on Extraterritoriality
On 13 February 2014, the European Commission adopted the RTS on contracts having a “direct, substantial and foreseeable effect within the EU and on non-evasion of provisions of EMIR and non- evasion”.
These RTS address EMIR Article 4(4) (in relation to the clearing obligation) and Article 11(14)(e) (in relation to the risk mitigation obligations). The draft RTS covers:
OTC derivative contracts entered into between two counterparties established in third countries
What would be considered to be “direct, substantial and foreseeable effect” within the EU
When it is necessary to apply the provisions of EMIR in order to prevent evasion
The provisions in these RTS will become effective six months after the RTS comes into force.
Regional Legal and Regulatory Issues
Clifford Chance

14. “Direct, Substantial and Foreseeable Effect within the EU”
Under the RTS:
Equivalent third countries
Article 13 relief will apply to transactions between two third country entities where at least one counterparty is established in the equivalent third country
“the provisions of EMIR can be disapplied” vs “counterparties shall be deemed to have fulfilled the obligations”
Which contracts would have a “direct, substantial and foreseeable effect”?
Guaranteed OTC derivative contracts
Guaranteed by an EU financial counterparty – direct effect
Amount of guarantee exceeds two cumulative thresholds – substantial effect
ESMA considers that the proposed tests above are sufficiently clear that counterparties can predict which contracts will be within scope – foreseeable
EU branches of non-EU entities
Contracts concluded with another EU branch of a non-EU entity (but not with an EU entity or non-EU entity) – direct effect
Contracts concluded with another EU branch of a non-EU entity from a non-equivalent jurisdiction – substantial effect
Counterparties can predict which contracts will be within scope – foreseeable
Regional Legal and Regulatory Issues

15. ESMA’s 2013 Equivalence Assessments

16. EMIR – Status of Equivalence Assessments
On 3 September 2013, ESMA delivered its first technical advice to the Commission on the equivalence of six jurisdictions (US, Japan, Australia, Hong Kong, Singapore, Switzerland) for the purposes of EMIR. Further reports were published by ESMA on 2 October 2013.
CCPs
Trade repositories
Article 13 EMIR US
Conditional equivalence
Partial/conditional equivalence
Japan
Postponed
Not yet equivalent for risk mitigation. Conditional equivalence for clearing.
Australia
Equivalence except ASX equities clearing
Equivalence
Hong Kong
Premature to give advice due to absence of rules
Singapore
Not planned
Switzerland
Canada
Not yet equivalent
India
South Korea
Rest of world
Regional Legal and Regulatory Issues 16

17. ISDA EMIR Protocols / Documents

18. EMIR – ISDA Protocols / Documents
Multilateral contractual amendment mechanism
Market participants can adhere to an ISDA Protocol (even if they are not an ISDA member)
Ongoing discussions with counterparties in APAC
Pros
Cons
No requirement to negotiate
Inflexible
Market standard solution
Restrictions on withdrawal
Efficient
Public
Regional Legal and Regulatory Issues 18

19. EMIR – ISDA Protocols / Documents (continued)
ISDA EMIR Documents
Standard Amendment Agreement for Timely Confirmations (March 2013)
2013 EMIR NFC Representation Protocol (March 2013)
2013 EMIR Portfolio Rec, Dispute Res and Disclosure Protocol (July 2013)
Regional Legal and Regulatory Issues 19

20. EMIR – ISDA Standard Amendment Agreement for Timely Confirmations
What aspect of EMIR does it address?
What does this document amend?
What obligation(s) does this document create?
What elections do I need to make?
What should I be aware of?
Article 11(1)(a) – “the timely confirmation…of the terms of the relevant OTC derivative contract”
It adds additional provisions to the Schedule of your ISDA Master Agreement with your counterparty
Each “Relevant Confirmation Transaction” needs to be confirmed by the “Timely Confirmation Deadline”
“Documenting Party” vs “Receiving Party”
Negative affirmation
Changing from Event of Default to Additional Termination Event
Regional Legal and Regulatory Issues 20

21. EMIR – ISDA 2013 EMIR NFC Representation Protocol
What aspect of EMIR does it address?
Why is it important to distinguish between NFC+ and NFC-?
What obligation(s) does this document create?
What elections do I need to make?
What should I be aware of?
Your classification as a NFC+ or NFC- under EMIR
Clearing
Timing of confirmations
Frequency of portfolio reconciliation
Daily valuation
A representation of your status
Delivery of “change of status” notices
NFC+ vs NFC- vs No representation
Notice delivery method
Consequence of breach of NFC representation
Balancing Payments
NB: AS AT 7 JANUARY 2014, THERE ARE 1,316 ADHERING PARTIES
Regional Legal and Regulatory Issues 21

