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CMS Panel on CEE, Russia and CISIFLR Capital Markets Forum 2013

9 April 2013

Panellists

Jacqueline Steven

Director and Assistant

General Counsel

Alan MacAlpine

Vice President

BNY Mellon

Sarah Blomfield

Director, Global Financial

Advisory

CMS Panel on CEE, Russia and CIS | 9 April 2013 2

General Counsel

Bank of America Merrill

Lynch

BNY MellonAdvisory

Rothschild

Mathias Strasser

Partner

CMS Austria

Daniel Winterfeldt

Head of International Capital Markets

CMS London

CEE, Russia and CIS Market Update

− Russia

• Megafon IPO

• Procurement law

• Central security deposit law


− Romania

• Collaboration Agreement between London Stock Exchange and Bucharest Stock Exchange – one year on

• Petrom transaction

− Austria

− Other

Current Structuring and Disclosure Issues With

Respect to Bank Regulatory Capital

Key topics

• Interplay of Basel III / CRD IV with current rules


• Interplay of Basel III / CRD IV with current rules

• Scope of resolution tools, particularly the “bail-in tool”, under the EU’s

proposed framework for bank recovery and resolution

• State guarantees

Basel III / CRD IV

Overview

• CET 1 ratio of 4.5% (compared with 2% core Tier 1 ratio under Basel II)

• Overall Tier 1 ratio of 6% (compared with 4.5% under Basel II)

• New: (1) capital conservation buffer consisting of CET 1 capital of 2.5%; (2) countercyclical capital buffer consisting of CET 1 capital of


2.5%; (2) countercyclical capital buffer consisting of CET 1 capital of between 0% and 2.5%; and (3) additional capital buffer for systemic risks

• AT 1 instruments must provide for mandatory write-down/conversion of into CET 1 if CET 1 ratio falls below a specified trigger (specified in CRD IV to be 5.125%)

• In addition, all AT 1 and Tier 2 are subject to mandatory write-down/conversion at the “point of non-viability”− This is part of Basel III – at the EU level, this isn’t addressed in CRR/CRD IV

but in the EU’s proposed Bank Recovery and Resolution Regime (see discussion below)

Basel III / CRD IV (cont’d)

Timetable

• CRR/CRD IV proposals published in July 2012

• Originally targeted effective date of 1 January 2013 was missed due to

intense political negotiations, mostly around non-Basel III issues (e.g.,


intense political negotiations, mostly around non-Basel III issues (e.g.,

with respect to banker bonuses), and delays in the U.S. implementation

timetable

• March 2013: agreement reached between the EU Parliament, EU

Council and EU Commission

• EU Parliament to vote on CRR/CRD IV at its plenary session to be held

between 15 and 18 April 2013

• 1 January 2014 targeted as new effective date, with full implementation

on 1 January 2019

Basel III / CRD IV (cont’d)

Issues

• To achieve maximum regulatory capital effect, instruments issued in 2013 must comply with both: (1) current rules; and (2) because they will remain outstanding beyond 1 January 2014, CRD IV

• In addition, despite CRD IV’s “no gold plating” principle, Member States


• In addition, despite CRD IV’s “no gold plating” principle, Member States have some leeway, which means issuers must consider Member States’ future approaches to the implementation of CRD IV in structuring the instruments

• Possible approaches

− Structure instruments to comply with stricter of current and future rules?

− Impose time limitations on those terms and conditions which become irrelevant after CRD IV implementation?

− Look to CRD IV for guidance on how to interpret currently applicable rules?

− In any event, need for close consultation with regulators

Bank Recovery and Resolution Regime

Overview

• The EU’s proposed Bank Recovery and Resolution Regime (BRR)

provides for, among other things, the resolution of banks if they are at

what Basel III refers to the “point of non-viability”


• A bank becomes subject to resolution when

− It is failing because it

• risks losing its banking license

• is or soon will be insolvent

• is about to receive extraordinary public financial support (subject to

narrow exceptions)

− There is no reasonable prospect that an alternative regulatory or private

sector alternative would prevent the bank from failing

− Resolution of the bank is in the public interest

Bank Recovery and Resolution Regime (cont’d)

Resolution tools• The BRR provides for four “resolution tools”: (1) the sale of business tool;

(2) the bridge institution tool; (3) the asset separation tool; and (4) bail-in

tool− The bail-in tool empowers regulators to: (1) cancel a bank’s shares; (2) write


− The bail-in tool empowers regulators to: (1) cancel a bank’s shares; (2) write

down the bank’s “eligible liabilities”; and (3) convert its eligible liabilities into

equity

• Affected creditors must not be treated worse than in a liquidation

scenario

• The first three tools are aimed at breaking up the bank, whereas the

fourth tool (the bail-in tool) is designed to put the bank back in a position

where it is able to continue to operate as a standalone institution

• Because the resolution tools are part of EU law, they take precedence

over any contrary provisions of national law or the terms and conditions

of the bonds to which they are applied


Eligible liabilities

• Eligible liabilities include all of a bank’s liabilities except

− Deposits up to the amount of the EU deposit insurance scheme

− Secured liabilities up to the value of the security


− Secured liabilities up to the value of the security

− Client money

− Certain other liabilities (liabilities to employees, trade liabilities, and tax and

social security liabilities)

