PASLA/RMA CONFERENCE Global Legal and Regulatory Issues and Business Implications

1. PASLA/RMA CONFERENCEGlobal Legal and Regulatory Issues and Business Implications Gregory J. Lyons March 6, 2014

2. Indemnified Securities Lending What Frameworks Are Relevant? Basel Committee Dodd-Frank Lender Disclosure FutureCapital Capital SCCL Lending LimitsFBO Rules Future Capital Lenders US/ForeignAgent Banks B/DBorrowers Structure Collateral Requirements MMFs Financial StabilityOversight Counsel/SEC Financial Stability Board

3. Where We Are – Where We’re Going (Maybe) Proposed Market Risk RulesFSB RecommendationsUS Capital Finalized BD Net Capital FinalizedMMF Proposal Derivatives Regulation Liquidity Coverage Ratio (LCR)Volcker Finalized US Capital Effective “Ramifications” Begin in Earnest 2014 Some “Big Bank” Rules Effective Today 2014 Mid-2014 End 2014 FBO Finalized Supplementary Big Bank Rules Proposed FTT Clarity? Leverage Ratio SCCL Finalized Supplementary Big Bank Rules Finalized MMF Finalized?

4. What We Will Cover Today • Permissibility & Structure- Volcker -Shadow Banking-Disclosure and Investor Protection • Capital & Liquidity- US/Int’l Capital Rules- LCR & NSFR • Exposure Limits • FBO Rules • Financial Transaction Tax

5. I. Permissibility & Structure

6. Volcker Rule and Global Perspective

7. Scope and Coverage • Applies to “banking entities” • Essentially, all FDIC-insured depository institutions (“IDIs”) (certain IDIs limited to trust and fiduciary activities are exempt) and affiliates • Foreign banking entities with a U.S. banking presence also are captured, but they have greater flexibility with respect to activities engaged in outside the United States • Agencies have not yet determined how the Volcker Rule will apply to systemically important nonbank financial institutions • The Dodd-Frank Act indicates that the Federal Reserve “shall” adopt additional capital charges and quantitative limits on the activities of nonbank SIFIs, subject to the exemptions for permitted activities that apply to banking entities

8. Scope and CoverageBanking Entities (Consolidated Coverage) BHC 3rd Party 50% 50% RIA/BD GP JV Insured Bank 20% CoveredFund 30% 20% Company Company 3/5 Directors 50% Company All 100% owned, except as noted

9. Compliance Timeline April 1, 2014 June 30, 2014 July 21, 2016-22? July 21, 2015 Conformance period ends Effective date of final rule Reporting of quantitative metrics ($50 bn in trading assets and liabilities) Extension of conformance period(s) • Potential extension of conformance period • Potentially two additional one-year “general” extensions • Additional potential five-year extension for “illiquid” funds (for obligations existing as of May 1, 2010)

10. Basic Prohibitions • Under the Volcker Rule, banking entities generally may not: • Engage in “proprietary trading” • Sponsor, acquire or retain an ownership interest in or have certain types of dealings with certain private funds

11. Proprietary Trading 24042656v1

12. Proprietary Trading – FundamentalsThe Prohibition • A banking entity generally may not trade any “financial instrument” as “principal” for its “trading account” (see next slide for explicitly excluded transactions) • Includes: Securities, derivatives, commodities futures and options on the foregoing • Includes: FX swaps and forwards • Excludes: Loans, spot FX, physical commodities Financial Instrument • Short-term trading (60-day rebuttable presumption) • Trading in market-risk capital rule covered positions and trading positions • Trading as a dealer, swap dealer or security-based swap dealer Trading Account

13. Proprietary Trading – FundamentalsExcluded Transactions • Repos and reverse repos • Securities lending  • Liquidity management (limited to securities transactions and subject to conditions) • Trading by a clearing member of a derivatives clearing organization or clearing agency • Covering short sales and similar existing obligations • Acting solely as agent, broker or custodian (including on behalf of affiliates) • Satisfying judicial and similar proceedings • Satisfying a delivery obligation for delivery, clearing or settlement on behalf of customers • Acting as trustee for deferred compensation, pension and similar employee plans Note: No general exclusion for asset-liability management