22. EMIR – ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol
Article 11(1)(b) – “formalised processes…to reconcile portfolios” and “to identify disputes between parties…and resolve them”
Article 9 – “details of any derivative contract…reported to a trade repository”
What aspect of EMIR does it address?
“Portfolio Data Sending Entity” – provide portfolio data
“Portfolio Data Receiving Entity” – perform data reconciliation
Resolution of disputes
Confidentiality waiver
What obligation(s) does this document create?
“Portfolio Data Sending Entity” vs “Portfolio Data Receiving Entity”
Business Day election
What elections do I need to make?
No Event of Default or Termination Event
Two Portfolio Data Receiving Entities
Dispute Notice
Limitations of confidentiality waiver
What should I be aware of?
NB: as at 7 January 2014, there are 8,416 adhering parties NB: ISDA Standard Amendment Agreement – 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Form
Regional Legal and Regulatory Issues 22

23. Status of HK OTC Derivatives Reforms

24. Possible Implementation Timeline for HK Reforms
Phase 1: Interim reporting requirement announced
Backloading for interim reporting to begin August
Mandatory interim reporting began on 9 December
Earliest start date for mandatory reporting and clearing in Hong Kong? Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2012
2013
2014
2015 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
HKMA/SFC publish joint consultation conclusions*
HKMA/SFC publish supplemental consultation** on scope of new regulated activities (Types ) + SIP
Securities and Futures (Amendment) Bill published.
First reading at Legco on 10 July 2013
OTC Clear has RCH status
Drafting subsidiary legislation and public consultation expected
Mandatory clearing
* Joint consultation conclusions on the proposed regulatory regime for OTC derivatives market in Hong Kong. ** Supplemental consultation on the OTC derivatives regime for Hong Kong – proposed scope of new/expanded regulatory activities and regulatory oversight of systemically important players.
Regional Legal and Regulatory Issues 24

25. BCBS-IOSCO Final Policy Framework for Margin Requirements for Uncleared Derivatives

26. Introduction
BCBS-IOSCO have published a final policy framework setting minimum standards for margin requirements for uncleared derivatives
“Margin requirements for non-centrally cleared derivatives” (September 2013) published by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO)
Follows first and second consultation documents published by BSBS-IOSCO in July 2012 and September 2013 (the second consultation document included the results of a quantitative impact.study)
Response to G20 Cannes November 2011 declaration calling for BCBS-IOSCO to develop standards on margin for uncleared derivatives
BCBS-IOSCO to create monitoring group to work during 2014
Monitoring group will evaluate the standards, focusing on relation and consistency of standards with other initiatives including: changes to trading book and counterparty credit risk. potential minimum haircuts for repos/reverse repos, implementation of the liquidity coverage ratio and capital requirements for central cleared derivatives
Further analysis of costs and benefits and overall efficiency and appropriateness of regime, including macroeconomic impact
Possible areas for review include:
Possible alignment of the model and standardised schedule approaches for calculating initial margin;
Guidance on validation and backtesting of models for margining;
Risks of not subjecting the fixed physically settled FX transactions associated with the exchange of principal of cross- currency swaps to the initial margin requirements (and possible adjustments to this exception)
Likely next steps
EU: ESAs to consult on regulatory technical standards setting margin requirements for financial counterparties and non-financial counterparties over the clearing threshold under EMIR for endorsement by the Commission
US: CFTC, SEC and prudential regulators continue to consider margin requirements under the Dodd-Frank Act for swap dealers and major swap participants
Regional Legal and Regulatory Issues 26

27. BCBS-IOSCO Final Margin Framework: Universal Two-way Margin System
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 2015
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
Regional Legal and Regulatory Issues

28. Main Changes from Second Consultation
The revised framework makes a number of significant changes to the proposals in the second consultation document including: 1
The framework sets a revised start date for the new regime (1 December 2015, instead of 1 January 2015) 2
Exemption for physically settled FX forwards and swaps (but national regulators may implement variation margin standards by supervisory guidance or national regulation) but these transactions count towards thresholds determining application of initial margin requirements 3
Initial margin requirements for cross-currency swaps do not apply to the fixed physically settled FX transactions associated with exchange of principal of cross currency swaps (but other cash flows must be subject to initial margin requirements) 4
The requirements will cover transactions indirectly cleared through a CCP and intermediated through a broker unless the non-member customer is subject to the CCP’s margin requirements or provides margin consistent with the CCP’s margin requirements 5
De minimise minimum transfer amounts for margin transfers must not exceed €500,000 (previously €100,000) 6
Managed funds to be considered separate entities outside consolidated group for the purposes of the €50 million initial margin threshold which applies to groups on a consolidated basis. National discretion to exclude public sector entities from margin regime 7
Firms may only rehypothecate or reuse buy-side customer (and not sell-side) initial margin for the purposes of hedging the firm’s exposures to customers and subject to conditions that protect the customer’s rights to the collateral (and ensure only one-time reuse of collateral) 8
Branches of legal entities may be subject to the margin rules of the entity’s home state or the requirements of the host country
Regional Legal and Regulatory Issues

