ServiceExpertiseIntegrityServiceExpertiseIntegrity northerntrust.com P R I N C I P L E S T H A T E N D U R E Topics in Regulatory Reform Derivatives Regulation:

Service Expertise IntegrityService Expertise Integrity

northerntrust.com

P R I N C I P L E S T H A T E N D U R E

Topics in Regulatory Reform

Derivatives Regulation: Dodd-Frank and Its Implications for the Buy-Side

September 12, 2012

2 Derivatives Regulation: Dodd-Frank and Its Implications for the Buy-Side

Welcome

Thank you for joining today’s interactive webinar on Derivatives Regulation: Dodd-Frank and Its Implications for the Buy-Side

Moderator: Judson Baker, Northern Trust

Key Note Speakers: Joe Palumbo, Ernst & Young

Nathan Howell, Sidley Austin

Topics to be Addressed: Final Dodd-Frank rulings and guidance

Key definitions such as "swap," "major swap participant," "active funds" and "financial entity"

End-User exceptions

Phase-in Periods

Swap data recordkeeping and reporting requirements

BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.

Dodd-Frank Title VII

CFTC Implementation

Northern Trust Presentation

N Howell – September 12, 2012

Overview

• Overall CFTC implementation status

• Clearing mandate

• End user exemption

• Phased compliance

• Exchange trading mandate

• Reporting

• Recordkeeping/retention

Status of DFA Implementation

• SEC is stuck in a holding pattern

• DFA effective July 21, 2011 (unless…)

• CFTC Order (expires October 12, 2012)

• CFTC has finalized 80%+ of rulemaking

• Compliance dates depend on each rulemaking

• CFTC has yet to finalize capital/margin rules or cross-border rules

Overview of Mandated Clearing

• No mandatory clearing until CFTC issues a mandate

• Any mandate must follow a notice and comment period

• Once issued, a clearing mandate only applies to those swaps that fit within the four corners of the mandate

• To date, no clearing mandate issued

CFTC Clearing Proposal

• CFTC has proposed to mandate clearing of several interest rate swaps and index CDS

• Comment period has ended

• Unclear when CFTC will issue the mandate, but likely soon

• Once mandated, clearing will be phased in

CFTC Phased Compliance Rules

• Cat 1 – Cat 1: 90 days

• Cat 2 – Cat 1 or 2: 180 days

• All others: 270 days

• Does not apply to swaps in which one of the parties relies on the end-user clearing exemption

Phased Compliance Categories

• Category 1: swap dealer, SBS dealer, MSP, MSBSP, active fund

• Category 2: commodity pool, private fund, 4(k) entities (excl. third-party subaccounts)

• Active Fund: private fund that is not a third-party subaccount, 200 or more swaps per month over trailing 12 months

• Third-party subaccount: acct. managed by independent manager resp. for clearing documentation

End-User Clearing Exemption

• Section 2(h)(7) of CEA

• No mandatory clearing if:

– Not a “financial entity”

– Using the swap to hedge or mitigate commercial risk (broadly defined)

– Notice to CFTC of how it meets financial obligations assoc. with non-cleared swaps

• Clearing becomes optional

Financial Entities

• Swap dealer, SBS dealers

• MSPs, MSBSPs

• Commodity pools

• Private funds

• Employee benefit plans (whether or not subject to ERISA)

• BHCA 4(k) entities

Exceptions to Financial Entity Definition

• Financing affiliates – primary business of providing financing; uses swaps for hedging commercial risks relating to rates or forex, 90% or more of which arise from financing the purchase or sale of products, 90% or more of which are mf. by parent or another sub

• Certain small regulated financial institutions ($10 billion or less in assets)

Exchange Trading Mandate

• If subject to mandatory clearing, must also be traded on a regulated futures market or a SEF

• Exception if no futures market or SEF makes the swap “available to trade”

• Rules for SEFs not yet final

• Rules on “available to trade” not yet final

Reporting

• Reporting obligations follow a waterfall

• Dealers > MSPs > End-users

• Dealers will principally be responsible for reporting swap data

• Certain swap data will be made publicly available

Recordkeeping and Retention

• Extensive records required to be kept by all trading parties

• Type of data depends on when the swap was entered into

• Retention for life of the swap plus 5 years

World OfficesBEI J I NG

Suite 608, Tower C2 Oriental Plaza No. 1 East Chang An Avenue Dong Cheng District Beijing 100738 China T: 86.10.5905.5588 F: 86.10.6505.5360

BRUSSELS

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

CHI CAGO

One South Dearborn Chicago, I llinois 60603 T: 312.853.7000 F: 312.853.7036

DALLAS

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

FRANKFURT

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

GENEVA

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

HONG KONG

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

HOUSTON

J PMorgan Chase Tower 600 Travis Street Suite 3100 Houston, Texas 77002 T: 713.315.9000 F: 713.315.9199

LONDON

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

LOS ANGELES

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

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

SAN FRANCISCO

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

SHANGHAI

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

SINGAPORE

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

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

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

WASHINGTON, D.C.

