Regional Legal and Regulatory Issues March 2014

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

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

Ending Too Big to Fail – the Global Plan 1 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

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

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 2015-2018 Leverage ratio to be introduced from 2018 NB: Any frontrunners? Regional Legal and Regulatory Issues

Status of EMIR

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

EMIR Timeline EMIR regulates OTC derivatives, CCPs and trade repositories and came into force on 16 August 2012. 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

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

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

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

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

“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

ESMA’s 2013 Equivalence Assessments

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

ISDA EMIR Protocols / Documents

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

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

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

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

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

Status of HK OTC Derivatives Reforms

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 11 + 12) + 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

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

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

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

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

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

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

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

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

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

Phase-in of Requirements Variation Margin Requirement to exchange variation margin between covered entities applies from 1 December 2015 From 1 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

EU Resolution Planning

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MiFID2 / MiFIR Regional Legal and Regulatory Issues

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

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

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

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

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

MiFID2 – Market Structure

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

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

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

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

Fixed Income and Derivatives Markets Transparency

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

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

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

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

Derivatives Execution and High Frequency Trading

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

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

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

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

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

Conduct of Business – Third Country Firms

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

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

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

Contact Partner Paget Dare Bryan T: +852 2826 2459 paget.darebryan @cliffordchance.com E: Regional Legal and Regulatory Issues