Saturday 28th May 2016
NEWS TICKER, FRIDAY MAY 27TH: BGEO Group plc, the London listed holding company of JSC Bank of Georgia, has this morning announced that Bank of Georgia, Georgia’s leading bank, and the European Bank for Reconstruction and Development (EBRD) have signed a GEL220m (approximately £70m) loan agreement with a maturity of five years. EBRD obtained the local currency funds through a private placement of GEL-dominated bonds arranged by Galt &Taggart, a wholly owned subsidiary of BGEO. This is the largest and the longest maturity local currency loan granted to a Georgian bank, which will allow Bank of Georgia to issue longer-term local currency loans, providing essential support for micro, small and medium sized enterprises to converge to DCFTA requirements, as well as underserved women entrepreneurs. “We are keen to develop financial products and lending practices, to service specifically women-led SMEs, which will ultimately increase their involvement in developing Georgia’s private sector”, says Irakli Gilauri, CEO of BGEO Group - The UK’s CBI has responded to analysis from the Treasury showing that a vote to leave the European Union could negatively impact UK pensions. Rain Newton-Smith, CBI Economics Director, says that: “All pension schemes benefit when funds can be invested across a stable, growing economy, to best support people in their retirement years. Any financial market turmoil caused by a Brexit is likely to have a negative effect on household wealth, the value of funds and damage pensions here at home, especially for those looking to retire within the next few years. The sheer weight of credible evidence points towards a serious economic shock if the UK were to leave the EU, meaning a hit to the value of our private pensions, jobs and prosperity.” - EPFR Global reports that Nine weeks into the second quarter mutual fund investors remain underwhelmed by their choices as they seek to navigate a global economy characterized by political uncertainty in Europe, lacklustre corporate profits and the prospect of another interest rate hike in the US, economic stress in major emerging markets and Japan's experiment with negative interest rates. During the week ending May 25 all nine of the major EPFR Global-tracked Emerging and Developed Markets Equity Fund groups posted outflows, as did Global, High Yield, Asia-Pacific and Emerging Markets Bond Funds, seven of the 11 major Sector Fund groups and three out of every five Country Equity Fund groups. Alternative Funds look to have taken in over $1bn for the fifth time in the past 14 weeks. Overall, EPFR Global-tracked Bond Funds added $2.6 billion to their year-to-date tally while another $9.1bn flowed out of Equity Funds. Some $12bn was absorbed by Money Market Funds with US funds attracting the bulk of the fresh money. EPFR Global-tracked Emerging Markets Equity Funds remained under pressure from many directions. China's economic data and policy shifts continue to paint a mixed picture for growth in the world's second largest economy, the US Federal Reserve is talking up the prospects of a second rate hike this summer, Europe's recovery appears to be running out of stream and the recent recovery in commodities prices is being viewed with scepticism in many quarters. All four of the major groups recorded outflows during the week ending May 25, with the diversified Global Emerging Markets (GEM) Equity Funds seeing the biggest outflows in cash terms and EMEA Equity Funds in flows as a percentage of AUM terms. Latin America Equity Funds extended their longest outflow streak since late 3Q15 as investors who bought into the prospect of political and economic change in Brazil confront the messy reality. However, year to date Brazil has been the top emerging market for all EPFR Global-tracked Equity Funds as managers bet that the impeachment proceedings against President Dilma Rousseff will open the door to more centrist economic policymaking says the funds data maven. Among the EMEA markets, the firm reports that GEM managers are showing more optimism than investors. EMEA Equity Funds have now posted outflows for five straight weeks and investors have pulled over $300m out of Russia and South Africa Equity Funds so far this month, though GEM allocations for both South Africa and Russia climbed coming into this month. The latest allocations data indicates less optimism about China despite is still impressive official numbers - annual GDP was running at 6.7% in 1Q16 - and the edge the recent slide in the renminbi should give Chinese exporters. GDP growth in Emerging Asia's second largest market, India, is even higher. Elsewhere, India Equity Funds