14. Covered FundsDefining Covered Funds • Certain Funds Exempt from the Definition of an Investment Company Issuer that would be an investment company under the Investment Company Act but for section 3(c)(1) or 3(c)(7) of the Act • Section 3(c)(1) excludes issuers with 100 or fewer beneficial owners • Section 3(c)(7) excludes issuers whose securities are owned exclusively by “qualified purchasers” • An issuer relying on either Section 3(c)(1) or 3(c)(7) may not make a public offering • Commodity Pools with Similar Characteristics Commodity pools for which: • The CPO has claimed an exemption under CFTC Rule 4.7 • The CPO is registered with the CFTC as a CPO in connection with the pool; substantially all the units of the pool are owned by qualified eligible persons; and units of the pool have not been publicly offered

15. Covered FundsThe Special Status of Foreign Covered Funds Volcker Rule Applies Foreign fund that: is organized or established outside the United States and has no ownership interests offered or sold in the United States; is engaged primarily in investing in securities for resale or other disposition or otherwise trading securities; has as its sponsor the U.S. banking entity or has issued an ownership interest owned by the U.S. banking entity; and if offered in the U.S., would rely on Section 3(c)(1) or 3(c)(7) U.S. Banking Entities Foreign Banking Entities Volcker Rule Doesn’t Apply

16. Covered Funds Exclusions Denied • Commenters requested that many other types of entities be excluded from the definition of “covered fund” • FMUs • Cash Collateral Pools • Pass-Through REITs • Muni Tender Option Bond Vehicles • Venture Capital Funds • Credit Funds • ESCs NotExcluded as Covered Funds • The agencies suggest that some of these entities may be able to rely on exemptions from the Investment Company Act other than section 3(c)(1)/(7) and, thus, may be able to avoid the “covered fund” definition

17. EU Banking Structural Reforms

18. The Proposed Regulation • The reforms introduced by a proposed Regulation will address concerns that certain banks (particularly large banking groups) have become too complex to manage, monitor and supervise, as well as too difficult to resolve should they fail. • The European Commission believes that an EU-wide initiative on structural reforms is necessary to achieve the ‘single rulebook’, in line with the CRD IV. • The proposed Regulation will introduce two significant reforms: • The prohibition on proprietary trading (as of 1 January 2017); and • The separation of trading activities (as of 1 July 2018).

19. The Proposed Regulation (continued) • The proposed regulation will apply to the following EU credit institutions, parent undertakings and certain other branches and subsidiaries: • Global systemically important institutions, as defined by the CRD IV Directive; and • Entities that for three consecutive years have total assets amounting to at least €30bn and trading assets of at least €70bn or 10% of their total assets. • The Regulation will not apply to firms excluded from the scope of the CRD IV Directive or the CRR (e.g. credit unions in the UK).

20. The Prohibition on Proprietary Trading • The proposed Regulation prohibits certain entities from engaging in 'proprietary trading‘. • Prohibited is the use of own capital or borrowed money to participate in the acquisition or disposal of any financial instrument or commodity for the sole purpose of making a profit for own account. • Trading in government bonds of EU member states is permitted. • The Regulation also prohibits investing in hedge funds or entities that engage in proprietary trading or that sponsor hedge funds. • Excluded from this prohibition are unleveraged and closed-ended funds (e.g. private equity, VC and social entrepreneurship funds).

21. The Separation of Trading Activities • The Regulation proposes to protect vulnerable retail clients by granting national competent authorities the discretion to separate a credit institution's trading activities from its retail activities. • If a credit institution's trading activities pose a threat to financial stability the competent authority may prohibit the performance of such activities. • Alternatively, trading activities may be performed by another entity in the same banking group provided it is legally, operationally and economically separate from the credit institution.

22. The Definition of Trading Activities • Trading activities are not directly defined by the proposed Regulation. • Instead, trading activities are stated to exclude (amongst others): • Lending, including consumer credit, credit agreements relating to immovable property and financing of commercial transactions. • Financial leasing. • Money broking, safekeeping and administration of securities. • Issuing electronic money and other means of payment, e.g. travellers’ cheques. • Safe custody services.

