United States Disclosure

AsiaLaw Supplement

Standards for Banks

Randall Guynn & Margaret Tahyar, Partners’

DAVIS POLK 81 WARDWELL

a clear idea of the types of disclosure that are customary or required for US securities offerings by hanks. As a result, we believe there IS often a higher level of apprehension than necessq. The purpose of this article is to fill that information gap and permit bank management to assess US disclt,sure staildards against the requirements and customs of their home market and the Euromarkets. With the information in this article, bank management sl~ould he able to evaluate areas that might

he difficult, sensitise or require the attenti<tn of senior management and, just as importantly, identify the rn;\n\ areas which will cause little or ii<> prt,hlem.

As \vith all summaries we ha\*e not included easer) conceivable detail ii-r this one. III particular, \ve ha\,e not

distinguished between an offering of securities publicI\ registered with the US SEC and a pri\.ate offering to

institutional invest<>rs under Rule 144A. Instead, we have set forth the discl<,sure \ve believe ~vc~uld jiener;lllp hc

as many fear. By the beginning of 1998, 37 foreign b;lnks from a wide range of countries had publicly-listed securities on the New York Stock Exchange. Many multiples of that number have raised capital through a type of institutional oft&in, (1 kno\vn as 21 Rule 144A offering. In addition, many foreign I

hanks have raised debt in offerings United States securities laws exempt from US Securities and Exchange Commission (SEC) operate on the generai registration requirements through their branches in the United States.

principle that a bank or any

The foreign hank path to the US other company selling capital markets is hecomin:: tvell- trod.

securities must provide an

We believe that bank investor with all of the management is typically aware that disclosure standards in the United

“material” information that

States are more demanding than in a “reasonable” or “prudent“

necessary, as 8 theoretic;tl matter, Tot- ;I la\v firm tt> pro\ride a discl<6ure opinion for most hanks. A detailed chart, comparing the requirements and

market customs cd a public offering and a Rule 144A c>fferinz, is set forth at the end of this ztrticle. Mt~l-e~n~er. wc’ have concc’ntr;lted primarily c)ii those disciosurc elements th;lt arc p:irticul;ir to foreign banks, nc>t the more general requirements of the US securities laws ahout which much has heen written. For a standard reference article on that topic, pIcase e-mail t;lh~nr@jl,\\l.coiii. In the first section <>i this ill-tiCIf we discuss US disclosure stand&s and the special statistical or “forIll”

requirements for hanks. In the sect& section we summarize the inform;itic>n

W e \vill not pretend th;It United States

disclosure standards are easy. It is the primary argument of tlii5 article, however, that they are not as difficult or impractical

their home market and in the Euromarkets. Wt? suspect

investor would want to

management is often forced to make know before parting with decisions about whether to raise capital in the United States without his money.

that foreign hanks typically disclose in an <&ermg itimed primarily at US inve5tors.

US DISCLOSURE STANDARDS United States securities laws operate <)I> the general principle that a bank or i\lly other cc~mpany selling securities must provide an investor \vith 811 of the “material” information that ;I l’re;~st~ni~l~l~l’ or “prudent”

THE ASIALAW GUIDE TO FINANCIAL MARKETS

investor would want to know before parting with his money. Many countries around the world have a similar standard but the practical application of the standard is different. The difference between the United States and other countries is threefold. First, there IS the US’s well- known litigation culture under which the disclosure, especially in an equity offering, will be judged in hindsight by hostile adversaries. Second, there is a strong and adequately-financed regulatory agency, the SEC, which formally and informally polices disclosure standards. Third, the materiality standard tnust be evaluated against the standards and customs of the United Srates’ very transparent securities markets, not the bank’s hotne market or the Euromarket. Disclosure must be drafted with all three of these differences in mind and with an awareness that a declaration of effectiveness by the SEC does not insulate a foreign bank from liability for a material misstatement or omission in the offering document.

