Fifth Third Bank 2014 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
34 Fifth Third Bancorp
prohibitions. For example, transactions on behalf of
customers or in connection with certain underwriting
and market making activities, as well as risk-
mitigating hedging activities and certain foreign
banking activities are permitted. The risk-mitigating
hedging exemption applies to hedging activities that
are designed to reduce or significantly mitigate
specific, identifiable risks of individual or aggregated
positions. Fifth Third is required to conduct an
analysis supporting its hedging strategy and the
effectiveness of hedges must be monitored and
recalibrated as necessary. Fifth Third will be required
to document, contemporaneously with the
transaction, the hedging rationale for certain
transactions that present heighted compliance risks.
Under the market-making exemption, a trading desk
is required to routinely stand ready to purchase and
sell one or more types of financial instruments. The
trading desk’s inventory in these types of financial
instruments has to be designed not to exceed, on an
ongoing basis, the reasonably expected near-term
demands of customers.
xThe Volcker Rule and the rulemakings promulgated
thereunder restrict banks and their affiliated entities
from investing in or sponsoring certain private equity
and hedge funds. Fifth Third does not sponsor any
private equity or hedge funds that it is prohibited
from sponsoring. As of December 31, 2014, the
Bancorp had approximately $165 million in interests
and approximately $60 million in binding
commitments to invest in private equity funds likely
to be affected by the Volcker rule. It is expected that
the Bancorp may need to eliminate these investments
although it is likely that these investments will be
reduced over time in the ordinary course before
compliance is required. In December 2014, the FRB
extended the conformance period through July 2016
for investments in and relationships with such
covered funds that were in place prior to December
31, 2013, and indicated that it intends to further
extend the compliance period for such investments
through July 2017. An ultimate forced sale of some
of these investments could result in Fifth Third
receiving less value than it would otherwise have
received.
xThe FDIC and the Federal Reserve adopted a final
rule that requires bank holding companies that have
$50 billion or more in assets, like Fifth Third, to
periodically submit to the Federal Reserve, the FDIC
and the FSOC a plan discussing how the company
could be resolved in a rapid and orderly fashion if the
company were to fail or experience material financial
distress. In a related rulemaking, the FDIC adopted a
final rule that requires insured depository institutions
with $50 billion or more in assets, like Fifth Third, to
annually prepare and submit a resolution plan to the
FDIC, which would include, among other things, an
analysis of how the institution could be resolved
under the FDIA in a manner that protects depositors
and limits losses or costs to creditors of the bank.
Initial plans for Fifth Third and its bank subsidiary
have been submitted, in accordance with the final
regulatory rules, for review by the FDIC, the Federal
Reserve, and the FSOC. The Federal Reserve and the
FDIC may jointly impose restrictions on Fifth Third
or its bank subsidiary, including additional capital
requirements or limitations on growth, if the agencies
determine that the institution’s plan is not credible or
would not facilitate a rapid and orderly resolution of
Fifth Third under the U.S. Bankruptcy Code, or Fifth
Third Bank under the FDIA, and additionally could
require Fifth Third to divest assets or take other
actions if it did not submit an acceptable resolution
within two years after any such restrictions were
imposed.
xTitle VII of DFA imposes a new regulatory regime
on the U.S. derivatives markets. While most of the
provisions related to derivatives markets are now in
effect, several additional requirements await final
regulations from the relevant regulatory agencies for
derivatives, the CFTC and the SEC. One aspect of
this new regulatory regime for derivatives is that
substantial oversight responsibility has been provided
to the CFTC, which, as a result, now has a
meaningful supervisory role with respect to some of
Fifth Third’s businesses. In 2014, Fifth Third Bank
registered as a swap dealer with the CFTC and
became subject to new substantive requirements,
including real time trade reporting and robust record
keeping requirements, business conduct requirements
(including daily valuations, disclosure of material risks
associated with swaps and disclosure of material
incentives and conflicts of interest), and mandatory
clearing and exchange trading of all standardized
swaps designated by the relevant regulatory agencies
as required to be cleared. Although the ultimate
impact will depend on the promulgation of all final
regulations, Fifth Third‘s derivatives business will
likely be further subject to new substantive
requirements, including margin requirements in
excess of current market practice and capital
requirements specific to this business. These
requirements will collectively impose implementation
and ongoing compliance burdens on Fifth Third and
will introduce additional legal risk (including as a
result of newly applicable antifraud and anti-
manipulation provisions and private rights of action).
Once finalized, the rules may raise the costs and
liquidity burden associated with Fifth Third’s
derivatives businesses and adversely affect or cause
Fifth Third to change its derivatives products.
xFinancial institutions may be required, regardless of
risk, to pay taxes or other fees to the U.S. Treasury.
Such taxes or other fees could be designed to
reimburse the U.S. Treasury for the many
government programs and initiatives it has taken or
may undertake as part of its economic stimulus
efforts. The Department of Treasury issued an
interim final rule in 2012 to establish an assessment
schedule for the collection of fees from bank holding
companies with at least $50 billion in assets and
foreign banks with at least $50 billion in assets in the
U.S. to cover the expenses of the Office of Financial
Research and FSOC. In August 2013, the FRB also