23. Covered Funds 24042656v1

24. Covered FundsThe Basic Prohibitions • A banking entity • may not, as principal, directly or indirectly, acquire or retain any ownership interest in or sponsor a covered fund • may not enter into “covered transactions” (as defined in Section 23A of the Federal Reserve Act) with a covered fund for which the banking entity, directly or indirectly, serves as investment manager, investment adviser or sponsor

25. Shadow Banking 24042656v1

26. FSB Shadow Banking Initiative: Five Workstreams • Banks’ interactions with shadow banking entities • Money market funds • Other shadow banking entities • Securitization • Securities lending and repos

27. FSB Shadow Banking Initiative: Timeline • Nov. 2012 • Proposals issued for public comment • End 2012 / Early 2013 • Quantitative impact assessment • Sept. 2013 G20 Summit • Provide final set of recommendations

28. Bank BD FSB Shadow Banking Initiative on Securities Lending and Repos • FSB April 2012 Interim Report on Securities Lending: • Discusses market regulation, transparency and other issues • Comment period closed May 25, 2012 • Generally involves interaction of Less regulated institutions

29. Securities Lending: FSB Areas of Concern • Report states focus from a shadow banking system on 1 2 4 3 Maturity & Liquidity Transformation Maturity Transformation and Leverage Chain Transactions Collateral downgrades/upgrades (Short term liabilities vs. long term assets) (Possible through leveraged investment fund financing) Short sale cash (Often used by banks to obtain repo financing) Securities borrowing collateral further lengthens Reinvested cash collateral into longer term assets Cash collateral to riskier investments(AIG)

30. Financial Stability Issues • Lack of Transparency (due to bilateral nature) • Macro-level market data • Micro-level (institution-specific) market data • Corporate (balance sheet disclosure) • Risk reporting (e.g., re-hypothecation) by intermediaries to clients • Procyclicality of system leverage/interconnectedness • Varies depending on: a) Value of collateral • b) Size of haircuts • c) Collateral “velocity” (rate reused) • Other Risks of Reuse of Collateral • Interconnectedness • Leverage

31. Financial Stability Issues (cont.) 4. Fire-Sale of Collateral Assets • Particularly with counterparties with large collateral pools 5. Agent Lender Practices • Lender Agent Bank Borrower • Indemnity eliminates lender concern of borrower risk 6. Cash Collateral Reinvestment • AIG-Lending as short term funding for investment • Collateral Pools may promote rapid withdrawal 7. Cash Collateral Valuation Rigor • MBS collapse Indemnity

32. Shadow Banking Risks in Sec. Finance: FSB Finalizes Policy Recommendations • Background • FSB issued final recommendations in August 2013:Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos • Final Recommendations address: • Financial stability risks in securities lending and repo markets • Policy recommendations related to: • enhanced transparency • regulation of securities financing activities • improvements to market structure • New proposals re: minimum haircuts for non-cleared securities finance transactions

33. Final FSB Recommendations • Enhanced transparency • Regulatory collection of “granular” data on securities lending / repo exposures • Collect trade-level (flow) data and “snapshots” of sec/lending repo markets • Global standards and processes for data collection/aggregation • Improved public disclosures for securities finance activities • Review reporting requirements for fund managers to end investors • Regulation • Minimum standards for cash collateral reinvestment • Minimum standards for collateral valuation and management • Prudential limits on, and disclosure requirements for, re-hypothecation • Market structure • Evaluation of costs/benefits of central clearing in securities lending markets • Low priority for changing insolvency treatment of securities finance transactions

34. Minimum Haircuts for Non-Cleared SFTs • Key Aspects of FSB Proposal (comments due Nov. 28, 2013) • Minimum standards for haircut calculation methodologies • Minimum standards for portfolio margin calculations • Numerical Floors

35. Shadow Banking RisksFRB Governor Stein Speech • November 7, 2013 Speech, “The Fire-Sales Problem and Securities Financing Transactions” • “Securities financing transactions . . . are particularly deserving of policy attention.” • Because of the “significant social costs, the goal of regulatory policy should be to get private actors to internalize these costs.” • The “sensible path forward might involve some mix of . . . capital surcharges, modifications to the liquidity regulation framework, and universal margin requirements.” Watch macroprudential, as well as microprudential, regulation