In addition to this overall “materiality” standard, the SEC has imposed certain statistical “form” requirements on publicly-offered securities. Certain of these fortn requirements have set the customary floor for disclosure in the United States and have therefore come to be expected in the context of the US markets. In a 144A offering, the SEC’s form requirements do not apply but the long custom of their use in the public markets means that, as a practical matter, many but not all of them are customarily disclosed in placements to institutional investors.

For banks there are two significant SEC form requirements that are likely to be very different and more detailed than in the bank’s home market and in the Euromarkets. The first is the SEC’s “Statistical Disclosure by Bank Holding Companies”, otherwise known as Guide 3. Guide 3 is a set of about 25 required tables and also includes required narrative information on a bank’s deposits, loans and investments. Guide 3 has existed since the early 1970s and was last revised by the SEC in 1986. Significant changes have occured since that time in bank accounting standards and the business of banking. The SEC has a project to revise Guide 3, but it is not clear when proposed revisions will be published.

Guide 3 applies in any public offering by a foreign bank in the United States just the same as it would apply to a US bank. The SEC staff has been quite open-minded about waivers of certain types of Guide 3 information for foreign banks if the bank can show that it does not have the information, that it would cause significant expense to produce it or that the infortnation is not relevant for it. The SEC is more likely to grant a waiver if the bank can provide alternative information which may be more relevant to the bank’s operations.

Significant elements of the infortnation required by

10

Guide 3 are also commonly found in Rule 144A ofterlngb, in part because it is very difficult to draft an adequate management’s discussion and analysis (see discusslcm below) without many of the Guide 3 tables. WC dc> not believe that in order for a law firtn to give a discl<>surc opinion in a Rule 144A offering all of the Guide 3 tat&> tnust be present in substantially the same form as the SEC requires. We believe that the Guide 3 tables are a tneans to the end of providing the investor with all material information. They are nor the end in and of themselves. The tables should he imposed on a Rule 144A offering with a strong dollop of common sense and an understanding of the way chat the foreign hank operates, as well as in light of the experience of other foreign banks.

In a Rule 144A offering, the focus can he on providing material infortnation rather than on filling in the SEC’s pre-set tables. As a result, tabular information is often substantially easier for a foreign bank to prepare because ir can, in most cases, use its existing tnanagement information systems to create the rahles. Moreover, there is room to replace the tabular information with narrative if that makes more sense in the particular situation. Finally, it is possible to modernize the Guide 3 tables, sotne of which are shelving their age, as the business of banking has changed significantly since many of these tables were first conceptualized in the 1970s.

We will provide one example of what we mean. Guide 3 requires that the amount of time deposits in amounts greater than US$lOO,OOO be disclosed. The US domestic context of this requirement is that only deposits of less than US$lOO,OOO are insured in the United States. But this table often has no tneaning outside of the United States where there is nothing magic about the US$lOO,OOO number, and it has even less meaning in a systetn where deposits are uninsured. The purpose of the table is to illustrate whether there are “hot” deposits that will flow out of the bank or the banking system quickly at any sign of trouble. In a Rule 144A offering we would not recommend that this table be slavishly followed. Instead, we would work with hank management, and based on the balance sheet and structure of the bank’s deposits and the risks of its banking system, create a table or other disclosure that serves the same purpose - to show the risks of “hot” deposits that tnight be pulled quickly. There should be no need to impose upon bank management a requiretnent to categorize deposits by whether they are greater than US$lOO,OOO, something that the bank’s information systems may not be set up to capture.

