Dodd Frank Act Title VII: What You Need to Know

What You Need to Know about Dodd Frank Act – Title VII and the Swap Dealer status of Intesa Sanpaolo

July 2020

CONTENTS

1. INTRODUCTION ...... 3

2. WHY THIS REGULATION? ...... 4

3. COMPARE BETWEEN EMIR AND DFA ...... 5

4. WHAT IS THE TERRITORIAL SCOPE OF DODD-FRANK ACT? ...... 6

5. WHICH ENTITIES AND ORGANIZATIONS ARE IN THE SCOPE OF DFA? ...... 7

6. WHICH ARE THE PRODUCTS COVERED BY DFA? ...... 8

7. WHICH ARE THE OTC DERIVATIVES REQUIREMENTS? ...... 9

7.1 All market participant...... 9

7.2 Major Swaps Participant (MSP)...... 9

7.3 Swap Dealer (SD) ...... 9

8. WHICH ARE DFA PILLARS? ...... 11

8.1 Electronic trading via swap execution facilities (SEFs)...... 11

8.2 Central clearing through central counterparties ...... 12

8.3 Business conduct standards ...... 14

8.4 Reporting to swap data repositories (SDRs) and recordkeeping requirements reporting

...... 17

9. BEHAVIOUR GUIDE FOR TRADING WITH US COUNTERPARTIES ...... 22

10. GLOSSARY ...... 23

Copyright © 2014 by the International Swaps and Derivatives Association, Inc. and the Futures and Options Association. Neither the International Swaps and Derivatives Association, Inc. nor the Futures and Options Association, has reviewed or endorsed any modifications that may have been made to this document.

Dodd Frank Act Title VII: What you need to know

1. INTRODUCTION

“All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements.” Communiqué of the G20 Summit in Pittsburgh

The information in this brochure is intended to give a general overview of the Title VII of the Dodd- Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank Act, DFA) that came into force in 2010 to regulate the U.S. financial sector1.

This act is designed to solve the need of a comprehensive financial reform after the financial crisis of 2008-09. In particular, Title VII is concentrated on the OTC derivatives market that has been essentially unregulated for several years, allowing large institutions to take significant trading risks. This paper focuses on compliance challenges across OTC derivatives market participants: users, dealers and infrastructure providers.

1 For further details regarding detailed non-mentioned requirement in the present document, please refer to CFTC rulebook or to the email address provided at the end of the document.

3 Dodd Frank Act Title VII: What you need to know

2. WHY THIS REGULATION?

The US government has responded to the financial crisis in 2008 with the Dodd-Frank Wall Street Reform and Consumer Protection Act. This consists in an over 8,000 pages long document focused on four key objectives: • Increase transparency of the Over the Counter (OTC) derivatives market; • Enhance consumer protection; • Minimize risk to the financial system and mitigate systemic risk; • Establish capital standards and regulation of big banks as financial safeguards to enhance private funds. Regarding to OTC, Dodd-Frank Act Title VII introduces some requirements which aim to: • Regulation of derivatives by the CFTC and/or SEC; • Move derivatives trading onto exchanges; • Margin requirements for cleared and uncleared swaps; • Registration required for Swap Dealers and Major Swap; • Increase transparency through more reporting to central repositories.

4 Dodd Frank Act Title VII: What you need to know

3. COMPARE BETWEEN EMIR AND DFA

Both the European Union (EU) and the United States (US) have adopted the primary legislation which aims to fulfill the G20 commitments that all standardized over-the-counter (OTC) derivatives should be cleared through central counterparties (CCPs) by end of 2012 and that OTC derivatives contracts should be reported to trade repositories (and the related commitments to a common approach to margin rules for uncleared derivatives transactions). European Securities and Markets Authority (ESMA) in Europe and the Securities Exchange Commission (SEC) as well as the Commodities Futures Trading Commission (CFTC) in the US decide which derivatives are eligible and when the clearing obligation applies. Furthermore, they are also responsible for supervising these regulations. The US Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in July 2010 and the text of the EU Regulation on OTC Derivatives, CCPs and Trade Repositories (EMIR) was published in the Official Journal in July 2012.

5 Dodd Frank Act Title VII: What you need to know

4. WHAT IS THE TERRITORIAL SCOPE OF DODD-FRANK ACT?

Dodd-Frank establishes the territorial scope of the CFTC’s and SEC’s jurisdiction over the Derivate market, with a focus on swap and security-based swaps market. Nevertheless, there are some exemptions: • the CFTC’s jurisdiction will not extend to activities outside of the U.S. unless they have a direct and a significant connection with activities in, or effect on, commerce of the U.S.; • the SEC’s regulations do not apply to any person who transacts a business in security- based swaps without the U.S. jurisdiction. Title VII of Dodd-Frank Act doesn’t provide a geographic scope by defining entity-related terms (i.e. U.S. person), but seemingly it has been designed to reach more broadly by focusing on whether the activities of a person or entity have a significant connection to the U.S. jurisdiction. Consequently, it doesn’t consider the mere geographic location of organization or entity itself, but the principles contained in Dodd-Frank apply wherever the current business of an entity is linked to the US, whether through US entities, US based resource, US assets or US counterparties. According to guidance from CFTC and SEC on the territorial scope provisions, the territorial scope of Dodd-Frank is not limited to the U.S. territory. In fact, where a US counterparty is transacting with a third country entity, the non-US counterparty would have to meet Dodd- Frank’s requirements. The third entity would be subject to Dodd-Frank regulation for central clearing, exchange/platform trading, reporting to trade repositories, margin, and standardization.