have struggled to attract fresh money as investors wait to for domestic business investment and the government's reform agenda to kick into higher gears says EPFR Global – According to New Zealand press reports, stock exchange operator, NZX, will initiate confidential enquiries into listed companies that experience large, unexplained share price movements, to determine whether they may be holding undisclosed "material" information even while remaining in compliance with the market's Listing Rules that require disclosure of material information at certain trigger points. In an announcement this morning, NZX also warned investors not to assume that a listed entity's Listing Rules compliance statements meant they did not have material information in their possession which would potentially require eventual disclosure - Asian stocks were modestly higher today, largely on the back of increasingly softening sentiment from the US Federal Reserve. Most people think there will be one rate hike this year, but likely it will be in July rather than June. Either way, it will be one and not two or three. Fed chair Janet Yellen is scheduled to talk about interest rates at an event at Harvard University today and the expectation is that a softer approach for the rest of this year will be writ large; a good signal of intent will follow today’s quarterly growth stats. The presidential election will encourage caution; continued market volatility will encourage caution and mixed manufacturing data will encourage caution. Japan’s benchmark Nikkei 225 index added 0.4% to touch 16,834.84 and Hong Kong’s Hang Seng rose 0.9% to 20,576.52. The Shanghai Composite Index gained 0.3% to 2,829.67. The Straits Times Index (STI) ended 6.65 points or 0.24% higher to 2773.31, taking the year-to-date performance to -3.80%. The top active stocks today were SingTel, which gained 1.05%, DBS, which gained 0.07%, UOB, which gained0.11%, Keppel Corp, which gained2.47% and Ascendas REIT, which closed unchanged. The FTSE ST Mid Cap Index gained 0.27%, while the FTSE ST Small Cap Index rose 0.30% - The European Bank for Reconstruction and Development (EBRD) says it is taking the first step towards developing a green financial system in Kazakhstan in partnership with the Astana International Financial Centre (AIFC) Authority. EBRD President Sir Suma Chakrabarti and AIFC Governor Kairat Kelimbetov signed an agreement today on the sidelines of the Foreign Investors Council’s plenary session to commission a scoping study for the development of a green financing system in Kazakhstan. The study, scheduled to be completed in 2017, will assess the demand for green investments, identify gaps in current regulations, and make recommendations for the introduction of green financing standards and for the development of the green bonds market and carbon market services. The development of a green financing system would be consistent with the COP21 Paris Agreement, aligning financing flows with a pathway towards low greenhouse gas emissions and climate resilient development. The AIFC Authority was put in place earlier this year and is tasked with developing an international financial centre in Astana. In March, the AIFC Authority, TheCityUK and the EBRD signed a Memorandum of Understanding to support the establishment of the financial centre and to encourage and improve opportunities for the financial and related professional services industries – Turkey’s Yuksel has issued notice to holders of $200m senior notes due 2015 (ISIN XS0558618384), and filed with the Luxembourg Stock Exchange, that the company has agreed a term sheet with the ad-hoc committee of noteholders and its advisors to implement a restructuring of the notes and is currently finalising the required scheme documentation with the Committee. Once agreed, the Company will apply to the English High Court for leave to convene a meeting of note creditors to vote on the scheme proposals as soon as reasonably practicable when the High Court reconvenes after vacation in June 2016 - Following the agreement in principle of the May 24th Eurogroup for the release of the next loan tranche to Greece, domestic authorities have intensified their efforts for the completion of all pending issues reports EFG Eurobank in Athens. According to Greece’s Minister of Finance Euclid Tsakalotos, on the fulfilment of all pending issues, €7.5bn will be disbursed in mid-June, of which €1.8bn will be channeled to clear state arrears – This weekend is the second UK May Bank Holiday. FTSE Global Markets will reopen on Tuesday, May 31st at 9.00 am. We wish our readers and clients a sunny, restful, safe and exceedingly happy holiday.

