G20 Reforms

ANZ OTC Reform Program

August 2015

Background to regulatory reform of OTC derivatives

2

What are the changes and why are they important?

Regulatory reforms were drafted in the aftermath of the Global Financial Crisis (GFC) of 2007-2009.

The reforms focus significantly on the trading of over-the-counter (OTC) derivative products.

The OTC derivatives market has historically been considered high risk and lacking in transparency. Many participants have previously entered into complex transactions without fully understanding the market and credit risk they were assuming.

Banks’ positioning in a range of OTC derivative positions are believed to have been a notable contributor to the GFC. The crisis saw many OTC derivative positions calling for payments of significant amounts of cash collateral. A lack of confidence, coupled with a credit crunch in the market, led to a funding deficit and the collapse of names such as Lehman Brothers, previously considered “too big to fail”.

Background to regulatory reform of OTC derivatives

3

The reforms aim to:

– enhance the transparency of transaction information available to relevant authorities and the public.

– promote financial stability.

– support the detection and prevention of market abuse.

G20 nations’ commitments to the reforms included:

– reporting of all OTC derivatives transactions to trade repositories.

– clearing of all standardised OTC derivatives through central counterparties.

– execution of all standardised OTC derivatives on exchanges or electronic trading platforms, where appropriate.

– risk mitigation processes for any trades that are not cleared.

– margining on uncleared swaps.

The changes provide a framework for the regulation of OTC derivatives reporting, clearing and trade execution.

What was the regulatory response to the GFC?

Background to regulatory reform of OTC derivatives

4

How has the reform been implemented?

Regulators have been appointed by governments to oversee the OTC trading legislation and ensure compliance.

Regulatory change has typically been phased in, beginning with the US in 2012.

Regulations will continue to be rolled out across jurisdictions in coming years.

Regulators are working together through groups such as the International Organization of Securities Commission (IOSCO) to achieve cross-border harmonisation on all regulations.

Regulators are also considering substitute compliance (agreement between regulators that meeting local regulations is sufficient for the other regional jurisdictions). Substitute Compliance has been agreed between CFTC and ASIC for Entity level requirements, but is still being negotiated for transaction-level requirements including reporting.

Focus of the Reforms

5

On which aspects of OTC trading do the reforms focus?

Regulations Live Expected Description

Trade Reporting

US, AU, HK, SG, EU, JP, Can

• From real-time to T+2 reporting of trade executions, trade amendments, confirmations and daily valuations to global repositories

• Delegated Reporting offering

Mandatory Clearing US AU, HK, SG, EU, Can

• Mandatory clearing of OTC products via Clearing Houses

Electronic Trading Platforms and SEFs US

AU, HK, SG, EU, Can

• Mandatory trading of OTC products via Electronic Trade Platforms such as SEFs where possible

Risk Mitigation US, EU AU, HK, SG, Can

• Portfolio reconciliation• Timely confirmation• Market valuation• Portfolio compression• Dispute resolution

Large Trade Reporting US EU • Daily reporting of open commodities contracts to the CFTC when upper threshold is exceeded

External Business Conduct US

• Disclosure of mid-market rates to non-professional counterparties• Daily distribution of valuations• Distribution of external trade identifiers• Scenario Analysis offering

Record KeepingUS, AU, HK, SG, EU, Can

• Mandated retention of key trade data for fixed period of time • Key trade data to be provided to regulator on request within 72 hours

Margining for Uncleared Swaps

US, AU, HK, SG, EU, Can

• To further reduce the risk of swaps, regulators globally are legislating to apply margin to any swaps that have not been cleared to be subject to margin with certain counterparties (FI’s)

Volcker Rules US, EU• Commercial bank proprietary trading and other risky trading activities prohibited• Limited exemptions apply for Markets trading desks which must demonstrate

Volcker conformance by generating and reporting financial metrics

Reporting

6

All applicable new OTC trades executed, and any amendments or cancellations, are reported on the day they occur.

Reports include Material Economic Terms (MET) of the trades, Counterparty static data, as well as valuations and collateral information.

Required reporting information can vary across jurisdiction, although there is a push for cross-border harmonisation.

Commodity Equity Credit FX Interest Rate

Option Option Index Tranched Exotic Basis

Swap Swap Index Untranched Forward CapFloor

Forward Forward Single Name NDF CPI/RPI

. NDO Cross Currency

Swap Exotic Vanilla

Vanilla Option Exotic Complex

Fixed Float

FRA

OIS

Swaption

Total Return Swap

Notes

US: Single name (credit and equities) is being regulated by the SEC under future regulations.

