BEIJING

BRUSSELS

CHICAGO

DALLAS

FRANKFURT

GENEVA

HONG KONG

LONDON

LOS ANGELES

NEW YORK

PALO ALTO

SAN FRANCISCO

SHANGHAI

SINGAPORE

SYDNEY

TOKYO

WASHINGTON, D.C.

SIFMA

Insurance and Risk Linked Securities Conference

Legal and Regulatory Developments - Dodd-Frank Act – Title VII Issues Wednesday, March 30, 2011 Ellen P. Pesch, Partner [email protected] 312-853-7296

Dodd-Frank Act – Title VII Issues •

Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Dodd-Frank Act addresses a wide range of issues: –

Title I (Financial Stability)

–

Title II (Orderly Liquidation Authority)

–

Title III (Transfer of Powers to the Comptroller of the Currency and the Federal Reserve Board)

–

Title IV (Regulation of Advisers to Hedge Funds and Others)

–

Title V (Insurance)

–

Title VI (Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions

–

Title VII (Over-the-Counter Derivatives)

–

Title VIII (Payment, Clearing and Settlement Supervision)

–

Title IX (Investor Protections and Improvements to the Regulation of Securities)

–

Title X (Bureau of Consumer Financial Protection)

–

Title XI (Federal Reserve System Provisions)

–

Title XII (Improving Access to Mainstream Financial Institutions

–

Title XIII (Pay It Back Act)

–

Title XIV (Mortgage Reform and Anti-Predatory Lending Act)

–

Title XV (Miscellaneous Provisions)

–

Title XVI (Section 1256 Contracts)

Dodd-Frank Act – Title VII Issues •

Title VII Over-the-Counter Derivatives – Regulates Products: • “Swaps” • “Security-based Swaps” – Regulates Entities: • “Swap Dealers” and “Security-based Swap Dealers” • “Major Swap Participants” and “Major Security-based Swap Participants” – Regulation is bifurcated: • CFTC has jurisdiction over “Swaps”, “Swap Dealers” and “Major Swap Participants” • SEC has jurisdiction over “Security-based Swaps”, “Security-based Swap Dealers" “Major Security-based Swap Participants”

Dodd-Frank Act – Title VII Issues • “Swap” definition in Dodd-Frank Act includes: “any agreement, contract or transaction…that provides for any payment (other than a dividend on an equity security) that is dependent on the occurrence…or the extent of the occurrence of an event or contingency associated with a potential financial, economic or commercial consequence…” • “Security-based Swap” definition in Dodd-Frank Act includes: “Swaps” that are based on “an index that is a narrow-based security index, including any interest therein or on the value thereof; a single security or loan, including any interest there in or on the value thereof; or the occurrence, non occurrence, or extent of the occurrence of an invent relating to a single issuer of a security or the issuers of securities in a narrow-based security index, provided that such event directly affects the financial statements, financial condition or financial obligations of the issuer.” Note: Transactions involving securities that involve 10 or more securities or loans fall within the “swap” definition rather than the “security-based swap” definition because of the “narrow-based” limitation.

Dodd-Frank Act – Title VII Issues •

“Swap Dealers” and “Security-based Swap Dealers” are defined as persons who: – Hold themselves out as a dealer; – Make a market in swaps or security-based swaps, as applicable; – Regularly enter into swaps or security-based swaps, as applicable, with counterparties in the ordinary course of business for their own account; or – Engage in activity causing themselves to be commonly known as a dealer or market maker in swaps or security-based swaps, as applicable

•

“Major Swap Participants” and “Major Security-based Swap Participants” are defined as persons who: – Maintain a substantial position in swaps or security-based swaps, as applicable, including positions held for hedging and positions held by employee benefit plans; – Whose outstanding swaps or security-based swaps, as applicable, create substantial counterparty exposure that could have serious adverse effects on the financial stability of the U.S. Banking System or financial markets; or – Are financial entities that are highly leveraged

Dodd-Frank Act – Title VII Issues •

Central Clearing – All Swaps and Security-based Swaps must be cleared if the CFTC or SEC, as applicable, determines that the type of product is required to be cleared AND a clearing organization accepts the type of product for clearing. – Only exception is for transactions involving a ‘Commercial End-User’ so long as the ‘Commercial End-User’ is (i) not a financial entity, (ii) is using the transaction to hedge or mitigate commercial risk, and (iii) notifies the CFTC or SEC, as applicable, how it generally meets its financial obligations associated with noncleared Swaps/Security-Based Swaps.

•

Exchange Trading - All Swaps and Security-based Swaps that are required to be cleared, must also be executed on a regulated exchange or swap execution facility (“SEF”), unless no exchange or SEF will accept the Swap or Security-based Swap for trading.

•

Reporting – The Dodd-Frank Act requires reporting of non-cleared Swaps and Security-based Swaps to either a registered swap repository or the CFTC or SEC, as applicable. – Reporting requirement applies to legacy Swaps and Security-based Swaps (i.e. those that were executed prior to enactment of the Dodd-Frank Act and were in effect on or after its enactment).