The second SEC “form” requiretnent was enacted in 1997 and will be imposed on companies, depending on size, during the next two years. it is the Market Risk Disclosure Rule. This rule is intended to require significant additional statistical and narrative disclosure

THE ASIALAW GUIDE TO FlNANClAL MARKETS

about derivatives and other financial instruments that bear market risk. It also requires a narrative discussion of the goals and strategy of risk management and the assumptions and limitations of any models used to measure market risk. It requires any company with marerial interest rate, equity, foreign currency and other market risks to disclose statistical forward-lc>oking information about future potential losses from its market risks. It requires disclosure about financial instruments. a category that is much broader than just derivatives. A bank may choose to disclose the information in tabular form, by a sensitivity analysis or through a Value at Risk (VaR) model. The Market Risk Dtsclosure Rule imposes a standard of disclosure that is greater than that required by virtually all other countries in the world and greater than that required by the Base1 Committee’s recommended standards. The nominal amounts or credit-

. . elements ot a hank’s ottering document. What tallows 15 ;t guideline to be tailored to each hank’s individual circumstances in light of the securities to be offered and the insestors to whom they will he offered. It should also be read in light of the more detailed infc>rmari~~n contained in the chart that fc~llo\vs this article.

Financial Statements and Reconciliation In an SEC-registered deal, the financial statements for II 1. k J,ln must include n reformatting fc~otnote, the notes must include a numher of US-GAAP (Generally Accepred Accounting Principles) items, and net income ;~nd stockholders’ equity must he reconciled to US GAAII None of this is necessary in a Rule 144A offermg and the preparation of fmancial statements in a format thar the SEC will accept is often major work for the hank and its outside accountants.

risk weighted amounts of derivative contracts are irrelevant for the purposes of the Market Risk Disclosure Rule. Instead, the Rule reduires an assessment of the risk of loss, in fair value, earnings or cash flow from market risk sensitive instruments. For an article that

contains a detailed discussion of this rule, e-mail guynn@dpw.com.

The MD&A section

is often dense and

turgid and can reflecf

too much over-cautious

lawyering and not

enough of the strong,

clear story that

management should

be telling.

The Market Risk Disclosure Rule applies directly only in SEC-registered deals hut we expect it, like Guide 3, to have an impact on disclosure in Rule 144A offerings as well. As with Guide 3, the Market Risk Disclosure Rule, should be viewed as a means to an end, not a goal in and of itself. It should be applied in a Rule 144A offering with a strong sense of the

market risks of the bank and in light of the compromises that other similar banks have made. We also believe that, at least in the Rule 144A context, an intelligent application of the Market Risk Disclosure Rule may provide a bank with more options for disclosure than have previously existed.

is often the type of information that investor rclilTions 01.

corporate communications is already ll~i~kil~~ ;~vail;thlc.

The description of strategy often requires senior management time and attention but the key work is in how to communicate not whether to communicate.

Here is one example. We often work on bank securities offerings where bank management tells us that the SEC’s traditional interest rate gap or mrsmatch table does not provide useful information and does not reflect the way that the bank internally manages interest rate risk. The Market Risk Dtsclosure Rule makes it clear that a bank can choose either a modernized interest rate mismatch table, a sensitivity analysis or a VaR analysis to disclose its interest rate risk.

Management’s Discussion and Analysis Thr Management’s Discussit)n snd Analysis, ohen c;~lleJ an “MD&A” hy American lawyers and investment hankers, IS a discussion, usdly ccnwr~-r~ the hsr rhrec years and any interim periods, of the balance shrct anit

income statement from the Il~illlil~~lll~lltl~ point of ~ICM’.

The idea is t<) provide management with an <>ppoI-[unlt\ to present the reasons hehind significant chanxc:, and trends m recent income statements and balance sheets. The SEC also expects that known trend and uncertainties will he revealed. As you mighr ~m;tg~ne,

depending upon the bank’s indtvidual cil-cumstances the management’s discussion ;IIIJ analysi5 can IX quite

CORE ELEMENTS OF AN OFFERING DOCUMENT In this section we set forth the core business and statistical

Description of Business and Strategy A complete description of the business areas covered, the types of cu‘;Tomerb targeted and the bank’s products should he provided. Also a stew c)f the

key elements of the hank’s organlzatlon and, for an equity deal, its brr,lreg) should be provided. The hus~ness description is virtually IXZZJCI a sensitive area. Most banks large enough to contemplate an offering in the United States are listed in their own country or are alread) pro\riding similai- inft~rmation in their honi~ m.irket. Morectver, a Jrscrlptic>n cti rhe I~l>~nrs>

THE ASIALAW GUDE TO FINANCIAL MARKETS 11

sensitive. In our experience, however, there is virtually

always a way to work with bank management to provide to investors the material information.