European Union (ESMA): Includes Exchange Traded Derivatives (eg, futures and ETOs).

Australia (ASIC): Includes Exchange Traded Derivatives (eg, futures and ETOs), but relief currently applies.

FX spot and FX security-based swaps: The definition of these products can vary dependent on jurisdiction.

Products not Reportable: Commodity FX

Spot Spot

Clearing

7

To minimise bilateral counterparty risk, all regulators have indicated that they will implement a clearing mandate to ensure products are cleared via an authorised Centralised Clearing Party (CCP).

Each jurisdiction has its own process for authorising CCPs. Cross-border recognition of authorised CCPs is taking place.

CFTC is the only jurisdiction with products currently subject to the clearing mandate.

CFTC Clearing Mandate Summary CFTC Clearing Products

Interest Rate Swaps

Forward Rate Agreements

Overnight Index Swaps

Credit Indices

Currency USD, GBP, EUR, JPY USD, GBP, EUR, JPY USD, GBP, EURCDX.NA.IG, CDX.NA.HY

iTraxx Europe, Crossover, HiVol

Tenor28 days to 50 YearsJPY 28 days to 30

Years3 days to 3 years 7 days to 2 years 3, 5, 7, 10 year

Index LIBOR, EURIBOR LIBOR, EURIBORFedFunds, SONIA,

EONIA

Counterparty US Person US Person US Person US Person

Authorised CCP LCH.Clearnet, CME LCH.Clearnet, CME LCH.Clearnet, CME ICE

US Persons can apply for an End User Exemption providing them relief from clearing derivatives. Evidence of this exemption is to be provided prior to their being allowed to trade products which are subject to the clearing mandate, and should be renewed annually.

Risk Mitigation

8

To further mitigate the risk of trading OTC derivatives which do not clear centrally, a number of additional obligations are being introduced by regulators. These include:

Obligation Requirement

Portfolio Reconciliation

Regular reconciliation of the MET and Mark-to-Market valuation of every OTC swap with each counterparty.

Timely Confirmation

Trade confirmation provided to and agreed upon by the counterparty within a specified time period.

Market Valuation Provision of daily market valuations.

Portfolio Compression

Regular portfolio compression on a multilateral and bilateral basis.

Dispute Resolution

Timely resolution of dispute between counterparties on market values or MET. Escalation to regulators if disputes cannot be resolved.

CFTC and ESMA both have live regulatory obligations on the obligations listed above. Although ANZ has no direct requirement to ESMA Risk Mitigation obligations, it has an indirect obligation when facing an EU Person.

IOSCO has recently released a paper outlining standards for Risk Mitigation based on the CFTC and ESMA implementations. It is expected that this will be rolled out globally by other regulators which are yet to implement these rules.

APRA is expected to consult on these obligations in Australia in late 2015.

ANZ OTC Reform Program

54 Key Compliance Milestones

• The OTC Reform Program has delivered 54 major milestones since ANZ registered as a US Swap Dealer on 1 January 2013.

Improving trade reporting and data quality

• Recently the Australian Banks have been working closely with ASIC and the GTR to understand and improve the quality of trade reporting data.

10

OTC Delivered Milestones – to date 54 milestones have been delivered by the Program

Date Item Date Item Date Item

Jan 2013 ANZ registered as a non-US swap dealer Oct 2013 US: SEFs go live Jul 2014 KRX (Korea) Membership Go Live – KRW IRS

Jan 2013US Reporting: Real-time & end-of-day for rates & credit

Nov 2013 US Reporting: USI on Swift (non-FX) Jul 2014SHCH IRS (Clearing) Membership Go Live – CNY IRS

Feb 2013US Reporting: Real-time & end-of-day for FX & commods

Nov 2013 Internal Milestone Aug 2014EMIR Phase 2 Reporting (daily pricing evaluation)

Mar 2013 JFSA Reporting: End-of-day for FX and rates Dec 2013 US Reporting: PB USI Aug 2014JFSA Phase 2 Reporting (branch level reporting)

Mar 2013 US Clearing: IRS/CDS mandatory clearing Dec 2013 HKMA Reporting: Phase 1 Aug 2014 US Portfolio Rec (non swap-dealer)