Dodd-Frank Act – Title VII Issues •

Margin - CFTC and SEC, as applicable, are granted authority to impose initial and variation margin requirements for non-cleared Swaps and Security-based Swaps entered into with Swap Dealers/Security-based Swap Dealers or Major Swap Participants/Major Security-based Swap Participants. – For non-cleared Swaps/Security-based Swaps, if requested by the counterparty, the Swap Dealer/Security-based Swap Dealer or Major Swap Participant/Major Security-based Swap Participant must hold the counterparty’s initial margin in a segregated account at an independent, third-party custodian.

•

Registration of Entities – – Swap Dealers and Major Swap Participants are required to register with the CFTC. – Security-based Swap Dealers and Major Security-based Swap Participants are required to register with the SEC.

•

Business Conduct/Minimum Capital - Swap Dealers/Security-based Swap Dealers and Major Swap Participants/Major Security-based Swap Participants will be subject to business conduct standards, back-office requirements and minimum capital requirements.

Dodd-Frank Act – Title VII Issues •

Extraterritorial Effect – – Title VII can apply to activity outside the U.S. if that activity has a direct and significant connection with activities in, or effect on, commerce of the U.S. or contravenes anti-evasion rules

•

Preemption – – The Dodd-Frank Act preempts state regulation of Swaps or Security-based Swaps as insurance – The Dodd-Frank Act preempts state gaming and bucket-shop laws with respect to Security-based Swaps - but not Swaps

World Offices BEIJING

FRANKFURT

LOS ANGELES

SINGAPORE

Suite 608, Tower C2 Oriental Plaza No. 1 East Chang An Avenue Dong Cheng District Beijing 100738 China T: 86.10.6505.5359 F: 86.10.6505.5360

Taunusanlage 1 60329 Frankfurt am Main Germany T: 49.69.22.22.1.4000 F: 49.69.22.22.1.4001

555 West Fifth Street Los Angeles, California 90013 T: 213.896.6000 F: 213.896.6600

6 Battery Road Suite 40-01 Singapore 049909 T: 65.6230.3900 F: 65.6230.3939

BRUSSELS NEO Building Rue Montoyer 51 Montoyerstraat B-1000 Brussels Belgium T: 32.2.504.6400 F: 32.2.504.6401

GENEVA Rue de Lausanne 139 Sixth Floor 1202 Geneva Switzerland T: 41.22.308.00.00 F: 41.22.308.00.01 HONG KONG

One South Dearborn Chicago, Illinois 60603 T: 312.853.7000 F: 312.853.7036

Level 39 Two Int’l Finance Centre 8 Finance Street Central, Hong Kong T: 852.2509.7888 F: 852.2509.3110

DALLAS

LONDON

717 North Harwood Suite 3400 Dallas, Texas 75201 T: 214.981.3300 F: 214.981.3400

Woolgate Exchange 25 Basinghall Street London, EC2V 5HA United Kingdom T: 44.20.7360.3600 F: 44.20.7626.7937

CHICAGO

NEW YORK 787 Seventh Avenue New York, New York 10019 T: 212.839.5300 F: 212.839.5599 PALO ALTO 1001 Page Mill Road Building 1 Palo Alto, California 94304 T: 650.565.7000 F: 650.565.7100

SYDNEY Level 10, 7 Macquarie Place Sydney NSW 2000 Australia T: 61.2.8214.2200 F: 61.2.8214.2211 TOKYO Sidley Austin Nishikawa Foreign Law Joint Enterprise

555 California Street San Francisco, California 94104 T: 415.772.1200 F: 415.772.7400

Marunouchi Building 23F 4-1, Marunouchi 2-chome Chiyoda-Ku, Tokyo 100-6323 Japan T: 81.3.3218.5900 F: 81.3.3218.5922

SHANGHAI

WASHINGTON, D.C.

SAN FRANCISCO

Suite 1901 Shui On Plaza 333 Middle Huai Hai Road Shanghai 200021 China T: 86.21.2322.9322 F: 86.21.5306.8966

1501 K Street N.W. Washington, D.C. 20005 T: 202.736.8000 F: 202.736.8711

Sidley Austin LLP, a Delaware limited liability partnership which operates at the firm’s offices other than Chicago, London, Hong Kong, Singapore and Sydney, is affiliated with other partnerships, including Sidley Austin LLP, an Illinois limited liability partnership (Chicago); Sidley Austin LLP, a separate Delaware limited liability partnership (London); Sidley Austin LLP, a separate Delaware limited liability partnership (Singapore); Sidley Austin, a New York general partnership (Hong Kong); Sidley Austin, a Delaware general partnership of registered foreign lawyers restricted to practicing foreign law (Sydney); and Sidley Austin Nishikawa Foreign Law Joint Enterprise (Tokyo). The affiliated partnerships are referred to herein collectively as Sidley Austin, Sidley, or the firm.