6 Dodd Frank Act Title VII: What you need to know

5. WHICH ENTITIES AND ORGANIZATIONS ARE IN THE SCOPE OF DFA?

DFA provisions apply to users, dealers and infrastructure providers of the OTC derivatives market, as the followings:

• Swap Data Repositories (SDRs);

• Derivatives Clearing Organizations (DCOs);

• Designated Contract Markets (DCMs);

• Swap Execution Facilities (SEFs);

• Swap Dealers (SDs);

• Major Swap Participants (MSPs);

• Swap counterparties who are neither swap dealers nor major swap participants, (“NONs”) – including Eligible Contract Participants (ECPs) and “without limitation” counterparties entitled to elect the clearing requirement exception.

7 Dodd Frank Act Title VII: What you need to know

6. WHICH ARE THE PRODUCTS COVERED BY DFA?

Derivative instruments generally covered by DFA are the followings: all security-based products, listed Single Name Equity Futures and Options, Credit Default Swaps (Single Names and Narrow-Based Index), Equity Swaps (Single Names and Narrow-Based Index), Futures, Futures Options, Interest-Rate Swaps/Derivatives, Credit Default Swaps/Derivatives (Broad Based Indexes), Commodity Swaps/Derivatives, Equity Swaps/Derivative (Broad Based Indexes), Foreign Exchange Swaps/Derivatives (some exceptions).

However, according to Swap Dealer Status of Intesa Sanpaolo, which is subject only to CFTC jurisdiction, derivatives asset classes under the DFA perimeter are: - Rates, - Currencies, - Non-deliverable forwards - Commodities, - Broad-based securities indices derivatives, and - Most indexed credit derivatives.

Forex spot are out of the DFA scope.

8 Dodd Frank Act Title VII: What you need to know

7. WHICH ARE THE OTC DERIVATIVES REQUIREMENTS?

7.1 All market participant

Any transaction sourced, executed, booked or settled in the U.S. or settled in the U.S. or through a US-based financial institution will, under current proposals, be subject to new requirements for OTC derivatives under the Dodd-Frank Act. These include: • Classification of major buyers and sellers in US derivatives markets as either a Major Swaps Participant (MSP) or Swap Dealer (SD), which requires registration with regulators and brings these parties fully in scope for the derivatives rules set out in Title VII. • Designation as an MSP or an SD by comparing derivatives activity to thresholds set by the regulators, excluding qualifying FX and commercial hedging activity as well as swaps between majority owned affiliates. • Swaps deemed eligible by regulators must be cleared through a central counterparty. • Eligible trades must be executed through a Designated Contract Market (DCM) or Swaps Execution Facility (SEF). • Additional capital and collateral requirements for both cleared and non-cleared trades, with tighter rules to protect customer assets. • Rapid reporting of all derivatives trades to a Swaps Data Repository (SDR). • Positions in certain commodities will be subject to quantitative limits. • Requirements are split between the CFTC and the SEC (and sometimes jointly regulated) depending upon the nature of the swap and its underlying asset.

7.2 Major Swaps Participant (MSP)

An entity may be deemed as an MSP if it maintains substantial positions in any of the major swap’s categories. The requirements for a Major Swap Participant are the followings: • a MSP must register with the CFTC and/or the SEC; • if a MSP meet the threshold of $8 billion it will be subject to the clearing requirements above, including additional risk management, reporting and record keeping. Otherwise, the entity will be subject to higher collateral requirements for uncleared trades.

7.3 Swap Dealer (SD)

An entity will be required to register as Swap Dealer with the Commodity Futures Trading Commission (CFTC) and/or the Securities Exchange Commission (SEC) if it: • hold itself out as a dealer in swaps or make a market as a dealer in swaps; • regularly enter into swaps with counterparties as an ordinary course of business for own account; • engage in any activity causing the entity to be commonly known as a dealer or market maker in swaps.

9 Dodd Frank Act Title VII: What you need to know

If an entity meets the criteria it will be subject to the clearing requirements above (the same as all market participants), including additional risk management, reporting and record keeping.

10 Dodd Frank Act Title VII: What you need to know

8. WHICH ARE DFA PILLARS?

Seeking greater accountability and transparency, Dodd-Frank Act legislation impacts the OTC derivatives in the following key areas: • Electronic trading via swap execution facilities (SEFs); • Imposing central clearing through central counterparties (CCPs); • Introducing more rigorous business conduct standards with counterparties; • Introducing additional requirements for SDs and MSPs and internal conduct standards; • Reporting to swaps data repositories (SDRs)and recordkeeping requirements reporting.

8.1 Electronic trading via swap execution facilities (SEFs)

On May 16, 2013, the CFTC adopted final rules relating to the registration and operation of swap execution facilities (“SEFs”) in order to define what types of trading platforms are required to register as SEFs, the core principles by which they must operate and the execution methods that can be used to satisfy the trade execution requirement. The rule likely has a significant impact on how OTC derivative contracts are priced, negotiated, and executed. According to it, any swap that is required to be cleared must be executed on a designated contract market (“DCM”) or SEF, unless no DCM or SEF makes the swap “available to trade”. SEFs must provide all eligible contract participants (“ECPs”) and independent Software Vendors (“ISVs”), such as aggregators, front-end trading software and smart order routing systems, with impartial access to their markets and market services—including any indicative quote screen and any similar pricing data displays. A SEF may not limit access to its trading systems or platforms to only certain types of ECPs or ISVs.

