Apr 26, 2013 ... Financial Services Office. ▻ Sam Peterson. Ernst & Young LLP. Dodd-Frank
Subject Matter Resource. Financial Accounting Advisory Services ...
Disclaimer ► This
material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. Ernst & Young LLP is a member firm serving clients in the US.
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Corporate end users and Title VII of Dodd-Frank
Corporate end users and Title VII of Dodd-Frank What you need to know about the new derivatives regulations 26 April 2013
Today’s moderator
Rob Royall Ernst & Young LLP Derivatives and Financial Instruments Leader Financial Accounting Advisory Services Join today's discussion on Twitter: #EY_DoddFrank © 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Today’s agenda ► Background ► Impact
and available exemptions
► Getting
ready
► The
new normal Join today's discussion on Twitter: #EY_DoddFrank
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Today’s moderator ►
Brad Berry Baker Botts LLP Partner
►
Marie Hollein, CTP Financial Executives International (FEI) and Financial Executives Research Foundation President and CEO
►
Andrew Lese Ernst & Young LLP Co-leader, Over-the-Counter (OTC) Derivatives Financial Services Office
►
Sam Peterson Ernst & Young LLP Dodd-Frank Subject Matter Resource Financial Accounting Advisory Services
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Opinion check How would you rate your company’s preparedness for Title VII of Dodd-Frank? A.
Unsure of the impact
B.
Just beginning to get up to speed
C.
Stakeholders informed, plan in place and in the process of implementing
D.
We think we’re ready, but we want to validate our efforts
E.
“Good to go”
F.
Does not apply (EY, faculty, alumni, other)
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Today’s agenda ► Background ► Impact
and available exemptions
► Getting
ready
► The
new normal Join today's discussion on Twitter: #EY_DoddFrank
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Dodd-Frank was a response to the 2008 global financial crisis ► ►
The financial crisis of September 2008 revealed global systemic risk in the derivatives markets A global response to a problem with global reach ►
►
The international community of regulators agreed that major changes to the OTC derivatives market were needed to prevent the need for future tax-payer-funded bailouts Broad agreement on the framework for derivatives regulation and need for coordination at the September 2009 G-20 Summit in Pittsburgh, PA
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Title VII aims to reduce systemic risk and has broad impacts ►
Heated policy debate in the U.S. resulted in one of the sixteen titles of Dodd-Frank — Title VII ►
Two primary objectives ► ►
► ►
Reduce systemic risk Increase transparency
Regulators given broad new powers and new tools All market participants face direct and indirect impacts ► ► ►
Impact hits far beyond financial sector Tens of thousands of “end users” impacted as well Impact to market structure will play out over the next several years
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
End users advocate a balanced approach to regulation ►
End users advocated for a careful and discriminate approach to regulation of OTC derivatives ►
Several trade associations and end-user coalitions formed, including the Coalition for Derivatives End Users; a set of common policy objectives emerged: ► ► ► ►
Educate policy makers on the important role of OTC derivatives in mitigating business risks at thousands of U.S. corporates Emphasize the importance of focusing regulatory efforts on the reduction and containment of systemic risk Preserve efficient access to OTC derivatives for risk mitigation for firms that do not pose systemic risk Rules and regulations that are clear and do not place an undue burden on market participants
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Title VII — key features ►
Creation of new designations for derivative products and market participants ►
Commodity Futures Trading Commission (CFTC) regulates vast majority of the market, including “swaps,” “swap dealers” and “major swap participants”
►
SEC regulates “security-based swaps,” “security-based swap dealers” and “major security-based swap participants”
►
Mandatory clearing, trading, recordkeeping, and reporting
►
Increased margin and capital requirements for bilateral, non-cleared derivatives
►
Robust new internal and external business conduct standards for large dealers
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Title VII — key features (continued) ►
Key market structure changes may result ►
An increase in hedging cost is possible
►
Potential move toward standardized trades
►
End-user exception to clearing and trading requirements available, but subject to important limitations
►
Potential impact on liquidity/working capital due to new increased collateral requirements
►
Regulatory enforcement of new rules
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Today’s agenda ► Background ► Impact
and available exemptions
► Getting
ready
► The
new normal Join today's discussion on Twitter: #EY_DoddFrank
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Definition of a “swap” ►
What types of derivatives are in scope? ► ►
The CFTC has jurisdiction over so-called “swaps,” including the types of derivatives commonly used by corporates Any contract, agreement or transaction that provides:
“…for the exchange, on a fixed or contingent basis, of 1 or more payments based on the value or level of 1 or more interest or other rates, currencies, commodities, securities, instruments of indebtedness, indices, quantitative measures, or other financial or economic interest or property of any kind . . . that transfers, as between the parties to the transaction . . . the financial risk associated with a future change in any such value or the level without also conveying without also conveying a current or future . . . ownership interest in an asset . . . or liability that incorporates the financial risk so transferred . . . .” - 7 U.S.C. (prelim) Section 43(a)(iii)
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Definition of a “swap” (continued) ►
In other words, almost everything is a “swap” unless it is privy to certain limited exemptions/exclusions ►
►
Even inter-affiliate derivatives are “swaps,” although they may be privy to certain exemptions from requirements
What is not a “swap”? ►
►
Futures and securities Forwards on non-financial commodities that are “intended” to be physically delivered ►
► ►
But embedded optionality may convert a forward into a swap
Book outs FX forwards/FX swaps that “solely” result in an exchange of currencies (subject to reporting, business conduct rules)
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Limited foreign exchange exemption ►
►
►
►
Title VII gave the U.S. Department of the Treasury the ability to grant a very limited exemption to a narrow class of FX derivatives On November 16, 2012, Treasury exercised this authority and released their final determination exempting FX forwards and FX swaps from the “swap” definition and, therefore, clearing, trading, and margin requirements FX forwards and FX swaps are still be subject to reporting requirements and business conduct standards There are concerns about the limitations of the exemption due to the narrow definitions of FX forward and FX swap that refer to an actual exchange of two currencies
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Key new entity classifications determine impact ► Swap dealers and MSPs face the heaviest compliance burden with wide-ranging impacts on the business ► Financial entities, and nonfinancial speculators, are subject to new clearing and trading requirements ► Exception from clearing/trading for some nonfinancial end users, but the exception is not automatic and is limited
Highest impact
Lowest impact
© 2013 Ernst & Young LLP. All Rights Reserved.
Swap Dealers (SDs)
►
Firms that sell/deal/make market in derivatives beyond a “de minimis” notional volume over the past 12 months
Major Swap Participants (MSPs)
►
Firms with a “substantial position” in speculative derivatives and/or “substantial counterparty exposure” on all derivatives, including those that qualify as hedges
Financial Entities
►
Includes SDs and MSPs, funds, banks, insurers, pensions, or any firm “predominantly engaged” in financial activities
Nonfinancial or “Commercial” End Users
►
Nonfinancial end users of derivatives that are privy to the enduser exception from mandatory clearing and trading requirements
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Corporate end users and Title VII of Dodd-Frank
Fact check Which of the following is true for your company? A.
We have completed an assessment of how our derivatives and entities are classified
B.
We are in the process of assessing how our derivatives and entities are classified
C.
We have not begun an assessment of how our derivatives and entities are classified
D.
Does not apply (EY, faculty, alumni, other)
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
End-user exception ►
A swap qualifies for the end-user exception if: ► ► ► ►
► ►
One party is not a “financial entity” Swap used to “hedge or mitigate commercial risk” Electing party notifies CFTC how it generally meets its financial obligations for non-cleared swaps Board committee of a SEC filer must review and approve decision to enter into clearing-exempt swaps
What does an end user have to provide to its counterparties regarding the end-user exception? What does an end user have to give to the regulators if it elects the end-user exception?
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Exemption from clearing requirement for inter-affiliate swaps ►
►
On April 1, 2013, the CFTC issued a final rule to exempt swaps for certain affiliated entities within a corporate group from the clearing requirement imposed under Title VII of Dodd-Frank Act The rule would allow the counterparties to some interaffiliate swaps — that are not privy to the end-user exemption — to opt out of clearing if certain conditions are met, including compliance with reporting, documentation, and risk management requirements for the inter-affiliate swaps ►
The CFTC expects that most end users will use the enduser exception rather than the inter-affiliate exemption
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Today’s agenda ► Background ► Impact
and available exemptions
► Getting ► The
ready
new normal Join today's discussion on Twitter: #EY_DoddFrank
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Getting ready - a framework for preparing
►
►
►
►
►
What are the derivatives activities across the enterprise? In what jurisdictions are the activities? How are my entities and counterparties classified ? What OTC reform rules apply? What exceptions might be available?