29. Objectives of Margin 1
Objectives of margin requirements for non-centrally cleared derivatives:
Reduction of systemic risk: reduce contagion and spillover effects from counterparty default plus broader macro-prudential benefits of reducing pro-cyclality and limiting build-up of uncollateralised exposures
Promotion of central clearing: margin requirements should reflect higher risk of uncleared trades
International consistency: needed to avoid undermining effectiveness of national regimes and competitive disparities 2
Proposals favour margining over capital:
Margin is “defaulter-pay” on a counterparty default, where capital is “survivor-pay”.
Margin is more targeted and dynamic taking into account risks of losses from a particular portfolio and is adjusted over time, where capital is shared collectively and is more likely to be depleted and is less easy to adjust (also capital requirements are not designed to be sufficient for the default of a particular counterparty, rather reflect a probability of default).
Therefore, margin offers enhanced protection against counterparty default if accessible at time of need and capable of being liquidated quickly.
But potential benefits must be weighed against the liquidity impact resulting from counterparties’ need to provide liquid, high quality collateral, including the impact on market functioning from aggregate demands for that collateral. 3
Revised proposals aim to take account of potential impact on liquidity by:
Allowing use of margin thresholds;
Eligibility of a broad range of eligible collateral;
Phasing–in the requirements over the period to 2019.
Regional Legal and Regulatory Issues

30. Results of Quantitative Impact Study
QIS based on data from 39 institutions
including 19 large internationally active dealers
QIS firms have €216 trillion of non-centrally cleared derivatives, representing 75% of global total
Central clearing mandate will reduce gross notionals of uncleared derivatives by 46%
Interest rate/equity derivatives expected to have biggest decline (53%, 56%) compared to FX/other asset classes (13%, 21%)
Currently, QIS firms only hold €100bn initial margin against uncleared derivatives
Represents 0.03% of gross notional exposure. Initial margin requirements are currently negotiated individually and market practice varies
Proposals would result in QIS firms holding €558bn initial margin against uncleared derivatives (if extrapolated to whole global market would require €0.7 trillion initial margin)
Estimates assume the reduction in portfolios resulting from mandatory clearing and reflect impact of €50m proposed threshold
With zero threshold, required margin would increase to €1.3 trillion (or €1.7 trillion for whole global market)
Figures assume use of models to calculate margin: under standardised margin schedule figures could be between 6 and 11 times higher
Bilateral initial margin requirements significantly higher than those required for central clearing
Bilateral requirements average about 0.5% of gross notional, compared to 0.1% for centrally cleared transactions (i.e. 5 times)
Main reason for higher requirements is lack of multilateral netting that is achieved by central clearing
Requirements represent 8% of QIS firms’ available unencumbered margin eligible assets
But this figure increases to 86% of available liquid assets if standardised margin schedule used
Note: All figures are estimates and approximate.
Regional Legal and Regulatory Issues

31. BCBS-IOSCO Key Principles
1. Appropriate margining practices should be in place with respect to all derivatives transactions that are not cleared by CCPs.
2. All financial firms and systemically important non-financial entities (“covered entities”) that engage in noncentrally cleared derivatives must exchange initial and variation margin as appropriate to the counterparty risks posed by such transactions.
3. The methodologies for calculating initial and variation margin that serve as the baseline for margin collected from a counterparty should (i) be consistent across entities covered by the requirements and reflect the potential future exposure (initial margin) and current exposure (variation margin) associated with the portfolio of non-centrally cleared derivatives in question and (ii) ensure that all counterparty risk exposures are fully covered with a high degree of confidence.
4. To ensure that assets collected as collateral for initial and variation margin purposes can be liquidated in a reasonable amount of time to generate proceeds that could sufficiently protect collecting entities covered by the requirements from losses on non-centrally cleared derivatives in the event of a counterparty default, these assets should be highly liquid and should, after accounting for an appropriate haircut, be able to hold their value in a time of financial stress.
5. Initial margin should be exchanged by both parties, without netting of amounts collected by each party (ie on a gross basis), and held in such a way as to ensure that (i) the margin collected is immediately available to the collecting party in the event of the counterparty’s default; and (ii) the collected margin must be subject to arrangements that fully protect the posting party to the extent possible under applicable law in the event that the collecting party enters bankruptcy.
6. Transactions between a firm and its affiliates should be subject to appropriate regulation in a manner consistent with each jurisdiction’s legal and regulatory framework.
7. Regulatory regimes should interact so as to result in sufficiently consistent and non-duplicative regulatory margin requirements for non-centrally cleared derivatives across jurisdictions.
8. Margin requirements should be phased in over an appropriate period of time to ensure that the transition costs associated with the new framework can be appropriately managed. Regulators should undertake a coordinated review of the margin standards once the requirements are in place and functioning to assess the overall efficacy of the standards and to ensure harmonisation across national jurisdictions as well as across related regulatory initiatives.
Regional Legal and Regulatory Issues