The MD&A section is often dense and turgid and can reflect too much over-cautious lawyering and not enough of the strong, clear story that management should be telling. This section should he written in English that is as simple as possible, and should reflect the management’s view of its own business. It should he inviting to read and make use of tables and graphs where that is a better way to present the material. We are sympathetic to the need to control risks in this section in light of the fact that the SEC and plaintiffs lawyers have traditionally focused on the MD&A.

The MD&A is stronger, and therefore less risky, when it reflects a sound understanding of the business and risks of banking. For example, it is important to draft the net interest income section of the MD&A wit-h an understanding of the trends in net interest margin, spreads and the average balance sheets. It is not helpful to investors to tell them that net interest income increased, that interest income increased and that interest expense increased. Investors should know whether the increases were driven by volume or rate changes and whether net interest margin is rising or falling. Investors should also he told management’s views on the trends in net interest margin, the proportion of net income that is attributable to fee income and whether that proportion is growing.

Credit Risk The bank’s management of credit risk is one of the most material elements for an investor and, not surprisingly, substantial elements of Guide 3 speak to credit risk. A foreign bank should expect to provide tabular information categorizing its loan portfolio and its sub-standard or non- performing loans, by type of loan. Sample categories

might be mortgage, consumer, large corporate, and medium-sized business. The SEC will generally permit the bank to use the categories that are required in its home country. A geographic breakdown should also be provided. Guide 3 requires that these tables sl~ow five years of information and the SEC staff feels quite strongly that three years is usually not enough. We have only had one experience where the SEC agreed to only three years of information and that was for a country where there had been a coup, a radical restructuring of the entire banking system and intense inflation. In that case there were strong arguments that anything older than three years was simply a different country.

The bank should also expect to provide a significant discussion of its primary bank regulators’ rules on interest accrual and when a loan is placed on non-accrual status, the provisions that must be made for non-performing

12

loans and the rules and regulations for classifying loans a.\ non-performing.

Guide 3 also requires mbular information atx,ut ;t hank’s reserves OF allowances and details on the changes in such reserves. Some hanking systems permit and even encc>urage hidden reserves and, for an SEC-registered offering, such hidden reserves, if they c~di not hi

disclosed, would be a significant problem. Even in a Rule 144A offering, hidden reserves are difficult and the bank should he prepared to discuss them in detail with the underwriters and their counsel even if they are not ultimately disclosed in the offering document.

In some markets where tllere are limited disclosure requirements for credit risk, there are often delicate issues in the disclosure of credit risk and it is an area that bank management should consider carefully. In other tnarkets, the Central Bank publishes the data and hanks are already accustomed to significant disclosure in this area.

Interest Rate Risk Quaint as it may seem, Guide 3 is so old chat it predates the US savings and loan crisis of the late 1980s. As an artifact from the early 1970s it perfectly preserves one atritude of that time - tt simply has no requirement that incerest rate risk be disclosed! For years, the SEC staff has informally imposed an interest rate mismatch table on all SEC-registered bank offermgs, to fill this gap. The new Market Risk Disclosure Rule fills this gap in a forma! way, requiring that interest rate risk be disclosed and suggesting a mode! interest rate gap table. The Market Risk Disclosure Rule also would permit a sensitivity or Value at Risk analysis of interest rate risk. Whatever method is used to illustrate interest rate risk, off-balance lledging strategies should be taken into account.