© 2013 Ernst & Young LLP. All Rights Reserved.
Gap Analysis ►
► ► ► ►
►
► ► ►
Roadmap / Action plan
Identify what needs to be done Documents Clearing arrangements Legal reps Management and BOD discussions Systems and process changes Inter-affiliate trades Record keeping Reporting
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►
►
► ►
►
►
How are these changes to be implemented What are the high risk/ high priority areas? What are the key deadlines What resources (people/process /technology) are needed? How does this fit with other initiatives? Define work streams, owners and responsibilities Objectives:
Impact Assessment
Implementation ►
►
►
►
Corporate end users and Title VII of Dodd-Frank
Educate key people and management (and BOD) Focus on high risk/high priority areas Implement system and process changes Execute documentation and legal agreements
Monitoring ►
►
►
What are the open issues to continuing assessing (e.g. un-cleared margin) What are they changes to key rulemakings, interpretations and market developments What are the international changes impacting my program
Getting ready for recordkeeping and reporting ►
Responsibility ► ► ►
►
Deadlines ►
►
Which trades are subject to reporting? Who is the reporting party? Is my counterparty a “swap dealer” or MSP? Is my counterparty a “US person”? Will inter-affiliate trades have to be reported? Different deadlines depending on various factors
What should end users be doing in the next few months? ► ► ►
Am I capturing the right data in my systems? Does my records retention policy need updating? How do I ensure accurate and timely reporting?
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Getting ready for the end-user exception 1. Educating management and BOD: management/BOD must 2. 3.
4. 5.
understand the impact of Title VII and new responsibilities Corporate governance: BOD must pass a resolution to give appropriate committee the authority to review/approve the decision to enter into clearing-exempt swaps Initial and annual review: the appropriate committee must review/approve the decision to enter into clearing-exempt swaps on an at-least annual basis and when entering into a new hedging strategy Annual filing: the company must submit a notification to the CFTC regarding how it qualifies for the end-user exception Trade-by-trade election of the exception: the company must qualify for and elect the end-user exception on a trade-bytrade basis
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
New role for the Board of Directors (BOD) The “appropriate committee” Must review and approve (at least annually) management’s decision to opt out of clearing and trading requirements Should revisit the review and approval process upon a change to the company’s hedging program Should amend policies and procedures to reflect the process for electing the end-user exception, as well as changes to the hedging strategy
Which BOD committee is the “appropriate committee”? The committee that authorizes the use of swaps is the appropriate committee
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Fact check Please indicate which applies to your company: A.
Have not spoken with the board about Title VII of Dodd-Frank
B.
Have spoken to the board, but have not received initial approval from a committee to use the end-user exception
C.
Have received initial approval from an appropriate board committee to use the enduser exception
D.
Not an SEC filing company
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
No docs, no deal? ►
Legal trade documentation now required for swaps (including FX) and existing documentation will need modification
►
Swap dealers must also comply with certain external business conduct (EBC) rules by May 1. ►
EBC rules require representations from and disclosure to counterparties
►
Many of these can be contained in up-front documentation
►
Legal Entity Identifiers (LEI) or CFTC Interim Compliant Identifiers (CICI) required for all counterparties for swap dealer reporting as of April 10 (possible extension to July)
►
ISDA protocols with related questionnaires have been developed to facilitate amending documentation to comply with new rules ►
Many swap dealers also have bi-lateral documents in addition
►
End users can use these to make representations related to how they qualify for the end-user exception
►
Without this documentation, swap dealers might not trade with nonswap dealer entities
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Today’s agenda ► Background ► Impact
and available exemptions
► Getting
ready
► The
new normal Join today's discussion on Twitter: #EY_DoddFrank
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Looking ahead — key changes still coming ►
Key proposed rules and guidance ► ► ► ►
►
Proposed rules on margin requirements for uncleared swaps Capital requirements for uncleared swaps (Basel III, etc.) Proposed guidance on cross-border swaps Need for clarification regarding financial affiliates hedging “on behalf” of their non-financial affiliates
Key developments in derivatives regulation abroad ► ► ► ►
Efforts to coordinate around the world, but absolute harmonization is unlikely Europe (EMIR, MiFID II, MiFIR, REMIT, etc.) Asia-Pacific (Japan, Singapore and Australia) Canada
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
What will the new normal look like? ►
►
Proposed rules have a huge potential to impact working capital, liquidity, hedging cost and hedging strategy ►
Will end users hedge less or opt to use cleared and exchange-traded derivatives?