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SEC adopts new rule to define terms related to OTC swaps market

Friday, 20 April 2012
SEC adopts new rule to define terms related to OTC swaps market The Securities and Exchange Commission has unanimously adopted a new rule to define a series of terms related to the over-the-counter swaps market. The rules, written jointly with the Commodity Futures Trading Commission (CFTC), implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that established a comprehensive framework for regulating derivatives. Adopting these entity definitions is a foundational step in the establishment of the new regime to regulate trading in this significant market, says SEC Chairman Mary Schapiro. These rules clarify for market participants whether their current activities will subject them to comprehensive oversight in the coming months. The final rule will become effective 60 days after the date of publication in the Federal Register. http://www.ftseglobalmarkets.com/

The Securities and Exchange Commission has unanimously adopted a new rule to define a series of terms related to the over-the-counter swaps market. The rules, written jointly with the Commodity Futures Trading Commission (CFTC), implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that established a comprehensive framework for regulating derivatives. "Adopting these entity definitions is a foundational step in the establishment of the new regime to regulate trading in this significant market," says SEC Chairman Mary Schapiro. "These rules clarify for market participants whether their current activities will subject them to comprehensive oversight in the coming months." The final rule will become effective 60 days after the date of publication in the Federal Register.

Under the Dodd-Frank Act, regulatory authority over swaps is divided between the SEC and the Commodity Futures Trading Commission (CFTC). The law assigns the SEC the authority to regulate security-based swaps, which are broadly defined as swaps based on a single security or a loan, or  a narrow-based group or index of securities, or even events relating to a single issuer or issuers of securities in a narrow-based security index. The CFTC, on the other hand, has primary regulatory authority over swaps. If adopted, the joint rules would establish which entities involved in the swaps market would be subject to the regulatory regime created by the Dodd-Frank Act.

The joint rules of the SEC and the CFTC define security-based swap dealer and major security-based swap participant as part of the Securities Exchange Act of 1934. In developing these definitions, the SEC staff was informed by existing information regarding the single-name CDS market, which will constitute the vast majority of security-based swaps that will likely fall under SEC jurisdiction. Title VII of Dodd Frank in particular authorises the SEC to regulate security-based swap dealers and major security-based swap participants, and create a system by which they could register with the SEC. Those dealers and major participants also would be subject to several statutory requirements including requirements related to capital, margin, and business conduct.



The Act, which defines the relevant terms, directs the SEC and the CFTC jointly to further define those terms in consultation with the board of governors of the Federal Reserve System. Those terms include swap dealer, security-based swap dealer, major swap participant, major security-based swap participant, and eligible contract participant. In December 2010, the SEC and CFTC proposed joint definitions of those terms. The staff also relied on the dealer-trader distinction, which informs determinations regarding dealer status in the traditional securities market and which already is used by participants in that market.

The new Rule 3a71-1 under the Securities Exchange Act defines the term security-based swap dealer consistent with the criteria set forth in the Dodd-Frank Act as someone who holds themselves out as a dealer in security-based swaps, makes a market in security-based swaps, regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account and engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps.

Consistent with the statute, the new rule also specifies that the term "security-based swap dealer" does not include a person who enters into security-based swaps for their own account "not as a part of a regular business."

The new rule interprets this definition in a manner that builds on the dealer-trader distinction that already is used to identify dealing activity involving other types of securities, while taking into account the special attributes of security-based swap markets. Further, the SEC would clarify the distinction between dealing activity and non-dealing activity such as hedging.

In addition, the new rule excludes from the dealer analysis (as well as the major participant analysis) security-based swaps between counterparties that are majority-owned affiliates.

The Dodd-Frank Act also directs the SEC to implement a de minimis exception from the "security-based swap dealer" definition for a person who "engages in a de minimis quantity of security-based swap dealing…." It also directs the SEC to establish factors for determining when someone falls within this exception.

The new Exchange Act rule 3a71-2 implements the exception in a way that is tailored to reflect the different types of security-based swaps and to phase in compliance in a way that would promote the orderly implementation of Title VII. For instance, the new rule exempts those entities or individuals who engage in dealing activity in security-based swaps above a certain notional dollar amount over a prior one-year period:

For credit default swaps that are security-based swaps, the de minimis exception in general is available to persons who enter into up to $3 billion in notional CDS dealing transactions over the prior 12 months.
For other types of security-based swaps, this threshold is $150m, reflecting the proportionately smaller size of this part of the market.

The proposed rule had set forth an across-the-board $100m notional threshold. In addition, the new rule sets a different de minimis exception for security-based swaps with "special entities" (as defined in Exchange Act Section 15F(h)(2)(C) to include certain governmental and other entities). For those special entities, the threshold is $25m in notional amount over the prior 12 months. This is consistent with the proposed rule.
Neither limits the number of security-based swaps that a person can enter, nor limits the number of a person's security-based swap counterparties in a dealing capacity. This is in contrast to the proposal.