36. Disclosure and Investor Protection 24042656v1

37. New Standards and Examination Priorities • In January 2014, SEC announced a sweep regarding securities lending practices, focused on fee splits between lenders and agents • At the end of 2013, FINRA finalized a new rules that, among other things, requires broker-dealers to: • provide disclosure to customers about risks of securities lending • obtain consent from customer to lend customer securities held on margin • make a “reasonableness” determination before borrowing fully paid or excess margin securities from a customer

38. II. Capital and Liquidity

39. Final U.S. Capital Rules 24042656v1

40. Applicability of Final Rules The Final Rules do not apply toforeign parent. Dodd-FrankForeign Prudential Rules? Foreign Parent SR 01-1 applies until no later than July 21, 2015 for well-managed, well-capitalized foreign FHCs. Exemption for certain SLHCs. U.S. Holding Company The Final Rulesapply to U.S.banks, thrifts,and to top tier BHCs and SLHCs. U.S. Bank Broker-Dealer(Indirectly)

41. General Effect of Final Rules Capital Requirements = Capital (Narrowed) (Increased) Risk-Weighted Assets (Risk weights increased)

42. Capital RatiosEnd-State Ratios With Supplementary Leverage Ratio Proposal Capital Conservation Buffer:Additional buffer to avoid limitations on capital distributions & discretionary bonuses. Progressive limitations for banks with capital levels below buffer.Countercyclical Buffer: Starts at 0 but could be as high as 2.5% upon agency discretion (e.g., during period of excessive credit growth). Applies only to Advanced Approaches Banks before Capital Conservation Buffer. G-SIB Surcharge: Applies only to designated banks. Supplementary Leverage Ratio: Tier 1 capital to total leverage exposure must be > 3%. Applies only toAdvanced Approaches institutions. Incorporates certain off-balance sheet assets in denominator (e.g.,guarantees, financial standby letters of credit, forward agreements). 1% - 2.5% G-SIB Surcharge 0% - 2.5% CountercyclicalBuffer 1% - 2.5% G-SIB Surcharge 2.5% CapitalConservationBuffer 0% - 2.5% 1% - 2.5% CountercyclicalBuffer G-SIB Surcharge 2.5% 0% - 2.5% CountercyclicalBuffer CapitalConservationBuffer 2.0% Tier 2 2.5% CapitalConservationBuffer 1.5% 1.5% AdditionalTier 1 AdditionalTier 1 1% IDI 4.5% 4.5% 2% 4.5% BHC 4% 3% CommonEquity Tier1 Capital 7% Total Tier 1Capital 8.5% Total Leverage Ratio SupplementaryLeverage Ratio with Add-On Total Capital10.5% Total

43. Standardized Approach(Effective January 1, 2015) 24042656v1

44. Comparison SnapshotCommercial Loans

45. Current Risk Weight Generally 0% for direct and unconditional claims on OECD governments 20% for conditional claims on OECD governments 100% for claims on non-OECD governments that entail some degree of transfer risk Comparison Snapshot Foreign Debt

46. Forthcoming Changes: Advanced Approaches Banks • Governor Tarullo: More “complementary” burdens on the horizon • Requirement to maintain certain levels of holding company equity and debt • The G-SIB Capital surcharges contemplated by the Basel Committee (the Basel Committee published a revised methodology for these surcharges on July 3, 2013) • Additional measures for risks related to short-term wholesale funding, including additional capital requirements for banks dependent on such funding

47. The CRD IV Directive • The Directive addresses EU-specific issues that do not directly relate to the Basel III reforms. • The Directive contains provisions on issues where the degree of prescription is lower and links with national law are particularly important. • Member states were required to transpose the Directive into national legislation and regulation by 31 December 2013.

48. The CRD IV Directive (continued…) • The Directive implements additional EU-specific reforms in the following areas: • Remuneration – a 1:1 ratio is imposed on certain bankers' salary relative to variable pay, which can rise to 1:2 with explicit shareholder approval. Firms are also required to disclose the number of individuals with a total remuneration over a certain threshold. • Corporate governance – measures are introduced to strengthen processes related to the composition of boards and their role in risk oversight and strategy, as well as strengthening the risk management function within firms.

49. The CRD IV Directive (continued…) • Sanctions – member states are required to apply administrative sanctions and fines for violations of EU banking legislation. • Reliance on external ratings – measures are introduced intended to the reliance by credit institutions on external credit ratings.

50. (Supplemental) Leverage Ratio