Products scope subject to trade execution on SEF/DCM

• The CFTC refers to swap transactions subject to the trade execution requirement as “Required Transactions”, required transaction must be executed on a SEF or DCM, required transaction must be executed adopting one of the following methods: - execution through an order book; or - execution through an RFQ System, which is defined as a request for quote (“RFQ”) facility that is operated in conjunction with an order book. • A SEF may list and provide mechanisms for trading of swaps that are not Required Transactions, which are known as “Permitted Transactions.” • CFTC does not impose any specific algorithm for matching participant bids and offers. • SEFs may list any swap product for trading in accordance with CFTC rules. An entity should trade on a SEF all products declared mandatory to trade.

11 Dodd Frank Act Title VII: What you need to know

• If a SEF list a product for trading that must also be cleared, the SEF would then file a MAT determination request. • Once the CFTC approves a SEF’s MAT determination that swap is available to trade for all SEFs listening or offering the swap.

Products Impacted

IRD Fixed-to-Floating Swap Class (USD – EUR – GBP )

CRD

North America untranched CDS Indices class European untranched CDS Indices class

Reference entities Corporate Corporate

Region North America Europe

CDX.NA.IG iTraxx Europe Indices CDX.NA.HY iTraxx Europe Crossover

CDX.NA.IG: 5Y iTraxx Europe: 5Y Tenor CDX.NA.HY: 5Y iTraxx Europe Crossover: 5Y

At any time, the then-current on-the-run At any time, the then-current on-the-run series Applicable series series and the preceding series that was and the preceding series that was replaced by replaced by the current one the current one

Tranched No No

Market participant application

• Registration to a SEF is mandatory to trade products listed by a SEF with US person. Participants should define the list of SEF to which register. • Market participants will not be required to trade any swap on a SEF or DCM until the later of 30 days after the made available to trade determination for that swap is approved or deemed certified by the CFTC, and the date on which the counterparties to the swap are required to clear the swap. • Registration to SEFs can take place at any time in the future (no deadline has been defined).

8.2 Central clearing through central counterparties

In order to avoid minimize to avoid/minimize counterparty credit risk and lack of transparency. Dodd- Frank Act in 2010 initiated a series of reforms to push standardized OTC derivatives into clearinghouses.

12 Dodd Frank Act Title VII: What you need to know

What is clearing?

The Dodd-Frank Act promotes “central clearing” as the primary method for managing the counterparty risk described above in OTC derivative transactions. Central clearing is already mandatory in the futures market and is currently optional in the OTC derivatives market. Dodd-Frank has made clearing mandatory for certain types of entities for certain types of swap transactions.

Clearing requirements

Dodd-Frank specifies core principles and mandatory clearing requirements for market participants including CHs and FCMs. CFTC and SEC will require certain types of swaps to be cleared and will have procedures to make such determinations. The Commodity Futures Trading Commission has defined a final rule that implements an exception to the clearing requirement for non-financial entities and small financial institutions that use swaps to hedge or mitigate commercial risk. DFA provides that the clearing requirement shall not apply to a swap if one of the counterparties to the swap: • is not a financial entity (banks, savings associations, farm credit system institutions, and credit unions with total assets of $10 billion or less); • is using swaps to hedge or mitigate commercial risk; • notifies the Commission, in a manner set forth by the Commission, how it generally meets its financial obligations associated with entering into non-cleared swaps. The exception provided is commonly referred to as the “end-user exception.” To implement the notification requirement, the final rule requires the reporting counterparty to report to a swap data repository (SDR) the following information for each swap for which the end-user exception is elected: • notice of the election of the exception; • the identity of the electing counterparty (i.e., the counterparty eligible to elect the end-user exception) to the swap.

Products Impacted by clearing obligation

CFTC requires certain classes of credit default swaps and interest rate swaps to be cleared by Derivatives Clearing Organization registered with the Commission.

IRD Fixed-to-Floating Swap Class (USD – EUR – GBP – JPY – AUD – MXN – CAD – PLN – NOK – SEK – HKD – SGD – CHF) Basis swap (USD – EUR – GBP – JPY – AUD) Overnight Index swap (USD – EUR – GBP – AUD – CAD)

13 Dodd Frank Act Title VII: What you need to know

Forward rate agreement (USD – EUR – GBP – JPY – PLN – NOK – SEK)

CRD

North America untranched CDS Indices class European untranched CDS Indices class

Reference entities Corporate Corporate

Region North America Europe

iTraxx Europe CDX.NA.IG Indices iTraxx Europe Crossover CDX.NA.HY iTraxx Europe HiVol

iTraxx Europe: 5Y,10Y CDX.NA.IG: 3Y,5Y,7Y,10Y Tenor iTraxx Europe Crossover: 5Y CDX.NA.HY: 5Y iTraxx Europe HiVol:5Y

CDX.NA.IG 3Y: from Serie 15 iTraxx Europe 5Y: from Serie 10 CDX.NA.IG 5Y: from Serie 11 iTraxx Europe 10Y: from Serie 7 Applicable series CDX.NA.IG 7Y: from Serie 8 iTraxx Europe Crossover 5Y: from Serie 10 CDX.NA.IG 10Y: from Serie 8 iTraxx Europe HiVol 5Y: from Serie10 CDX.NA.HY 5Y: from Serie 11

Tranched No No

Which are the exemptions from the Mandatory Clearing Requirement for Inter-Affiliate Swaps?