• Notwithstanding the above, regulators may exempt the following

instruments from the scope of the bail-in tool

− Covered bonds and hedging instruments “secured in a similar way”

− Derivatives where the exemption is necessary to allow the bank to continue to

function or to avoid systemic effects


Operation of the bail-in tool

• Regulators may apply the bail-in tool to eligible liabilities in whatever

amount is necessary to ensure the bank can continue as a standalone

institution


• Bail-in order

− CET 1 capital (shares)

− AT 1 and Tier 2 capital

− Subordinated debt

− Instruments whose terms and conditions provide for a write-down or

conversion in a financial distress situation

− Other eligible liabilities, including senior debt


Timeline


• Effective date of 31 December 2014 targeted, but bail-in tool may be

delayed until 31 December 2017


Issues

• Classic bond investors may be restricted in their ability to hold equity and

thus may be unable to invest in instruments with a write-down or

conversion feature

• Conversion is generally preferable to write-down, except if write-down is


• Conversion is generally preferable to write-down, except if write-down is

only temporary

• How best to address the possibility of bail-in through disclosure, given

that many details are still unclear?

• Possible approaches

− Incorporate a write-down/conversion feature in the instruments’ terms and

conditions?

• If so, model the disclosure on the EU’s current proposal or use an

alternative wording?

− Merely describe the proposal in the regulatory section of the prospectus?

− Address in risk factors?

State Guarantees

Recent (December 2012) ESMA guidance on state guarantees for

bank instruments

• Confirmation that the Prospectus Directive/Regulation regime does not

apply to securities unconditionally and irrevocably guaranteed by a

Member State


Member State

• However, where either the securities are not unconditionally and

irrevocably guaranteed or the bank wants to passport the offering to

another Member State, the Prospectus Directive/Regulation must be

complied with in full – i.e., generally, the prospectus must contain similar

disclosure about the guarantor as about the issuer

• ESMA notes that national regulators may authorize the omission of

information under Article 8 of the Prospectus Directive (disclosure would

be contrary to public interest, detrimental to issuer and not material or of

minor importance only for a specific offer)

Corporate Governance in CEE

Why is Corporate Governance important?

− Discourages fraud and excessive executive risk taking


− Discourages fraud and excessive executive risk taking

− Builds investor confidence in companies and financial markets

− Helps to underpin long-term company performance

Overview of Corporate Governance

Leadership

Effectiveness

Whole board

responsible for

Is board

composition

appropriate?

Induction,

training,


Corporate Governance

Leadership

Relationships

with

shareholdersRemuneration

Accountabilityresponsible for

long term

success

Effective

dialogue with

investors

Transparency,

performance

Setting risk

appetite,

internal

monitoring,

strategic fit

training,

evaluation and

re-election

Corporate Governance in CEE

− Pre-financial crisis, rapid growth across CEE driven by privatisation, deregulation and EU membership

• considerations of good corporate governance took a back seat in absence of co-ordinated pressure from outside investors and lack of government/regulatory focus on this area


government/regulatory focus on this area

− Corporate Governance initiatives lag behind rest of EU because of relatively short history of CEE countries as market economies and absence of investor pressure groups (such as UK’s ABI) in the region

Balance between free market versus burden of compliance/

stakeholder protection versus abuse of corporate power

Key Corporate Governance themes in CEE

− State-driven rather than investor-group led

• Regulation tends to address wider constituency of interests (e.g. employee rights)

− Crackdown on performance-related pay “fat cats” less relevant as banks have not followed excessive risk-taking


as banks have not followed excessive risk-taking practices/bonus culture of U.S./U.K. markets

− Existence of independent board members less prevalent than rest of EU

− Extra-territorial effect of FCPA/UK Bribery Act and increased global and political will to prosecute bribery and corruption

Focus on improving monitoring and efficiency of “comply or

explain” principles and increased shareholder transparency

Holding Company and Listing Jurisdictions

Holding companies• Corporate Governance and related investor expectations

• Tax considerations

− Typical Choices:• Cyprus, Ireland, Luxembourg, Netherlands, United Kingdom


Listing venues• Peer group listings

• Market liquidity

• Time and expense

• Cyprus, Ireland, Luxembourg, Netherlands, United Kingdom

− Typical Choices:• Warsaw Stock Exchange, Frankfurt Stock Exchange, London Stock

Exchange, Irish Stock Exchange, Vienna Stock Exchange

Settlement and Corporate Actions Issues

− DTC Trends

− De-materialisation of DTC


− T2S securities

− 801 and 802 exemptions

− Rule changes for Russian securities offerings

− Euroclear Market Claims

− Ukraine: transactions tax and depository receipts

Impact of Recent U.S. Securities Laws

Developments

− JOBS Act

− Foreign Private Issuers


− FCPA Developments

− Conflict Mineral Rules and Guidance

− Insider Trading

CMS International Capital Markets Group

− Our International Capital Markets Group comprises experts across 30 jurisdictions, with a total of 54 offices in Western and Central Europe and beyond.