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, New York, Los Angeles, San Francisco, Palo Alto, Dallas, London, Hong Kong, Houston, Singapore and Sydney, is affiliated with other partnerships, including Sidley Austin LLP, an I lli nois limited liability partnership (Chicago); Sidley Austin (NY) LLP, a Delaware limited liability partnership (New York); Sidley Austin (CA) LLP, a Delaware limited liabi lity partnership (Los Angeles, San Francisco, Palo Alto); Sidley Austin (TX) LLP, a Delaware limited liability partnership (Dallas, Houston); 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 partnersh ip (Hong Kong); Sidley Austin, a Delaware general partnership of registered foreign lawyers restricted to practicing foreign law (Sydney); and Sidley Austin Nishikawa Foreign Law J oint Enterprise (Tokyo). The affiliated partnerships are referred to herein collectively as Sidley Austin, Sidley, or the firm.

© 2012 Northern Trust Corporation northerntrust.com

N O R T H E R N T R U S T

Thank you for participating in today’s webinar

Please contact Jud Baker at 312-444-7102 or [email protected] regarding any additional questions.

Today’s webinar was recorded and the replay will be sent to all invitees by the end of this week. Please feel free to share with your colleagues.

18 Derivatives Regulation: Dodd-Frank and Its Implications for the Buy-Side

Important Information

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S.  The Northern Trust Company, London Branch (reg. no. BR001960), Northern Trust Global Investments Limited (reg. no. 03929218) and Northern Trust Global Services Limited (reg. no. 04795756) are authorised and regulated by the Financial Services Authority. The material within and any linked material accessed via this communication is directed to eligible counterparties and professional clients only and should not be distributed to or relied upon by retail investors. For Asia Pacific markets, it is directed to institutional investors, expert investors and professional investors only and should not be relied upon by retail investors.

Northern Trust (Guernsey) Limited, Northern Trust Fiduciary Services (Guernsey) Limited, and Northern Trust International Fund Administration Services (Guernsey) Limited are licensed by the Guernsey Financial Services Commission. Northern Trust International Fund Administrators (Jersey) Limited and Northern Trust Fiduciary Services (Jersey) Limited are regulated by the Jersey Financial Services Commission. Northern Trust International Fund Administration Services (Ireland) Limited, Northern Trust Securities Services (Ireland) Limited and Northern Trust Fiduciary Services (Ireland) Limited are regulated by the Central Bank of Ireland. Northern Trust Global Services Limited has a Luxembourg Branch, which is authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF). Northern Trust Luxembourg Management Company S.A. is regulated by the Commission de Surveillance du Secteur Financier (CSSF). Northern Trust Global Investments Limited has a Netherlands branch, which is authorised by the Financial Services Authority and subject to regulation in the Netherlands by the AutoriteitFinanciëleMarkten. Northern Trust Global Services Limited has a Netherlands Branch, which is authorised and regulated in the Netherlands by De Nederlandsche Bank. Northern Trust Global Investments Limited has a Sweden branch, which is authorised by the Financial Services Authority and subject to regulation in Sweden by the Finansinspektionen. Northern Trust Global Services Ltd (UK) Sweden Filial is authorised by the Financial Services Authority and subject to regulation by the Finansinspektionen. Northern Trust Global Services Limited operates in Abu Dhabi as a Representative Office. Our registered office is authorised and regulated by the Central Bank of the United Arab Emirates. The Northern Trust Company operates in Australia as a foreign authorised deposit-taking institution (foreign ADI)and is regulated by the Australian Prudential Regulation Authority. The Northern Trust Company has a branch in China regulated by the China Banking Regulatory Commission. The Northern Trust Company of Hong Kong Limited is regulated by the Hong Kong Securities and Futures Commission. Northern Trust Global Investments Japan, K.K. is regulated by the Japan Financial Services Agency. The Northern Trust Company has a Singapore Branch, which is a foreign wholesale bank regulated by the Monetary Authority of Singapore. The Northern Trust Company operates in Canada as The Northern Trust Company, Canada Branch, which is an authorised foreign bank branch under the Bank Act (Canada). Trustee related services in Canada are provided by the wholly owned subsidiary The Northern Trust Company, Canada, an authorised trust company under the Trust & Loans Companies Act (Canada). Deposits with The Northern Trust Company and its affiliates and subsidiaries are not insured by the Canada Deposit Insurance Corporation.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. For more information about this notice, see http://www.northerntrust.com/circular230.