On April 1, 2013, the CFTC voted to adopt final rules implementing an exemption from the mandatory clearing requirement for transactions between certain affiliated parties, known as the “Inter-Affiliate Exemption”. The Inter-Affiliate Exemption proposed to exempt swaps between certain affiliated entities from the clearing requirement in order to promote responsible economic or financial innovation and fair competition. To qualify for the exemption, affiliates must clear all of their Designated Swaps with unaffiliated counterparties (“Outward-Facing Designated Swaps”) at certain recognized clearinghouses or satisfy an exception from clearing under U.S. law or an exemption deemed comparable by the CFTC under foreign law. Recognizing that foreign jurisdictions have started, but have not completed, implementing mandatory swap clearing regimes, the CFTC has provided temporary alternative compliance mechanisms to meet this condition.

8.3 Business conduct standards

One potentially far-reaching section of Dodd-Frank Title VII is the implementation of internal and external business conduct standards. The CFTC has released new guidelines applicable to all SDs and MSPs, introducing new standards to govern their dealings with all counterparties, including

14 Dodd Frank Act Title VII: What you need to know

special entities. The standards are designed to prohibit certain abusive practices, mandate disclosures of material information to counterparties, and require SDs and MSPs to undertake additional due diligence relating to dealings with counterparties. To comply with the new external business conduct standards, SDs and MSPs must now apply Know Your Counterparty (KYC) criteria to all counterparties. In support, ISDA has introduced a new protocol to facilitate the collection of information on an entity level rather than at the current trade level. The new protocol has been met with some hesitation as it automatically allows dealers to share confidential end-user information with regulators. Other newly acquired responsibilities for broker- dealers are to confirm the identity and legal status of counterparties while avoiding the disclosure of the counterparty’s confidential information, providing daily marks for all swaps not required for mandatory clearing when the counterparty is a non-SD or non-MSP, and a suitability and scenario analysis to be provided upon request when first entering into a swap contract. The implementation of these external and internal standards has significant impacts across front office, operations, and technology, while also affecting how broker-dealers interact with their clients. SDs and MSPs will need to either enhance existing policies and procedures or create new ones to stay compliant with the regulations while also maintaining their competitiveness in the market. SDs and MSPs that fail to obtain the necessary information from their buy-side counterparties and/or fail to conform to the new due diligence standards will be prohibited from trading with those counterparties. For uncleared swaps, SDs and MSPs are required to provide counterparties with both mid-market and end-of-day marks, and to disclose the methodology and assumptions used to prepare them. For cleared trades between SDs and non-SDs, the SDs must notify the non-SDs of their ability to receive an end-of-day mark from the CCP.

Detailed business conduct standards On February 23, 2012, the CFTC adopted final rules regarding the internal business conduct of swap dealers and major swap participants (“swap entities”) under the Dodd-Frank Act. The rules combine five separate CFTC proposals and address: • reporting, recordkeeping and daily trading records requirements; • conflicts of interest involving research and clearing activities; • chief compliance officer designation and duties; • risk management and operational requirements.

Reporting, recordkeeping and daily trading record The rules require swap entities to keep full, complete and systemic transaction and position records. The required transaction records include all information necessary to conduct a comprehensive and accurate trade reconstruction, both oral and written. This includes nearly all information collected during pre-execution, execution and post-execution processes.

15 Dodd Frank Act Title VII: What you need to know

Swap entities must make and keep ledgers or other records of the daily calculation of the value of each swap, the daily current and potential future exposure for each counterparty and the daily value of all collateral both before and after haircuts. Daily trading records must also be kept for related cash and forward transactions, including enough information to conduct a comprehensive and accurate reconstruction for each such transaction. Position records must link to the record of the transaction that gave rise to the position. Swap entities also will be required to keep full, complete and systematic records of all activities related to their business as a swap entity. These include records related to governance financial records, complaints and marketing and sales materials.

Conflicts of interest involving research and clearing activities The provisions relating to conflict of interest policies and procedures are based largely on FINRA’s equity research rule and apply to research analysts - employees of a swap entity primarily responsible for preparation of the substance of a research report relating to a derivative and employees who report to such a person.

Chief compliance officer designation and duties The rules require swap entities to designate a single CCO who will report to the board of directors or senior officer of the swap entity. The CCO is required to meet with the board of directors or senior officer at least once a year. The CCO may be a member of the legal department of the swap entity or its general counsel although, in either case, the CFTC notes that the CCO and swap entity are expected to “articulate clearly the segregation of that individual’s CCO and non-CCO responsibilities”. The CCO is required to provide its annual report to the board or senior officer for their review. In addition, the CCO must submit the report electronically to the CFTC within 90 days of the end of the swap entity’s fiscal year, although the swap entity may apply to the CFTC for an extension. Swap entities may petition for confidential treatment of the report under existing CFTC regulations.

Risk management and operational requirements The rules require swap entities to create a risk management program that includes written policies and procedures. Risk management program applies to the swaps activities of the swap entity. The risk management program must be approved by the governing body of the swap entity and be provided to the CFTC (or to the NFA if directed by the CFTC) at the time of registration and thereafter upon request. The definition of “governing body” includes the CEO or committees of a board of directors or body performing a similar function, as well as a board, body, committee or officer of a division of a registrant if registration is required of a separately identifiable division. CFTC require that the risk management program consider not only the swap-related risks of the swap entity, but also risks posed by the swap entity’s affiliates, whether or not swap-related. In addition,

16 Dodd Frank Act Title VII: What you need to know

CFTC requires the risk management program to be integrated into risk management at the consolidated entity level.