32. Universal Two-way Margin System
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)
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
Up to each group how to allocate the threshold between different entities in the group
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
Minimum transfer amount
Margin transfers can be subject to a minimum transfer amount not exceeding €100,000
Dispute resolution
Parties should have rigorous and robust dispute resolution procedures
*Margin transfers can be subject to a minimum transfer amount not exceeding €500,000
Regional Legal and Regulatory Issues

33. Margin Amounts and Methodologies
Initial Margin
Designed to reflect potential future exposure of a transaction
Required amount of initial margin may be calculated by reference to either (i) a quantitative portfolio margin model or (ii) a standardised margin schedule
Quantitative portfolio margin model
Models must be approved by the appropriate supervisory authority and be subject to an appropriate governance process
For purposes of informing the initial margin baseline, the potential future exposure of a non-centrally-cleared derivative should reflect an extreme but plausible estimate of an increase in the value of the instrument that is consistent with a one-tailed 99 percent confidence interval over a 10-day horizon, based on historical data that incorporates a period of significant financial stress
Subject to approval by the relevant supervisory authority, netting may be performed within well-defined asset classes (such as currency/rates, equity, credit and commodities), subject to being covered by an enforceable netting agreement, but not across such asset classes
Standardised margin schedule
Initial margin calculated as a percentage (2% – 15% depending on asset class) of notional exposure
Allowed to reduce the gross notional initial margin for derivatives subject to enforceable netting using the net-to-gross ratio used for regulatory capital purposes
Can exclude transactions which do not give rise to any counterparty risk (e.g. sold options)
Variation Margin
For the purpose of informing the variation margin baseline, the full net current exposure of the non-centrally-cleared derivative must be used
Netting may be performed across all non-centrally-cleared derivatives under the same netting agreement
National Supervisory Discretion
BCBS-IOSCO recognise that national supervisors may wish to alter margin requirements to achieve macroprudential outcomes, such as preventing build up of leverage and balance sheet expansion
Considering possible macroprudential add-on or buffer on top of baseline or minimum requirements
Regional Legal and Regulatory Issues

34. Phase-in of Requirements
Variation Margin
Requirement to exchange variation margin between covered entities applies from 1 December 2015
From December:
Trigger level for consolidated groups
2015
€3 trillion
2016
€2.25 trillion
2017
€1.5 trillion
2018
€0.75 trillion
2019 onwards
€8 billion
Initial Margin
Aim is to ensure that larger and most systemically risky firms are subject to initial margin requirement at an earlier stage
Requirement to exchange two-way initial margin with a threshold of up to €50 million staged phased in from 1 December 2015 to 1 December 2019
In each year, covered entities will be subject to requirement if total gross notional value of uncleared derivatives of their consolidated group is over the specified trigger level
From 1 December 2019 a permanent exclusion from requirement applies for covered entities if gross notional value of uncleared derivatives of their consolidated group is below trigger level of €8 billion
Trigger levels calculated by averaging month-end positions of the consolidated group for June, July, August preceding relevant 1 December
A covered entity subject to the initial margin requirement is only required to exchange initial margin with other covered entities also subject to that requirement
Regulators to work to ensure sufficient transparency as to which entities are and are not subject to the requirement
Comments sought on whether phase-in is appropriate
Note: based on total gross notional value of uncleared derivatives of the consolidated group (including FX forwards and swaps).
Rules Apply Prospectively
Margin requirements apply to new transactions entered into after specified dates (and may also apply if existing transactions amended to extend the contract for the purpose of avoiding margin requirements)
Regional Legal and Regulatory Issues

35. EU Resolution Planning

36. The EU Status of Implementation of RRD/CMD
Bank Recovery and Resolution Directive (RRD)
Crisis Management Directive (CMD)
Parameters agreed 27 June 2013 by ECOFIN
Final compromise text published 19 December 2013
National legislation by year end
Member state compliance by 1 January 2015
Bail in provisions by 2018
Regional Legal and Regulatory Issues
Clifford Chance

37. Objectives and Principles
Objectives (avoid destruction of value, minimise cost of resolution)
Ensure continuity of critical functions
Avoid significant adverse effects on financial stability
Protect public funds
Protect depositors and investors
Protect client funds and assets
Objectives
Principles
Principles
Shareholders bear first losses
Creditors bear losses after shareholders in order of priority of claims
Senior management is generally replaced
Former members of management shall provide necessary assistance
Senior management are made liable for their individual responsibility
Except where otherwise provided, creditors of same class treated equitably
No creditor incurs greater loss than in insolvency proceedings
Regional Legal and Regulatory Issues