There is also a Guide 3 requirement for average balance sheets, showing average interest rates earned on different types of liabilities and assets and a table which allocates changes in interest income between changes in volume and rate. The average balance sheets and volume and rate tables are mandatory in a public offering. Average balance sheets are often initially daunting for a foreign bank but tend to be one of the more informative tables in explaining the bank’s performance. Although Guide 3 requires that they be provided on the basis of a daily average, weekly or monthly averages can be provided if they are representative of the bank’s balance sheet. The SEC has been quite sympathetic on this point.

Average balance sheets in a slimmed-down form often also appear in Rule 144A offerings and even when they do not appear in the offering document they have been produced for back-up diligernce and for cross-checking of the management’s discussion and analysis of net interest

income.

THE ASIALAW GUlDE TO FINANCIAL MARKETS

A bank should also be prepared to disclose its fixed- income investments hy type, maturity and average yield. Guide 3’s required tables cm “investment securities” which mix debt and equity investments are very outdated. For Rule 144A offerings, we recommend a sensible updating of the SEC’s tahtes \\hich split> equity risk ad interest rate risk into their separate comp~ments.

Equity Risk A bank should he prepared to disclose the value of its equity investments and provide an estimate of the equity price risk that it faces. It is not necessary to disclose them by name. A hank with a significant equity portfolto might disclose its investments by \ratue and type of Industry.

Liquidity Risk A bank should he prepared to discuss, and provide tabular information on, the structure of its deposit base; including the extent to which it has core retail deposits, it reties on interhank or other \vhotesate funding, its deposits are divided between demand, ttme and savings and other significant elements depending npc~li its operating environment. Deposit insurance or the tack of it should

be dtscussed.

Currency Risk Exposure to currency risk should also be discussed. This includes the extent to which loans are funded in one currency and lent in another, the extent to which borrowers’ ability to repay is dependent upon the stability of exchange rates between certain currency pairs, the extent to which the hank has cross-border outstandings and the hank’s exposure to fluctuations in exchange rates, which it may be managing with derivatives. The extent to which a bank is taking positions in the foreign currenq markets or acting as a dealer for customers should also be discussed. This information can be provided by a combination of narrative, tables and Value at Risk analysis. Finally, any information on exchange controls or currency boards in the ho;ne country should be discussed.

Legal Risk The bank’s legal and regulatory environment should be described. This includes the role of the central bank and other regulators, the power of the hanking authorities, legal risks, such as the ahillty to foreclose or enforce cottaterat, the types of capital adequacy rules in place, restrictions on dividends, gc>\rernment p<>!~c~es on bailouts and potential changes in law or regulation that might Ixlve a material impact on the bank. The point is not to provide a summary of local hanking laws. It is to provide an overview of the most significant teg~at risks and strengths in the home country. Sometimes the key

THE ASIALAW GUIDE TO FINANCIAL MARKETS

regulatory rules are set forth very early in the offcrlng document as a marketing ttx)! where they can serve i1s i1 primer for US investors on the tiome country’s regulator\ regime. There are \~irtuatty never any sensitiviries ;th,ut this dis&>sure, which is 21 m;ittcr cd puhtic reccmi II> the

!10111(3 CoIIlltry.

Operational Risks Significilnt operati<& risks ShoutJ he describe‘!. The\ would vary from bank to hank hut, at the lnonwllt, ~I.OIIIJ

certainty include a report on the b;mk’s progress w’ttll the Year 2000 prohtem and whether it u~ould impost materl;ll costs. The SEC has ~na& Ytvr 2000 dtsctosure XI are.1 ot focus. It might also include, for example, a dlscusslon of human resources, skilled labor sht~rtages, internal tr;tinin(: programs, investments in technt&>gy, or preparatic)ns for the Eun).

CONCLUSION Iii the experience of the ;iutht>rs, and inany other> at our

firm, hank disclosure require5 ai understandung cji the business of banks, the experience of other hanks approaching the disclosure pnjcess and a wiltmgness to think through the practical application of the SEC’s rules to each country’s hanking system and regulations. We hetieve that the SEC staff IS mucl~ more open to

reasonable tvaivers from Guide 3 than is comm~~il\ believed. That having heen said, it is clear that the US SEC’s standards for bank disclosure are more detailed and higher than in most other markets, and a hank approaching the US capital markets will need to grapple with that fact.