Selected business conduct standards

Confirmation • SDs/MSPs must execute confirms as soon as technologically possible, but before the specified deadlines in the compliance schedule. • When transacting with non-SD/non-MSP counterparties that are not financial entities, SDs/MSPs have slightly relaxed timeframes to execute the confirmation, but they are still required to send an acknowledgement within the shorter deadline.

Portfolio Reconciliation & Dispute Resolution • SDs/MSPs must agree on terms of reconciliation with counterparties: includes exchange of trade terms and valuations and reconciliation of discrepancies in material terms and valuations. • For transactions with other SDs/MSPs, SDs/MSPs are required to resolve any discrepancies in material terms immediately and have policies and procedures reasonably designed to resolve discrepancies in valuation within 5 business days. • For transactions with non-SDs/non-MSPs, SDs/MSPs are required to have policies and procedures designed to resolve discrepancies in terms and valuation in a timely manner. • SDs/MSPs are required to report to CFTC, if - the difference in the valuation (higher - lower values) is > 10% of the higher value and > $20million; - valuation dispute is not resolved within 3 business days (with other SDs/MSPs) or 5 business days (with other counterparties). Portfolio Compression • For transactions with other SDs/MSPs, SDs/MSPs must have policies and procedures for terminating fully offsetting positions in a timely manner, and to participate in periodic bilateral and multilateral portfolio compression exercises, when appropriate. • For transactions with all other counterparties, SDs/MSPs must have policies and procedures for periodically terminating fully offsetting positions and participating in portfolio compression exercises when requested by the counterparty.

8.4 Reporting to swap data repositories (SDRs) and recordkeeping requirements reporting

Reporting Requirements • Both buy- and sell-side firms are now gearing up to be in compliance with requirements in each of the below categories:

17 Dodd Frank Act Title VII: What you need to know

- Real-time reporting requirements. Requires submission of specific data to SDRs within 15 minutes after execution and outlines the rules regarding public dissemination of swap transaction and pricing data. - Swap data record-keeping and recording. Details the record-keeping requirements such as data retention and retrievability. It also defines creation (e.g., primary economic terms, confirmation), valuation, and continuation data (e.g., post-trade events) and new data identifiers (i.e., unique swap identifier, legal entity identifier, and unique product identifier). • Historical swaps reporting requirements. Encompasses both pre-enactment swaps (i.e., swaps entered into before the enactment of Dodd-Frank) and transition swaps (i.e., swaps entered into after the enactment of Dodd-Frank, but before the final compliance date defining a swap). • The reporting party is dependent on the status of the counterparties as a swap dealer (SD) or major swap participant (MSP), and whether the swap has been cleared through a derivative clearing organization (DCO) or executed on a swap execution facility (SEF). According with the regulations a reporting party must report any “publicly reportable swap transaction” to a SDR “as soon as technologically practicable” once the transaction has been executed. The SDR will then disseminate the pricing and volume data “as soon as technologically practicable” to the public and counterparties will retain anonymity in the public dissemination of swap transaction data by the SDR.

Recordkeeping All participants must maintain records of a swap throughout its existence and at least five years following the swaps termination. If an entity is a SDR, then it is required to maintain records of a swap for at least fifteen years following the termination of a swap. SDRs are required to maintain records of a swap via “readily accessible means” (“readily accessible” is interpreted by the CFTC as “[retrievable] via electronic real-time access or at least on the same day”) for the first five years following the termination of a swap. For SEFs, DCMs, DCOs, SDs, and MSPs, the rulemaking requires records to be “readily accessible” throughout the life of the swap and for two years following the final termination of the swap. For the subsequent 3 years (the remainder of the required retention period), the records must be retrievable within three business days.

Forms of Records For SEFs, DCMs, DCOs, SDs, and MSPs, the recordkeeping data must be maintained in electronic form with the exception that these entities may keep records in paper form only if they are “originally created and exclusively maintained in paper form.”

Reporting Obligation

18 Dodd Frank Act Title VII: What you need to know

• Obligation to report all cleared and uncleared swaps to trade repository; • All new derivatives contracts and certain pre-existing contracts will have to be reported once the reporting obligation takes effect; • DCOs required to report cleared interest rate and credit derivatives; • Swap dealers expected to start reporting al credit and interest rate derivatives; • Reporting requirements will be in effect for all products and market participants.

Real time reporting Perimeter • OTC Swaps (not including FX Forward and FX Swaps, but including Currency Swaps, Cross Currency Swaps, NDFs, FX Options).

Regulatory requirements • The part 43 rules are designed to make swap transaction and pricing data available to the public in real-time by regulating reporting and public dissemination while protecting the anonymity of market participants. • Any swap that is an arm’s-length transaction between two parties that results in a corresponding change in the market risk position between the two parties; or any termination, assignment, novation, exchange, transfer, amendment, conveyance, or extinguishing of rights or obligations of a swap that changes the pricing of a swap must be reported and publicly disseminated. • The parties to the transaction would report to the appropriate registered swap data repository for public dissemination as follows: - If only one party is a swap dealer or major swap participant, then the swap dealer or major swap participant should report to the registered swap data repository; - If one party is a swap dealer and the other party is a major swap participant, then the swap dealer should report to the registered swap data repository; - In all other situations, the parties shall designate which party should report to the registered swap data repository. • Swap transaction and pricing data must be reported to a registered swap data repository “as soon as technologically practicable” after execution of a publicly reportable swap transaction. • Swap transaction and pricing data must be publicly disseminated by a registered swap data repository “as soon as technologically practicable” after the registered swap data repository receives such data, unless the publicly reportable swap transaction is subject to a time delay.