38. Key Elements of Directive
Harmonised objectives and triggers
Common set of resolution tools (sale, bridge bank, asset separation, bail-in)
European system of financing arrangements
Recovery and resolution planning
Resolvability assessments
Regulators’ powers to address or remove impediments to resolvability
Intra-group financial support agreements 1
Resolution
Preparation 3 2
Early intervention
Triggered by failure/likely failure to meet authorisation conditions
Regulators’ powers to direct remedial action
Power to appoint special manager
Regional Legal and Regulatory Issues

39. Resolution Tools Sale of business Bridge institution Asset separation
Bail-in
Transfer of shares or all/ part of assets/ liabilities to purchaser on commercial terms
Transfer of all/ part of assets/ liabilities to a bridge institution
Bridge controlled by public authorities, aim to sell within two years
Transfer of all/ part of assets/ liabilities to asset management vehicles(s) controlled by public authorities
Aim to maximise value by sale or ensure orderly wind down
Can only be used with other tools
Power to write-down eligible liabilities (or convert to shares) to (re)capitalise an institution or bridge institution
Mandatory write down of capital instruments
Additional tools and powers at Member State discretion:
If do not obstruct effective group resolution and consistent with resolution objectives/principles
Regional Legal and Regulatory Issues

40. Bail-in of Loss Absorbing Capital
Aim of Bail in proposal
Lessen likelihood of tax payer intervention
Exercise of statutory power, not a contractual trigger
Contrast with contingent capital: Co Co’s
Co Co’s have clear objective triggers
Bail in relies on Regulator’s discretion
Co Cos based on going concern trigger
Bail in based on resolution authorities determination of non-viability
No absolute requirement to issue “bail-in bonds”
LAC requirement may be fully met with Tier 1 and Tier 2
National resolution authorities to set requirements
Update on Bank Capital
Regional Legal and Regulatory Issues

41. Triggers for Tier 1 Capital
Article 51 states that a trigger event occurs when the Common Equity Tier 1 capital ratio of the institution falls below a minimum of 5.125%
Terms of instrument may specify a higher level or one or more additional triggers
Recent example of BBVA banks set out the following 4 trigger events
The CET ratio is less than 5.125%
The Capital Principal Ratio is less than 7%
The EBA CT 1 Ratio is less than 7%
The Tier 1 ratio is less than 6% and the Bank/Group has reported losses for last 4 quarters with result that capital and reserves have been reduced by 1/3rd more.
Also BBVA had a non-viability trigger
Now seeing non-viability in Asia deals
Who is determining?
How is it being determined?
Regional Legal and Regulatory Issues

42. Hong Kong Consultation on Resolution
Joint consultation by Financial Services and the Treasury Bureau, the Hong Kong Monetary Authority, the Securities and Futures Commission and the Insurance Authority
Two-stage consultation process
Responses by 6 April 2014 for first stage
Broad issues to determined
Resolution authority?
Home/host/branches
Scope and balance of requirements for Hong Kong
FMIs
Bail-in provision
Pre-emption, stays and early termination
Regional Legal and Regulatory Issues

43. EU Central Securities Depositories (CSD) Reform
Common status:
EU presidency annoucement in December 2013
Preliminary political agreement with EU parliament
Full text for agreement in 2014
Implementation 2015
Timed with Target 2-securities initiatives
Scope and impact
Improve settlement of securities
Trading under MiFID2 (OTFs etc)
Avoid settlement fails
Regulation of CSDs
Common EU approach for authorisation and supervision
Regional Legal and Regulatory Issues

44. EU Central Securities Depositories (CSD) Reform (continued)
Regulation of CSDs
competent authority and regulation
Supervision and organisational requirements
Conduct
Management of legal, operational and other risks
Capital requirements
Conflict of laws
Will it improve legal certainty issues?
Will they be included?
Regional Legal and Regulatory Issues

45. EU Central Securities Depositories (CSD) Reform (continued)
On-going Access
With securities issuers
Between depositories
With other FMIs
Restrictions from carrying out other businesses?
Cross-border impact
Passporting
Recognition of 3rd countries
Registration
Transition timeline
Regional Legal and Regulatory Issues

46. EU – Regulation of Shadow Banking
A key focus of G20 and policy makers globally post financial crisis
Securities financing integral to shadow banking debate
SFTs – perceived risks
‘run risk’ due to procyclical nature of SFTs
high levels of (sometimes hidden) leverage
rehypothecation concerns – who owns collateral when a counterparty defaults?
Contagion risk - high degree of connectedness between banking and shadow banking sectors
Regional Legal and Regulatory Issues