SEC Form F-l Registration Rule 144A Offering Circular

Financial Statements

Three years of income statements and two years of balance sheet.

Same.

Financial statements must be reformatted to meet SEC requirements for banks OT a reformatting footnote to the financial statements prepared. A reformatting footnote is the most popular option.

Not required.

Two years of net income and stockholders’ equity must be reconciled to US GAAP (Generally Accepted Accounting Principles).

Reconciliation to US GAAP not required. Market practice is to provide an appendix stating the major differences between home country GAAP and US GAAP.

Cash flow statements must be included and may be prepared in accordance with IAS standards.

Can be excluded.

Latest interim financials must be included. Latest interim financials included as a matter of market practice.

Selected financial information, income and balance sheet, must be provided for five years and any interim periods. Only significant line items are presented and the most recent year is translated into US dollars.

Selected financial information provided for five years in most cases, three years in other cases. The most recent year is translated into US dollars.

If latest balance sheet is more than 10 months Not required. old at the time of effectiveness, interim financials must be reconciled to US GAAP.

A capitalization table, showing short and long term debt, shareholders’ equity and minority interest both before and after the proposed offering is provided as a matter of market practice.

Same.

For debt and preferred stock, the ratio of earnings to fixed charges must be disclosed.

Market practice is to include ratio if material.

Management’s Discussion & Analysis

A discussion, from the point of view of management, of the reasons behind the changes and trends in all significant income statement and balance sheet items. All known material trends must be discussed. Covers three years of income and two of balance sheet plus any interim periods.

Same.

14 THE ASIALAW GUIDE TO FiNANClAL MARKETS

SEC Form F-l Registration Rule 244A Offering Circular

Risk Factors

Separate section specifically describing the risk Same. factors associated with the securities, the country and other elements. Not required for all banks from all countries, more typical for emerging market banks and not typical for Western European banks. After October 1, 1998 must be in “plain English”.

Business Description

Detailed description of the business of the bank, Same. usually running at least six to seven pages and covering all significant aspects of the business and the structure of the bank.

Risk Management

Risk Management. Discussion of bank’s risk Similar. management, policies and committees. Should contain a discussion of the known limitations in VaR models or other risk analysis. The goals and strategy of risk management and use of derivatives and instruments should be discussed.

Interest Rate Risk

Interest Rate Risk. Typically an interest rate Same. asset/liability gap table is included. Alternatively, sensitivity analysis or Value at Risk analysis can be provided.

Average Balance Sheets. Three years of average Abbreviated form usually included. Even if not balance sheets, showing interest income/expense disclosed, information in it is part of diligence to and average rates/yield on all major categories underwriters and their counsel and forms basis of assets and liabilities. Must be separated by of management’s discussion and analysis of net domestic and international categories for those interest income and net interest margin. banks with significant international operations. Averages are supposed to be daily but the SEC has accepted weekly or monthly from foreign banks.

Volume and Rate Arzalysis. Three years of Sometimes dealt with textually rather than by a changes in net interest income, showing volume table. Often not disclosed, but is part of and rate analysis. Must be separated by diligence to underwriters and their counsel and domestic and international categories for those forms the basis of management’s discussion and banks with significant international operations. analysis of net interest income and net interest

margin.

Margin and Average Spread. Three years of Three years of net interest margin and spread average interest-earning assets, net interest usually disclosed although not in the tabular

continued otmka,

THE ASIALAW GUIDE TO FINANCIAL MARKETS 15

SEC Form F-I Registrafion Rule 144A 0 fferiq Circular

4 ; 1 1 1

L

income, gross margin, net interest margin, and average spread.

form required by Guide 3.

Interest-Earning Deposits. Interest-earning deposits with other banks, segregated by country or region for three years.