SDR reporting Perimeter • OTC Swaps, FX Forward and FX Swaps.

19 Dodd Frank Act Title VII: What you need to know

Regulatory requirements • Recordkeeping requirement: SEFs, DCMs, DCOs, SDs, MSPs, and non-SD/MSP counterparties must keep records throughout the existence of a swap and for five years following termination of the swap. SDRs must keep records throughout the existence of the swap and for fifteen years following termination of the swap. • Data reporting requirement: o Creation data: - For all swaps executed on a SEF or DCM, all required creation data is reported by the SEF or DCM. - For off-facility swaps accepted for clearing within the applicable deadline for reporting PET data, all required swap creation data is reported by the DCO. - For off-facility swaps not cleared or not accepted for clearing within the applicable deadline, required swap creation data is reported by the reporting counterparty. o Continuation data: - For cleared swaps is reported by the DCO, though SD and MSP reporting counterparties must also report valuation data. - For uncleared swaps, all continuation data is reported by the reporting counterparty. - All data for a swap must be reported to a single SDR, which is the SDR receiving the first data report. - An SDR must maintain all swap data reported to it in a format acceptable to the Commission and must transmit all swap data requested by the Commission to the Commission in an electronic file in a format acceptable to the Commission In reporting swap data to an SDR, each reporting entity or counterparty must use the facilities, methods, or data standards provided or required by the SDR. Historical Reporting Perimeter • OTC Swaps, FX Forward and FX Swaps

Regulatory requirements • Historical swaps: - “Transition swap’’: means a swap executed on or after the date of enactment of the Dodd-Frank Act (i.e. July 21, 2010) and before the applicable compliance date. - “Pre-enactment swap’’ means a swap executed before date of enactment of the Dodd-Frank Act (i.e., before July 21, 2010) the terms of which have not expired as of the date of enactment of Dodd-Frank Act. • Recordkeeping requirement:

20 Dodd Frank Act Title VII: What you need to know

- “Transition swap”: commission requires to counterparties to keep records of all information specified in a minimum PET data tables. - “Pre-enactment swap”: required counterparties to keep only the information and documents concerning such swaps that were in their possession on or after the date of the applicable Interim Final Rule. The final rule provides that counterparties may keep these records in any format they choose. • Swap data reporting: - Commission requires reporting of all of the minimum primary economic terms that were in the possession of the reporting counterparty on or after April 25, 2011. The final rule will not require reporting of unspecified, additional primary economic terms matched or verified by the counterparties to such swaps. With respect to execution times, the final rule will require reporting the date of execution and call for reporting the time of execution only if that time was recorded when the trade was executed and is known to the reporting counterparty on or after April 25, 2011. • Determination of reporting counterparty - If only one counterparty is a swap dealer, the swap dealer shall fulfil all counterparty reporting obligations. - If neither party is an swap dealer, and only one counterparty is an major swap participant, the major swap participant shall fulfil all counterparty reporting obligations. - If both counterparties are non-SD/MSP counterparties, and only one counterparty is a financial entity, the counterparty that is a financial entity shall be the reporting counterparty. - For each pre-enactment swap or transition swap for which both counterparties are swap dealers, or both counterparties are major swap participants, or both counterparties are non-SD/MSP counterparties that are financial entities, or both counterparties are non-SD/MSP counterparties and neither counterparty is a financial entity, the counterparties shall agree which counterparty shall fulfil reporting obligations with respect to that swap; and the counterparty so selected shall fulfil all counterparty reporting obligations. - For pre-enactment or transition swaps for which both counterparties are non-SD/MSP counterparties, if only one counterparty is a U.S. person, that counterparty shall be the reporting counterparty and shall fulfil all counterparty reporting obligations.

21 Dodd Frank Act Title VII: What you need to know

9. BEHAVIOUR GUIDE FOR TRADING WITH US COUNTERPARTIES

When an entity enters into a deal with a counterparty under DFA (US counterparty, foreign branch of US counterparty, or non-US person guaranteed or conduit affiliate of US counterparty), it shall be aware of the potential impacts on its business activities, arising from the fact that also the foreign counterparty is required to be compliant with the DFA rule. More specifically the entity must be compliant with some requirements on the basis of the classification of its counterparty. In general, prior to entering into a deal: • the front has to verify the counterparty eligibility in order to assess if it can enter into a deal with such counterparty. If the counterparty is not an eligible contract participant, the entity could not trade with it. • the front has to verify the status of the counterparty in order to assess the degree of complexity of the DFA requirements. If the counterparty is qualified in DFA scope any Non-US Swap Dealer is required to comply with DFA requirements.