47. Financial Stability Board Shadow Banking Policy for SFTs
Two ‘workstreams’ focusing on SFTs: WS3 and WS5
WS5 proposals – to make the securities financing markets more robust e.g. enhanced transparency, improvements to market structure etc.  
WS5 consulting on minimum standards for haircut methodologies and numerical haircut floors
WS3 (‘other shadow banking entities’) focus on risky activities,
primarily short term funding e.g. SFTs
policy tools – imposing bank like regulatory capital requirements (liquidity buffers, leverage limits, large exposures limits, restrictions on types of liabilities held) 
Implementation date unknown – will depend on national implementation
Regional Legal and Regulatory Issues 47

48. EU Regulation on Reporting and Transparency of SFTs
29 January 2014 – Commission proposed regulation on reporting transparency of securities financing transactions
Scope
Parties to securities financing transactions or financing structures with equivalent economic effect
UCITS managers and investment companies
AIFMs
Parties to rehypothecation arrangements
Implementation – unknown at present
Regional Legal and Regulatory Issues 48

49. EU Regulation on Reporting and Transparency of SFTs – Key Features
All SFTs to be reported to a central repository
Detailed reporting on SFT activity by investment funds (including UCITS and AIFs)
Prior risk disclosure and express written consent required before any rehypothecation of assets
Regional Legal and Regulatory Issues 49

50. MiFID2 / MiFIR
Regional Legal and Regulatory Issues

51. Why the New Legislation?
MiFID2 / MiFIR
Implementation of G20 agenda
Enhancing the single rulebook
Implement
Enhance
Scheduled review of 2003 MiFID1
Response to market developments
Review
Response
Regional Legal and Regulatory Issues

52. Wide Ranging Changes to Existing Rules
Market structure
Platform trading obligation
Pre- and post-trade transparency
Transaction reporting
Data service providers
Algorithmic trading
Third country
Extended business conduct
Product intervention
Governance
Commodity derivatives
Markets rules
Other changes
Regional Legal and Regulatory Issues

53. Structure of the Legislation
Level 1
Recast Markets in Financial Instruments Directive (MiFID2)
Scope: instruments, services, exemptions
Authorisation, controllers, governance, passporting, branches of third country firms
Organisational and conduct of business rules
Obligations of MTFs, OTFs, regulated markets
Commodity derivatives position limits, management, reporting
Data reporting services providers
Regulatory powers
Reviews, reports
Markets in Financial Instruments Regulation (MiFIR)
Definitions
Pre- and post-trade transparency and waivers
Platform trading obligations for shares and OTC derivatives
Transaction reporting
Clearing of derivatives on regulated markets
Access issues
Cross-border business by third country firms
Product/practices intervention powers
ESMA position management powers
Level 2
Delegated/implementing acts (regulations or directives):
Drafted and adopted by Commission following advice from ESMA
Regulatory/implementing technical standards (regulations):
Drafted by ESMA and endorsed by the Commission
Level 3
ESMA guidelines and ESMA/Commission FAQs
National implementation:
Primary or secondary legislation, regulatory rules
Penalty regimes
Regional Legal and Regulatory Issues

54. MiFID2/MiFIR: Expected Timeline
24 months
6 months
Consultation on national implementation
Publication in Official Journal and in force
National transposition deadline
New rules begin to apply Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2014
2015
2016
2017
2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
ESMA consults on advice/RTS/ITS
ESMA delivers draft RTS/ITS to Commission
Notes:
Legislation in force 20 days after publication in Official Journal
Commission may request ESMA to provide advice on delegated acts in advance of draft RTS/ITS
Very limited transitional provisions
Market Abuse Regulation (MAR) expected to be published at same time and to apply from 24 months after it comes into force
12 months
6 months
Regional Legal and Regulatory Issues

55. Implementation Challenges
Strategy
Clients
Non-EU impact
Systems
Documentation and compliance
Regional Legal and Regulatory Issues

56. MiFID2 – Market Structure

57. Market Structure Key changes: MiFID1 MiFID2 Multilateral*
New trading venue – OTFs
SIs wider in scope
Trading pushed on venue or SI
Align RM and MTFs
Multilateral*
Multilateral*
Regulated Markets (RMs)
Regulated Markets (RMs)
Multilateral Trading Facilities (MTFs)
Multilateral Trading Facilities (MTFs)
Organised Trading Facilities (OTFs)
Bilateral
Systematic internalisers (SIs)
Bilateral
OTC
Systematic internalisers (SIs)
OTC
* “trading venues”
Regional Legal and Regulatory Issues

58. Key Definitions RMs and MTFs
Multilateral
Bilateral
RMs and MTFs
a multilateral system... which brings together … multiple third-party buying and selling interests in financial instruments – in the system and in accordance with non- discretionary rules – in a way that results in a contract
OTFs (new)
any system or facility, which is not a regulated market or MTF, ... in which multiple third-party buying and selling interests in financial instruments are able to interact in the system in a way that results in a contract
Multilateral system
any system or facility in which multiple third parties buying and selling trading interests in financial instruments are able to interact
SIs
an investment firm which, on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market or an MTF or an OTF (note likely change to implementing acts)
OTC transactions
no definition in compromise text
Regional Legal and Regulatory Issues