The new de minimis rule will be phased in over time depending on the level of security-based swap dealing activity in a way that promotes the orderly implementation of Title VII.For credit default swaps, only those entities and individuals who transact $8bn or more worth of CDS dealing transactions over the prior 12 months initially have to register as security-based swap dealers. For other types of security-based swaps, the phase-in level is $400m. These phase-in levels will terminate at a future date after SEC staff completes a report on the security-based swap market; unless the SEC establishes new de minimis thresholds or, absent that, after a period of time specified in the rule.

The SEC's de minimis thresholds were tailored to the specifics of the products and the markets based on analysis of available data. In particular, this analysis highlighted the significant concentration in the single-name CDS market, which is the portion of the CDS market regulated by the SEC. Both the $3bn de minimis threshold and the $8bn phase-in level for CDSs should ensure that the vast majority of notional dealing activity in this market is subjected to the SEC's Title VII dealer regulatory regime, consistent with the statutory de minimis exception.

Similarly, for security-based swaps other than CDSs, the effort was guided in part by data that showed that the size of this market is only a small fraction of the size of the CDS market. Consistent with this difference between these two markets, the new rule sets the de minimis threshold for these security-based swaps at $150m and the phase-in level at $400m.

In establishing who is a security-based swap dealer, Congress gave the SEC the task of identifying those entities that specifically engage in dealing activity in this market. In doing so, Congress did not intend for all or even most market participants who merely engage in security-based swap transactions - such as mutual funds and pension funds - to be regulated as security-based swap dealers. Further, in addition to limiting the pool to just dealers, Congress also sought to have the SEC regulate only those market participants who engage in dealing activity above a de minimis amount. By following Congress's mandate to capture those engaged in dealing activity (even above a certain threshold), the new rule extends the protections of the Title VII dealer regulatory regime not only to regulated dealers but also to their counterparties.
Definition of "Major Security-Based Swap Participant"

The term "major security-based swap participant" is defined by rules 3a67-1 through 3a67-9 of the Securities Exchange Act.

In particular, the Dodd-Frank Act lays out three parts to the definition, and a person who satisfies any one of them is a major security-based swap participant:

A person who maintains a "substantial position" in any of the major security-based swap categories, excluding positions held for hedging or mitigating 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 security-based swaps create "substantial counterparty exposure that could have serious adverse effects on the financial stability of the U.S. 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 security-based swap categories.

The statutory definition excludes security-based swap dealers.
Definition of "Substantial Position"

The Dodd-Frank Act provides that the SEC should define "substantial position" at a threshold it deems to be "prudent for the effective monitoring, management or oversight of entities that are systemically important or can significantly impact the financial system of the United States."

Under the new rule, "substantial position" is defined by using objective numerical criteria which promote the predictable application and enforcement of the requirements governing major participants. The new rule utilizes tests that would account for both current uncollateralized exposure and potential future exposure. A position that satisfies either test is a "substantial position." The first "substantial position" test excludes positions hedging commercial risk and employee benefit plan positions from the substantial position analysis.

These tests apply to a person's security-based swap positions in each of two major security-based swap categories: security-based credit derivatives (any security-based swap based on instruments of indebtedness including loans or on credit events relating to one or more issuers or securities) and other security-based swaps.
First Test of "Substantial Position"

The first substantial position test under the new rules:

Measures a person's current uncollateralized exposure by marking the security-based swap positions to market using industry standard practices.
Allows the deduction of the value of collateral that is posted with respect to the security-based swap positions.
Calculates exposure on a net basis, according to the terms of any master netting agreement that applies.

The thresholds established under the new rule for the first test are a daily average current uncollateralized exposure of $1 billion in the applicable major category of security-based swaps.
Second Test of "Substantial Position"

The second test under the new rule accounts for both current uncollateralized exposure and the potential future exposure associated with a person's security-based swap positions. The second substantial position test determines potential future exposure by:

Multiplying the total notional principal amount of the person's security-based swap positions by specified risk factor percentages (ranging from 6 to 15 percent) based on the type of swap and the duration of the position.
Discounting the amount of positions subject to master netting agreements by a factor ranging between zero and 60 percent, depending on the effects of the agreement.
Further discounting the amount of the positions by 90 percent if the security-based swaps are cleared, or by 80 percent if they are subject to daily mark-to-market margining.
The thresholds established under the new rule for the second test are $2 billion in daily average current uncollateralized exposure plus potential future exposure in the applicable major security-based swap category.

Definition of "Hedging or Mitigating Commercial Risk"

As noted, the first test of the major participant definition excludes positions held for "hedging or mitigating commercial risk" from the substantial position analysis.