22 Dodd Frank Act Title VII: What you need to know

10. GLOSSARY

Acknowledgment Written or electronic record of all of the terms of a swap signed and sent by one counterparty to the other. Central Clearing Central clearing is the process in which transactions are processed, guaranteed, and settled by a central counterparty (“CCP” or clearing house) that steps in between the two parties. Contracts submitted for clearing are novated to the CCP, meaning that the CCP essentially becomes the buyer to every seller and the seller to every buyer. Commodity Futures Trading Commission (CFTC) The Federal regulatory agency established by the Commodity Futures Trading Act of 1974 to administer the Commodity Exchange Act. Confirmation The consummation (electronically or otherwise) of legally binding documentation (electronic or otherwise) that memorializes the agreement of the counterparties to all of the terms of a swap transaction. A confirmation must be in writing (whether electronic or otherwise) and must legally supersede any previous agreement (electronically or otherwise). A confirmation is created when an acknowledgment is manually, electronically, or by some other legally equivalent means, signed by the receiving counterparty. Derivatives Clearing Organizations (DCOs) In general, the term “derivatives clearing organization” means a clearinghouse, clearing association, clearing corporation, or similar entity, facility, system, or organization that, with respect to an agreement, contract, or transaction: • Enables each party to the contract to substitute, through novation or otherwise, the credit of the derivatives clearing organization for the credit of the parties. • Arranges or provides, on a multilateral basis, for the settlement or netting of obligations resulting from such agreements, contracts, transactions. • Provides clearing services or arrangements that mutualize or transfer among participants in the derivatives clearing organization the credit risk arising from such contracts. Exemptions. The term “derivatives clearing organization” does not include an entity, facility, system, or organization solely because it arranges or provides for: • Settlement, netting, or novation of obligations resulting from agreements, contracts, or transactions, on a bilateral basis and without a central counterparty. • Settlement or netting of cash payments through an interbank payment system; - Settlement, netting, or novation of obligations resulting from a sale of a commodity in a transaction in the spot market for the commodity.

23 Dodd Frank Act Title VII: What you need to know

Designated Contract Markets (DCMs) A Designated Contract Market is a board of trade (or exchanges) that operate under the regulatory oversight of the CFTC. DCMs are designated to trade futures, swaps, and/or options. A designated contract market can allow both institutional and retail participants and can list for trading contracts on any commodity, providing that each contract is not readily susceptible to manipulation. DCMs may list for trading futures or option contracts based on any underlying commodity, index or instrument. A Designated contract market can be considered both as a regulated market or as OTC.

Eligible Contract Participant Means an eligible contract participant, as defined in Section 1a(18) of the CEA and 17 C.F.R. § 1.3. The term “eligible contract participant” means: (A) acting for its own account— (i) a financial institution; (ii) an insurance company that is regulated by a State, or that is regulated by a foreign government and is subject to comparable regulation as determined by the Commission, including a regulated subsidiary or affiliate of such an insurance company; (iii) an investment company subject to regulation under the Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.) or a foreign person performing a similar role or function subject as such to foreign regulation (regardless of whether each investor in the investment company or the foreign person is itself an eligible contract participant); (iv) a commodity pool that— (I) has total assets exceeding $5,000,000; and (II) is formed and operated by a person subject to regulation under this chapter or a foreign person performing a similar role or function subject as such to foreign regulation (regardless of whether each investor in the commodity pool or the foreign person is itself an eligible contract participant) provided, however, that for purposes of section 2(c)(2)(B)(vi) of this title and section 2(c)(2)(C)(vii) of this title, the term “eligible contract participant” shall not include a commodity pool in which any participant is not otherwise an eligible contract participant; (v) a corporation, partnership, proprietorship, organization, trust, or other entity— (I) that has total assets exceeding $10,000,000; (II) the obligations of which under an agreement, contract, or transaction are guaranteed or otherwise supported by a letter of credit or keep well, support, or other agreement by an entity described in subclause (I), in clause (i), (ii), (iii), (iv), or (vii), or in subparagraph (C); or (III) that— (aa) has a net worth exceeding $1,000,000; and

24 Dodd Frank Act Title VII: What you need to know

(bb) enters into an agreement, contract, or transaction in connection with the conduct of the entity’s business or to manage the risk associated with an asset or liability owned or incurred or reasonably likely to be owned or incurred by the entity in the conduct of the entity’s business; (vi) an employee benefit plan subject to the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.), a governmental employee benefit plan, or a foreign person performing a similar role or function subject as such to foreign regulation— (I) that has total assets exceeding $5,000,000; or (II) the investment decisions of which are made by— (aa) an investment adviser or commodity trading advisor subject to regulation under the Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) or this chapter; (bb) a foreign person performing a similar role or function subject as such to foreign regulation; (cc) a financial institution; or (dd) an insurance company described in clause (ii), or a regulated subsidiary or affiliate of such an insurance company; (vii) (I) a governmental entity (including the United States, a State, or a foreign government) or political subdivision of a governmental entity; (II) a multinational or supranational government entity; or (III) an instrumentality, agency, or department of an entity described in subclause (I) or (II); except that such term does not include an entity, instrumentality, agency, or department referred to in subclause (I) or (III) of this clause unless (aa) the entity, instrumentality, agency, or department is a person described in clause (i), (ii), or (iii) of paragraph (17)(A); (bb) the entity, instrumentality, agency, or department owns and invests on a discretionary basis $50,000,000 or more in investments; or (cc) the agreement, contract, or transaction is offered by, and entered into with, an entity that is listed in any of subclauses (I) through (VI) of section 2(c)(2)(B)(ii) of this title; (viii) (I) a broker or dealer subject to regulation under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or a foreign person performing a similar role or function subject as such to foreign regulation, except that, if the broker or dealer or foreign person is a natural person or proprietorship, the broker or dealer or foreign person shall not be considered to be an eligible contract participant unless the broker or dealer or foreign person also meets the requirements of clause (v) or (xi);