59. Market Structure Under MiFID2
RMs
MTFs
OTFs1
SIs
OTC
Operator
Exchange
Exchange or Firm
Firm
Non-discretion’y execution
Yes No
Where quotes binding
Conduct of business rules
Operator can use own capital
Access to facilities
Transparent, non-discriminatory rules, objective criteria
Transparent , non-discriminatory rules, objective criteria
Transparent, non-discriminatory rules, objective criteria
Commercial policy (in objective, non-discriminatory way)
Commercial policy
Admission to trading
Clear, transparent rules (+ other criteria)
Transparent rules (+ adequate PAI2)
N/A
Resilience, circuit breakers, tick size
Surveillance required (MAR)
1. Non-equities only; 2. Publicly available information
Regional Legal and Regulatory Issues

60. Market Structure Under MiFID2 (continued)
RMs
MTFs
OTFs1
SIs
OTC
Pre-trade transparency
Yes (incl. non-equities)
Yes No
Pre-trade waiver available
N/a
Post trade transparency
Publish execut’n quality data
Eligible OTC derivs platform
Authorities can suspend trading
Record orders
1. Non-equities only
Regional Legal and Regulatory Issues

61. Fixed Income and Derivatives Markets Transparency

62. Transparency Rules for Non-equities
Bonds and structured products
Emission allowances
Derivatives traded on a trading venue
Firms, SIs, OTFs, MTFs, RMs.
Scope
Pre-trade waivers
Post-trade deferral
Exemptions
Liquidity definition (Art 2 (7a) MiFIR)
ESMA RTS to calibrate waiver and deferral regimes
Key
variables
Regional Legal and Regulatory Issues

63. Transparency Rules for Non-equities (continued) (Trading Venues pre-trade) Articles 7 and 8 of MiFIR
Obligations (Art. 7)
Waivers (Art. 8)
All RMs, MTFs, OTFs to publish bid/offer and depth of trading interest
Applies to actionable indications of interest
Continuous basis during normal trading hours
Give access to publication arrangements on reasonable commercial terms and non- discriminatory basis to firms subject to Art. 17
Granted by NCAs following ESMA opinion
1. Orders large in scale relative to normal market size
2. Indications of interest in RFQ and voice trading systems above a specific size that would expose liquidity providers to undue risk
3. Derivatives not subject to trading obligation / other instruments without liquid market.
NCA can temporarily suspend the Art. 7 obligation if liquidity drops (3 month rolling period)
ESMA RTS to cover variables (size and liquidity thresholds)
Regional Legal and Regulatory Issues

64. Transparency Rules for Non-equities (continued) (Trading Venues post-trade) Articles 9 and 10 of MiFIR
Obligation (Art. 9)
Deferral (Art. 10)
Publish price, volume and time of trade
As close to real-time as reasonably possible
Give access to publication arrangements on reasonable commercial terms and non- discriminatory basis to firms subject to Art. 20
Granted by NCAs following ESMA opinion
1. Orders large in scale relative to normal market size
2. No liquid market
3. Size of trade would expose liquidity providers to undue risk
Limited publication during deferral period / volume omission during extended deferral period possible
NCA can temporarily suspend the Art. 9 obligation if liquidity drops (3 month rolling period)
ESMA RTS to specify what data to be published and conditions/criteria for deferral
Regional Legal and Regulatory Issues

65. Transparency Rules for Non-equities (continued) (OTC and SIs pre-trade and post-trade) Articles 17 and 20 of MiFIR
Pre-trade
Post-trade
SIs must publish firm quotes for liquid instruments and make those quotes available to other clients.
Undertaking to transact with other clients to whom quote made available where trade below a specified size.
SIs can set non-discriminatory limits on number of transactions per quote.
No Art. 17 obligation if trade above specified size threshold (Art. 8 threshold)
SIs must publish volume and price of trades at time concluded via APA
Scope and time limits for deferral (and temporary suspension of obligation) analogous to Art. 9 and 10 (deferred publication, limited publication, volume omission, etc.)
ESMA RTS will specify disclosable data and application of the obligation in securities financing context
Regional Legal and Regulatory Issues

66. Derivatives Execution and High Frequency Trading

67. Derivatives – Mandatory Trading Obligation
OTC derivative subject to the clearing obligation under EMIR
In order to become subject to mandatory trading, derivatives must be:
Admitted to trading on at least one relevant trading venue;
Sufficiently liquid
ESMA to take into account anticipated impact on liquidity of relevant derivatives and commercial activities of end users
ESMA also to consider whether derivatives only sufficiently liquid in transactions below a certain size
Not an intragroup transaction under Article 3 EMIR
Not subject to transitional provisions under Article 89 EMIR
Declared subject to mandatory venue trading obligation
Must be traded only on:
Regulated market
MTF
OTF
Equivalent third country market
Regional Legal and Regulatory Issues