►
Will some end users de-centralize corporate structure for hedging risk if centralized treasury entities are regulated?
►
Will end users re-evaluate how they select counterparties?
There will be changes in market mix between standardized and structured products, a trend already evidenced by the ‘futurization of swaps’ to reduce the stringent margin and registration requirements
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
The compliance time frame The compliance time frame 2013 May
June
July
August
June 10, 2013 Mandatory clearing of initial category of swaps May 1, 2013 Documentation with swap (e.g., IR swaps) for financial end users dealer counterparties related to new business conduct standards must be amended (e.g., ISDA August 2012 DF Protocol) Summer/fall 2013
September September 9, 2013 End-user exception from mandatory clearing of initial category of swaps (e.g., IR swaps) for non-financial end users
Documentation with swap dealer counterparties related to the end-user exception and other requirements must be amended (e.g., ISDA March 2013 DF Protocol) Compliance with new record-keeping and reporting requirements for swaps between end users
Many key deadlines have been set in 2013 that apply directly or indirectly to end users
© 2013 Ernst & Young LLP. All Rights Reserved.
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Originally slated for April 10, Many expect several key the deadline for reporting of proposed rules to be finalized trades between end users in 2013, including those was delayed relating to margin and crossborder swaps Corporate end users and Title VII of Dodd-Frank
What you can do now Determine who is leading the compliance efforts Educate stakeholders - compliance, treasury, internal audit Educate the Board regarding their new responsibilities
Perform impact assessment of new and pending rules Assess the classification of Derivative products used Legal entities that execute derivative products
Develop compliance roadmap and implementation tasks Determine resources required to execute the compliance implementation plan
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Recap
Oneminute recap © 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Resources Financial Executives International — financialexecutives.org ►
Committee on Corporate Treasury (CCT) http://www.financialexecutives.org/KenticoCMS/Communities/Committees/CorporateTreasury-(CCT).aspx#axzz2QXCagPef
►
CCT’s comment letters http://www.financialexecutives.org/KenticoCMS/Knowledge-Center/CommentLetters.aspx?cmtcode=cct#axzz2QXCagPef
Ernst & Young — ey.com/us/faas ►
►
The road to reform: helping commercial end users of OTC derivatives comply with Dodd-Frank’s Title VII Dodd-Frank’s Title VII — OTC derivatives reform: Important answers for board members as companies begin the road to reform
© 2013 Ernst & Young LLP. All Rights Reserved.
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Corporate end users and Title VII of Dodd-Frank
Contact us Brad Berry
+ 1 202.639.7921
[email protected]
Baker Botts LLP
Marie Hollein Financial Executives International and Financial Executives Research Foundation
+ 1 973.765.1000
[email protected]
Andy Lese
+ 1 212.773.2070
[email protected]
Ernst & Young LLP
Sam Peterson Ernst & Young LLP
+ 1 212.773.3667
[email protected]
Rob Royall Ernst & Young LLP
© 2013 Ernst & Young LLP. All Rights Reserved.
Page 35
+ 1 215.448.5017
[email protected]
Corporate end users and Title VII of Dodd-Frank
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Corporate end users and Title VII of Dodd-Frank What you need to know about the new derivatives regulations
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Corporate end users and Title VII of Dodd-Frank
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Corporate end users and Title VII of Dodd-Frank
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Corporate end users and Title VII of Dodd-Frank
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Corporate end users and Title VII of Dodd-Frank