25 Dodd Frank Act Title VII: What you need to know

(II) an associated person of a registered broker or dealer concerning the financial or securities activities of which the registered person makes and keeps records under section 15C(b) or 17(h) of the Securities Exchange Act of 1934 (15 U.S.C. 78 o 5(b), 78q(h)); (III) an investment bank holding company (as defined in section 17(i) of the Securities Exchange Act of 1934 (15 U.S.C. 78q(i)); (ix) a futures commission merchant subject to regulation under this chapter or a foreign person performing a similar role or function subject as such to foreign regulation, except that, if the futures commission merchant or foreign person is a natural person or proprietorship, the futures commission merchant or foreign person shall not be considered to be an eligible contract participant unless the futures commission merchant or foreign person also meets the requirements of clause (v) or (xi); (x) a floor broker or floor trader subject to regulation under this chapter in connection with any transaction that takes place on or through the facilities of a registered entity (other than an electronic trading facility with respect to a significant price discovery contract) or an exempt board of trade, or any affiliate thereof, on which such person regularly trades; or (xi) an individual who has amounts invested on a discretionary basis, the aggregate of which is in excess of— (I) $10,000,000; or (II) $5,000,000 and who enters into the agreement, contract, or transaction in order to manage the risk associated with an asset owned or liability incurred, or reasonably likely to be owned or incurred, by the individual; (B) (i) a person described in clause (i), (ii), (iv), (v), (viii), (ix), or (x) of subparagraph (A) or in subparagraph (C), acting as broker or performing an equivalent agency function on behalf of another person described in subparagraph (A) or (C); or (ii) an investment adviser subject to regulation under the Investment Advisers Act of 1940 [15 U.S.C. 80b– 1 et seq.], a commodity trading advisor subject to regulation under this chapter, a foreign person performing a similar role or function subject as such to foreign regulation, or a person described in clause (i), (ii), (iv), (v), (viii), (ix), or (x) of subparagraph (A) or in subparagraph (C), in any such case acting as investment manager or fiduciary (but excluding a person acting as broker or performing an equivalent agency function) for another person described in subparagraph (A) or (C) and who is authorized by such person to commit such person to the transaction; or

26 Dodd Frank Act Title VII: What you need to know

(C) any other person that the Commission determines to be eligible in light of the financial or other qualifications of the person. Execution Means, with respect to a Swap Transaction, an agreement by the counterparties (whether orally, in writing, electronically, or otherwise) to the terms of the Swap Transaction that legally binds the counterparties to such terms under applicable law. Futures Commission Merchant (FCM) Individuals, associations, partnerships, corporations, and trusts that: • solicit or accept orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any exchange; and • accept payment from or extend credit to those whose orders are accepted. The Commission, by rule or regulation, may include within, or exclude from, the term “futures commission merchant” any person who engages in soliciting or accepting orders for, or acting as a counterparty in, any agreement, contract, or transaction subject to this chapter, and who accepts any money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom, if the Commission determines that the rule or regulation will effectuate the purposes of this chapter. FCM maintains two types of cleared swap customer accounts: • FCM customer account (maintained at a bank) to hold assets not on deposit with DCO (“FCM Customer Account”). • Account maintained by the DCO for FCM’s cleared swap customers (“DCO Customer account”). Major Swap Participants (MSPs) A Major Swap Participant is defined as any person who is not a swap dealer, and satisfies any one of them: • A person that maintains a ‘substantial position’ in any of the major swap categories, excluding positions held for hedging or mitigation commercial risk and positions maintained by certain employee benefit plans for hedging or mitigating risks in the operation of the plan. • A person whose outstanding swaps create ‘substantial’ counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets. • Any financial entity that is ‘highly leveraged’ relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate Federal banking agency and that maintains a substantial position in any of the major swap categories. Swaps • Credit swap: any swap that is primarily based on instruments of indebtedness, including, without limitation:

27 Dodd Frank Act Title VII: What you need to know

- any swap primarily based on one or more broad-based indices related to instruments of indebtedness; and - any swap that is an index credit swap or total return swap on one or more indices of debt instruments. • Equity swap: any swap that is primarily based on equity securities, including, without limitation: - Any swap primarily based on one or more broad-based indices of equity securities; and - any total return swap on one or more equity indices. • Foreign exchange swap: does not include swaps primarily based on rates of exchange between different currencies, changes in such rates, or other aspects of such rates (cross-currency swaps). • Interest rate swap: any swap which is primarily based on one or more interest rates, such as swaps of payments determined by fixed and floating interest rates; or any swap which is primarily based on rates of exchange between different currencies, changes in such rates, or other aspects of such rates (cross-currency swaps). • Other commodity swap means any swap not included in the credit, equity, foreign exchange, or interest rate asset classes, including, without limitation, any swap for which the primary underlying item is a physical commodity or the price or any other aspect of a physical commodity. Swap Data Repositories (SDRs) The term “Swap data repositories (SDRs)” means any person that collects and maintains information or records with respect to transactions or positions in, or the terms and conditions of, swaps entered into by third parties for the purpose of providing a centralized recordkeeping facility for swaps. Swap Dealers (SDs) The Dodd-Frank Act identify a “swap dealer” as any person who: • Holds itself out as a dealer in swaps; • Makes a market in swaps; • Regularly enters into swaps with counterparties as an ordinary course of business for its own account; • Engages in activity causing itself to be commonly known in the trade as a dealer or market maker in swaps. The CFTC requires that persons engaged in these activities register as swaps dealers after they have reached a “de minimis” threshold, meaning that, the aggregate gross notional amount of the swaps, with certain exceptions, that the person enters into over the prior 12 months in connection with dealing activities exceeds $8 billion. Swap Execution Facilities (SEFs) Means a trading system or platform created by the Dodd-Frank Act in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple

28 Dodd Frank Act Title VII: What you need to know

participants in the facility or system, through any means of interstate commerce. The Dodd-Frank Act imposed different statutory provisions on SEFs than on designated contract markets.

29 Dodd Frank Act Title VII: What you need to know