68. Mandatory Trading Process
“Bottom up” process
“Top down” process
Class of OTC derivatives is declared subject to mandatory clearing under EMIR
ESMA consults on whether to impose mandatory trading on that class or a subset of that class
ESMA proposes draft regulatory technical standards (RTS) to Commission within fixed period after adoption of RTS on clearing under EMIR
Mandatory trading may be phased-in for some counterparty types
Where a class of OTC derivatives has not been declared subject to mandatory trading
ESMA shall regularly monitor activity in those derivatives to identify cases where this may pose systemic risk and to prevent regulatory arbitrage
ESMA shall, on its own initiative, identify and notify to the Commission derivatives that should be subject to the trading obligation but which no CCP is authorised to clear under EMIR or which are not admitted to trading.
Regional Legal and Regulatory Issues

69. Derivatives – Mandatory Trading Obligation (2)
OTC derivative subject to the clearing obligation under EMIR
Effective equivalent recognition for EU trading venues in relation to derivatives;
Commission decision that there are equivalent legally binding requirements:
Authorisation and supervision;
Venue has clear and transparent rules on admission to trading;
Issuers are subject to periodic information requirements;
Market abuse rules
Commission decision only for purposes of determining eligibility as a trading venue for these purposes, and may be limited to a category or categories of trading venues.
Not an intragroup transaction under Article 3 EMIR
Not subject to transitional provisions under Article 89 EMIR
Declared subject to mandatory venue trading obligation
Must be traded only on:
Regulated market
MTF
OTF
Equivalent third country market
Regional Legal and Regulatory Issues

70. Who is Subject to Mandatory Trading?EU
Non-EU
Only if transaction has a direct, substantial and foreseeable effect in the EU or if necessary or appropriate to prevent evasion
Where possible and appropriate, ESMA’s technical standards shall be identical to those under EMIR
FC or NFC+
FC or NFC+
OTC derivative
Third country financial institution or
TCE
FC = financial counterparty
NFC+ = non-financial counterparty over the EMIR clearing threshold
TCE = non-EU entity which would have been subject to the trading obligation if established in the EU
Third country financial institution = non-EU entity authorised to carry on any of the activities listed in BCD, MiFID 2, Solvency II, UCITS, IORPs, AIFMD
FC or NFC+
OTC derivative
TCE
TCE
OTC derivative
Note: Exemption for duplicative or conflicting obligations. Treatment of entities exempt under Article 1(4) or 1(5) EMIR?
Regional Legal and Regulatory Issues

71. Algorithmic Trading What is algorithmic trading?
High frequency algorithmic trading techniques
Direct electronic access (DMA / sponsored access)
What is algorithmic trading?
Systems and controls, business continuity
Notify competent authorities (competent authorities may request further details)
Record keeping obligations
Liquidity provision obligation where market making
Effective systems and controls regarding DMA / sponsored access
Obligations on investment firms
Definition of “algorithmic trading” cross refers to MiFID
Market manipulation definition now expressly refers to algorithmic or high frequency trading strategies
Interaction with MAR / MAD2
Regional Legal and Regulatory Issues

72. Conduct of Business – Third Country Firms

73. Branch Regime (Articles 41-46 MiFID2)
Member states may require TCFs to establish branches when providing services to retail or elective professionals
Alternatively, member states can allow such services to continue to be provided on the basis of existing member state rules
Scope
If a branch is required, member states must impose:
criteria for authorisation
Compliance with MiFID conduct of business rules
Criteria for authorisation
Some member states may require branches for retail and elective professional services
Current UK position – preserving the status quo?
Practical Impact
Regional Legal and Regulatory Issues

74. Cross-border Regime (Articles 36-45 MiFIR)
TCF must register with ESMA to provide services on a cross-border basis
OR if TCF has established a MiFID2 branch, it can provide services to eligible counterparties and per se professionals across member states on the basis of the rules applicable to that branch (subject to equivalence decision – see below)
Limited to services to eligible counterparties and per se professionals
Registration with ESMA
Registration by ESMA is contingent on equivalence decision
Reciprocity by third country also required
Equivalence
Member state rules will continue to apply for three years after an equivalence decision has been reached
After three years, ESMA-registered TCFs can provide services to eligible counterparties and per se professionals throughout member states on the basis of their home state rules
Effect of equivalence decision
Regional Legal and Regulatory Issues

75. APAC OTC Reform status slides [to be included in March set]
Regional Legal and Regulatory Issues

76. Contact Partner Paget Dare Bryan T: +852 2826 2459 E:
Regional Legal and Regulatory Issues