The definition in the new rule for "hedging or mitigating commercial risk" encompasses any security-based swap position that is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, where the risks arise in the ordinary course of business from a potential change in the value of:

Assets that a person owns, produces, manufactures, processes, or merchandises.
Liabilities that a person incurs.
Services that a person provides or purchases.

The definition of hedging or mitigating commercial risk does not encompass any security-based swap position that is held for a purpose that is in the nature of speculation or trading. Also, in contrast to the proposed rule, the new rule does not include requirements for assessing the effectiveness of hedging positions or for documenting that assessment.
Definition of "Substantial Counterparty Exposure"

The new rule defines substantial counterparty exposure using a calculation method that is the same as the method used to calculate substantial position. However, the definition of substantial counterparty exposure is not limited to the major categories of security-based swaps, and does not exclude hedging or employee benefit plan positions. Rather it encompasses all of a person's security-based swap positions.

The thresholds established under the new rule for substantial counterparty exposure are a current uncollateralized exposure of $2 billion or a sum of current uncollateralized exposure and potential future exposure of $4 billion across the entirety of a person's security-based swap positions.
Definition of "Financial Entity" and "Highly Leveraged"

The third aspect of the statutory definition of major security-based swap participant addresses any "financial entity" - other than one subject to capital requirements established by an appropriate federal banking agency - that is "highly leveraged" relative to the amount of capital it holds, and that maintains a substantial position in a major category of security-based swaps. For this part of the definition, the new rule uses the same definition of substantial position described above without excluding hedging or employee benefit plan positions.

For this aspect of the definition, the new rule uses the definition of "financial entity" that is based on the definition of that term in the Dodd-Frank Act provision for an end-user exception from mandatory clearing in Exchange Act Section 3C(g)(3). The new rule defines the term "highly leveraged" as reflecting a ratio of liabilities to equity in excess of 12-to-1. The proposal had set forth 8-to-1 and 15-to-1 as alternative thresholds.
Additional Aspects of the Definition of Major Security-Based Swap Participant

The new rule contains the following changes from the proposal:

Includes a safe harbor that provides that a person is not be deemed to be a major participant under certain conditions. Those conditions account for, among other things: the notional amount of the person's security-based swap positions, the maximum possible uncollateralized exposure associated with the person's security-based swap positions, and monthly calculations of current exposure and potential future exposure. The safe harbor is intended to help persons who are not likely to be major participants avoid the costs of performing the full major participant calculations.
The rulemaking further clarifies that security-based swap positions are attributed to beneficial owners of an account, or to parents or affiliates of a person, only when the counterparty to a security-based swap has recourse to the beneficial owner, parent or affiliate.

The new rule makes additional changes to the major participant tests, many of a technical or clarifying nature. Under the new rule, the SEC staff has to report to the Commission on whether changes should be made to the rules defining both security-based swap dealers and major security-based swap participants (including the rule implementing the de minimis exception to the dealer definition). The staff must also complete this report no later than three years following the later of the last compliance date for the registration and regulatory requirements for security-based swap dealers and major security-based swap participants or the first date on which compliance with the trade-by-trade reporting rules for credit-related and equity-related security-based swaps to a registered security-based swap data repository is required.

Commodity Exchange Act Amendments:

In addition to updating the Securities Exchange Act, the new rules jointly written by the SEC and the CFTC further define "swap dealer" and "major swap participant" in the Commodity Exchange Act (CEA). These rules and interpretations in many respects are parallel to the Exchange Act rules and interpretations addressed above. The new rule also further defines "eligible contract participant" under the CEA. The term "eligible contract participant" also is used in the Securities Exchange Act and is defined by cross reference to the CEA.

What's Next?

These new rule becomes effective 60 days after the date of publication in the Federal Register. However, dealers and major participants will not have to register with the SEC until the dates that will be provided in the SEC's final rules for the registration of dealers and major participants.

When the new rule further defining "eligible contract participant" becomes effective, certain exemptive relief that the SEC provided in connection with section 6(l) of the Exchange Act will expire. At that time, dealers, major participants, and other persons will become subject to section 6(l), which prohibits any person from effecting a security-based swap transaction (other than on a national securities exchange) with a person who is not an eligible contract participant, under the definition as amended by Title VII and as further defined by the new rule.

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