Included only if material.

Securities Portfolio-Value. For each of the last Textual or tabular discussion of securities three years, report on securities held, show book value, discuss market value and any valuation

portfolio with all material elements typicall) included. Can be divided between debt and

allowance, discuss differences between trading and held to maturity, segregate by domestic and international and by government and other securities.

equity.

Securities Portfolio-Yields. For each of the last three years, show the book amount of securities that are due in one year or less, after one year to five years, after five years to ten years and state the weighted average yield for each range of maturities. For banks with significant international holdings, segregate domestic and international.

Show material elements only.

Credit Risk

Loans by T)qe. For each of the last five years, disclose loans by types of customer, ie, commercial, financial, agricultural, real estate, mortgage, consumer, construction. The SEC has suggested categories but will permit banks to use their own internal categories as shown in internal management information systems.

Loans by Maturity and Interest Rate Sensitivity. For each of the last five years show loans that Ire due in less than one year, one to five years, and over five years. The loans must be set forth my type and the total amount of loans that are “ixed or variable rate must be shown.

Loa Losses. A fin year analysis of loan losses, 3y type, including changes in the allowance for oan losses, recoveries, net charge offs and 3rovisions. Also five year analysis of the allocation of the allowance. SEC staff sometimes -equires that this discussion be updated for nterim periods.

iubstandard, Problem Loans and other Risk 5iements in the Loan Portfolio. For each of the ast five years, show non-accruing loans by type. 4 substantial narrative discussion of the bank’s mderwriting and credit control policies, the

Similar, dependin g on materiality and loan growth patterns.

Substantially the same depending on materiality !

and loan growth patterns.

Substantially similar, depending on materiality.

Substantially similar.

16 THE ASiAlAW GUIDE TO FlNANCiAL MARKETS

SEC Form F-I Registration Rule 144A OffeGg Circular

policy for placing loans on non-accrual, of provisioning policies, of all risk elements in the portfolio and of potential problem loans is required. The amount of interest that would have been recorded had non-accruing loans been current must be disclosed. SEC staff may require that the information be included for interim periods.

Liquidity Risk

Deposits. For each of the last three years, show Should be specifically tailored to the structure of types of deposits (demand, time, etc) in excess of the balance sheet. 10% of average total deposits and segregated between domestic and foreign.

Large Deposits. For last year end show time deposits in excess of US$lOO,OOO by time remaining to maturity (under three months, three to six months, six to twelve months, over twelve months).

Dependence on large time deposits disclosed to the extent material and according to context in the home country.

Short-Term Borrowings. Show short-term borrowings, for each of the last three years, to the extent they exceeded 30% of stockholders’ equity.

Disclosed if material.

Currency Risk

Cross-Border Outstandings. Geographic breakdown of foreign country outstandings, as of each of the last three years, required if such outstandings are greater than 1% of total assets. Disclosure by type of borrower also required and, if there are significant loans to countries with liquidity difficulties additional disclosure is required.

Exchange Controls and Exchange Information. Discussion of any applicable exchange controls and exchange rates.

Foreign Exchange Risk. If material show potential future losses from forward contracts and other financial instruments by VaR, sensitivity or table.

Cross-border outstandings disclosed to the extent material. Should be formatted for the bank’s risk profile rather than a pre-set table.

Same.

Similar.

Equity Risk

Equity Price Risk. A table, sensitivity or VaR analysis showing equity price risk if material.

Similar.

THE ASIALAW GUIDE TO FINANCIAL MARKETS 17

SEC For-m F-l Registration Rule 144A Offeriq Circular

Information on the Home Country, Taxation and Markets

Legal Risk. Discussion of the supervision and regulation of the banking system in the home country. The purpose is to show key legal risks. For banks from countries in which other banks have issued securities in the US, this section becomes fairly standard and precedents may exist.

Same.

Competition. Several paragraphs on competition in the home market.

Same.