Apr 2013 US Real-time reporting reconciliation Jan 2014 US Reporting: USI on Swift (FX) Oct 2014 ASIC Phase 2 Reporting

Apr 2013Internal compliance (existing rules & new regs) monitoring

Feb 2014 EMIR Reporting Phase 1 Oct 2014 ASIC Reporting – ANZ NZ Subsidiary

May 2013US: Introduced mandatory Business Conduct rules

Feb 2014Reconciliation: T+1 Trade Reconciliation

Oct 2014 CANADA Trade Reporting

Jul 2013 Reporting: Remediation 1C Feb 2014Rates & Credit SEFs mandatory trading

Nov 2014US: Margin Segregation for Uncleared Swaps facility

Jul 2013 US Reporting: Commodity Large Trader Ctpys  Mar 2014SHCH FX (China) Membership Go Live

Dec 2014 Submitted inaugural CCO Report

Jul 2013 JFSA Reporting: Phase 1 Apr 2014 MAS Phase 1 Reporting Jan 2015Unmasked ASIC reporting for all trades (except Singapore and Korea)

Aug 2013 CFTC Portfolio Reconciliation Apr 2014 ASIC Phase 2A Reporting Feb 2015US: Large Trader Report Phase 2 - Ownership & Control Report to CFTC

Sep 2013 EMIR Portfolio Reconciliation Apr 2014 Internal Milestone Apr 2015AU: ASIC Ph 2 (NZ Reporting - position reporting for FX, commods & equities)

Sep 2013 Clearing: Category 3 May 2014 SHCH: FX Spot Clearing Apr 2015AU: ASIC Phase 3A Large Funds and ADI’s Delegated Reporting - Credit & Rates

Sep 2013 Internal Milestone May 2014 Internal Milestone Apr 2015HK Nexus rules finalised – report nexus trades early

Oct 2013 US Reporting: Expanded US Person Definition Jun 2014US: Reporting valuation data to CME/ICE

Apr 2015 CCIL PvP Go Live

Oct 2013 ASIC Reporting: Phase 1 Jul 2014ASIC Phase 1 Reporting (emission trading & physically settled commodities)

May 2015SG: MAS FX Position Reporting (including Part 1A)

Oct 2013 Clearing: US foreign branches Jul 2014 MAS Phase 2 Reporting Jul 2015Hong Kong (HKMA) UTI Pair/Share, Nexus and additional field reporting

Regulatory RequirementKey: Internal ANZ Requirement

OTC Program – Compliance Status and Forward Agenda

11

Compliance Forward Agenda

U.S. Dodd Frank Developments· CFTC issued updated Part 20 Guidebook providing instructions for submitting large trader reports (LTR). The

guidebook includes a number of technical corrections to the existing LTR validation rules that the CFTC staff use to check Part 20 LTR data submissions. The validation rules will go live for testing on 31 August 2015. reporting entities LTR will need to pass the new validation requirements for the LTR to be successfully submitted to the CFTC from the go live date. The Compliance go live date for successful submission is 1 October 2015

· CFTC new electronic submissions of Ownership and Control Rules 102s Reports has opened the test environment for swap dealers to test new 102s report filings

EMIR• ESMA published responses to the consultation paper on extending the clearing obligation to EEA currencies. ESMA

proposed to extend the mandatory clearing obligation for certain IRS products in CZR, DKK, HUF, NOK, SEK & PLN – the remaining countries (after the UK) that have not taken the Euro

Switzerland • Switzerland will implement legislation with regards to OTC reform with the Swiss Financial Market Infrastructure Act

(FMIA) expected to come into effect in early 2016. Although the FMIA appears to follow EMIR to a certain extent, it is not a mirror copy. For instance, although the Swiss reforms will bring in trade reporting, risk mitigation requirements, mandatory clearing and a trading obligation in a similar format to EMIR, reporting will be single-sided only. FMIA will also introduce four (4) categories of counterparties. This categorisation will apply to both Swiss and non-Swiss counterparties when they enter into a derivative contract with a Swiss entity. FMIA is yet to be translated into English

Clearing  • MAS is consulting on a SGD and USD clearing mandate. • Similarly consultation on ASIC’s clearing mandate closed in July. Hong Kong have not yet consulted. Based on this

the industry do not expect to see clearing mandates for Australia, Hong Kong or Singapore until Q1 2016 at the earliest.