− We regularly advise investment banks, financial institutions, corporate issuers and government bodies on equity fundraising, debt capital markets and structured products in respect of both domestic and international


and structured products in respect of both domestic and international transactions.

− We deliver top-quality service and value. Our team regularly works and trains together across our practice and sector groups. By combining our international capital markets and US securities expertise with the national market understanding of our locally based experts, we are able to work as a cohesive and efficient team.

− CMS has a substantial and active capital markets offering, handling transactions ranging from IPOs, secondary offerings and private placements to mergers and acquisitions of quoted companies. Our broad client base and sector experience ensure our advice is always delivered in the appropriate commercial context.

Contact details

Daniel is a US securities partner in the international corporate practice of the London office of CMS Cameron McKenna LLP andhas over 14 years-experience practising in the London and New York markets. Daniel has significant experience in representing US, UK, European and Asian investment banks and corporate issuers on a wide range of international securities

Daniel Winterfeldt

Head of International Capital Markets

T: +44 20 7367 2700

E: [email protected]


representing US, UK, European and Asian investment banks and corporate issuers on a wide range of international securities transactions, including: Rule 144A and Regulation S equity and debt offerings; Regulation S, Category 3 transactions for US companies listing in the United Kingdom; rights offerings; exchange offers; equity-linked securities offerings; initial public offerings and secondary and follow-on offerings of equity securities, including SEC-registered transactions. Daniel also advises the London Stock Exchange on a range of US securities issues. Daniel was named in Chambers and Partners Directory for Equity Capital Markets and was recognised by The Lawyer as one of the Hot 100 legal practitioners for 2008.

Daniel is the founder and Co-Chair of the Forum for US Securities Lawyers in London (the “Forum”), a trade association representing over 1,500 US-qualified lawyers practising at a number of law firms and financial institutions in the London capital markets, as well as market participants including securities exchanges, settlement systems and registrars. Founded in 2006, the Forum is an independent, self-funded organisation dedicated to addressing issues of, application of and compliance with, US securities laws in the London and international capital markets. The Forum’s recent projects have included the submission of comment letters to the US Securities and Exchange Commission (the “SEC”) on its proposed changes on its proposed amendments to Rule 12g3-2(b) under the Exchange Act, on its proposed amendments to the cross-border exemptions for business combination transactions and on its proposals on exemptions for foreign broker-dealers), as well as publishing a set ofprocedures for the electronic settlement of Regulation S, Category 3 shares during the one-year period following the Distribution Compliance Period (the “Year Two Project”). The Forum has also developed a set of procedures for the application of the 3(c)(7) exemption under the Investment Company Act to equity securities offerings on the London Stock Exchange.

At the 2012 FT Legal Awards, Daniel Winterfeldt was recognised with the only individual award, being named the Legal Innovator of the Year for his work building the capital markets practice as well as founding and co-chairing both the Forum for US Securities Lawyers in London and the InterLaw Diversity Forum. In addition, earlier this year Daniel was recognised for his US securities practice as well as his work with the Forum for US Securities Lawyers in London and the InterLaw Diversity Forum by being admitted to the Bar of the Supreme Court of the United States.

Contact details

Mathias Strasser

Partner

T: +43 1 40443 94550

E: [email protected]


Mathias Strasser is a Partner at CMS Reich-Rohrwig Hainz (in Vienna, Austria), where he focuses on the areas of mergers & acquisitions, private equity and capital markets.

He earned his law degrees from the University of Vienna and Harvard Law School. He then worked for a leading US law firm in New York, London and Frankfurt as European Counsel, advising on numerous significant international transactions.

Mathias is admitted to practice law in Austria, England and New York.

Facts and Figures

− 54 offices

− 48 cities

− 29 countries

Albania, Austria, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, France, Germany, Hungary, Italy, Luxembourg, The Netherlands, Poland, Portugal, Romania,


CMS Adonnino Ascoli & Cavasola Scamoni (Rome); CMS Albiñana & Suárez de Lezo (Madrid); CMS Bureau

Francis Lefebvre (Paris); CMS Cameron McKenna (London); CMS DeBacker (Brussels); CMS Derks Star

Busmann (Amsterdam); CMS von Erlach Henrici (Zurich); CMS Hasche Sigle (Berlin); CMS Reich-Rohrwig

Hainz (Vienna) and CMS Rui Pena & Arnaut (Lisbon). Head office of each firm in brackets.

Portugal, Romania, Russia, Serbia, Slovakia, Slovenia, Spain, Switzerland, Ukraine and United Kingdom

Outside Europe

Algeria, Brazil, China, Morocco and United Arab Emirates

− > 750 partners

− > 2,800 fee earners

− > 5,000 total staff

− Combined annual turnover: EUR 808 million (2011)

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