Trading Markets. Description of any trading markets in the home country for the securities. Any applicable US trading market is also included.

Same.

Home Country Economic lnfornzatiolz or Annex. As a matter of market custom, an annex on the home country economy is prepared for emerging markets. This is nor necessary for G-7 countries and for most other Western European countries.

Same.

Taxation. Material elements of home country and US taxation of securities is described.

Same.

The Underwriting and the Securities

Underwriting. Two to three page description of the plan of distribution, the names of the underwriters, the underwriter’s compensation and other details.

Substantially same.

Affiliate of Bank as Underwriter. An affiliate of the bank may participate in the underwriting group outside of the United Stares and subject to certain restrictions. An authorized Section 20 susidiary is required to participate in the US underwriting.

Same.

Description of the Securities. Description of the securities being offered, often running several pages, is required. Includes interest rates, calculation methods, events of defaults, procedures for note holders meetings, etc.

Same.

Custody Risk. Custody risk, clearance and settlement mechanics are also described.

Same.

Market for the Securities. Description of the trading market for the securities and the home country exchanges.

Same.

THE ASIALAW GUIDE TO NNANCIAL MARKETS

SEC Form F-l Registratiorz Rule 144A Offering Circular

Use of Proceeds. The use of the proceeds must Same. be disclosed, including any temporary investments. If the proceeds will be used for an acquisition or to repay debt, it must be disclosed. The SEC staff often focuses attention on this section.

Other Disclosure Requirements

Material Properties. Material properties must be Same. disclosed. This is usually a short and easy section for banks.

Material Litigation. Material litigation must be Same. disclosed.

Directors aud Officers. Names, ages and Material information only, although as a biographical information on directors and senior marketing matter, biographical and other data officers are provided. If, and onZ>f if, aggregate on the directors and senior management is compensation is disclosed in the home market, it sometimes included. must be disclosed here. Material transactions between the bank and directors and officers must be disclosed. If the bank, as many do, gives home mortgage and other consumer loans to officers and directors, the number is typically disclosed as an aggregate.

Controlling Ownership. Any ownership of more Controlling or influential shareholdings only. than 5% of the stock of the bank must, if known to the bank, be disclosed, and all substantial and controlling ownership disclosed. Ownership of company stock by the officers and directors must be disclosed and any family relationships between them.

Reiated Party Transactions. All material Material related party transactions will form transactions with related parties must be part of the diligence and may be disclosed. disclosed, usually in the aggregate. For some banks, particularly those controlled by families, and with outstanding loans to members of the control group this can sometimes be sensitive.

Material Contracts. Copies of all material Copies need not be attached but material contracts must be attached to the registration contracts may need to be discussed generally. statement and become public. This includes general contracts and the contracts related to the offering. Sometimes, confidential treatment can be obtained from the SEC for certain contracts. This is sometimes sensitive.

Expenses. Significant expenses related to the Not necessary. offering must be disclosed.

continued overleo

TUE ASIALAW GUlDE TO FINANCIAL MARKETS 19

SEC Form F-l Registration Rule 144A 0 ffering Circular

On-Going Reporting Requirements

Annual. An annual report on Form 20-F must be filed within six months after the end of each fiscal year. The annual report must contain substantially all of the F-l disclosure.

Copies of annual home country reports need to be furnished with the SEC.

Interim. Interim reports made public in the home country must also be furnished to the SEC. Interim financials do not need to be reformatted or reconciled.

Copies of interim home country reports need to be furnished to the SEC.

Materiality and Listing. Listing agreements and the securities laws will require that certain material events that may affect the price of the securities be disclosed. The NYSE requires that a company act promptly to dispel any rumors.

Not applicable.

General warning - The article and chart attached are simplifications of complex legal and regulatory reqzrirenlcrlts. They should not be relied upon as legal advice and should be used with art understanding that indiuidual circumstances may vary greatly.

20 THE ASIALAW GUIDE TO FINANCIAL MARKETS