Archive for the ‘Derivatives’ Category

Hardwired Conflicts: Big Bang Protocol, Libor and Paradox of Private Ordering

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday June 4, 2013 at 9:22 am
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Editor’s Note: The following post comes to us from Daniel Awrey of the University of Oxford Faculty of Law.

The working paper, Hardwired Conflicts: The Big Bang Protocol, Libor and the Paradox of Private Ordering, examines the darker side of the private market structures at the heart of the global financial system.

Imagine we allowed referees to place bets on the sporting events they officiated. On one level, this would almost certainly offend our sense of fair play. On another level, however, we might ultimately view this as unproblematic insofar as teams were able to freely contract with those referees willing to make credible commitments not to exploit such conflicts of interest, and so long as compliance with these contracts was relatively easy to monitor and enforce. Imagine now, however, that there exists a limited number of qualified referees, that these referees coordinate in the development of a standard form contract which does not prohibit betting on games, and that they collectively enjoy sufficient market power to ensure that these contracts receive widespread adoption. Imagine further that the costs of determining whether a referee had in fact wagered on a game are extremely high and, as a corollary, that there exists no credible threat of either private contractual enforcement or market-based (reputational) sanctions. Given these additional facts, we might be of the view that this state of affairs is likely to undermine confidence in the integrity of the game. Indeed, it is precisely for this reason that professional sports leagues prohibit referees from wagering on games. It seems remarkable, therefore, that we permit this type of activity in the most high stakes game of all: finance.

…continue reading: Hardwired Conflicts: Big Bang Protocol, Libor and Paradox of Private Ordering

Cross-Border at the Crossroads: The SEC’s “Middle Ground”

Posted by John Ramsay, U.S. Securities and Exchange Commission, on Saturday June 1, 2013 at 9:58 am
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Editor’s Note: John Ramsay is acting director of the Division of Trading and Markets at the U.S. Securities and Exchange Commission. This post is based on Mr. Ramsay’s remarks at the New York City Bar Association, available here. The views expressed in the post are those of Mr. Ramsay and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff.

I’d like to describe the Commission’s recent set of proposals on the cross-border regulation of derivatives. First, though, I’ll describe the state of play among international regulators, both in developing their derivatives regimes and in grappling with the thorny cross-border aspects of derivatives trading.

Status of International Regulatory Efforts

Countries are at various stages of implementing their derivatives regimes in response to the G20 commitments.

The U.S. is further along in this effort. The SEC has now proposed substantially all of the rules required by Title VII, and we have adopted the foundational definitional rules and those governing swap clearing agencies standards, among others. The CFTC is further along in the adoption mode and is on track to complete the adoption of their rules later this year.

Other jurisdictions are further behind, which means that it is difficult to assess at this point how similar their requirements may be to those that the U.S. is implementing.

…continue reading: Cross-Border at the Crossroads: The SEC’s “Middle Ground”

The Changing Landscape of the CFTC’s Enforcement Actions

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday May 4, 2013 at 10:39 am
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Editor’s Note: The following post comes to us from John H. Sturc, partner and co-chair of the Securities Enforcement Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert by Mr. Sturc and Jeffrey L. Steiner; the full text, including footnotes, is available here.

During the past four years, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) has substantially expanded its regulatory reach and flexed stronger enforcement muscles. Since 2010, the CFTC has dramatically increased its annual enforcement action totals, and has imposed record high financial penalties on significant market participants. In 2011 and 2012, the CFTC filed at least 201 enforcement actions, almost as many as the past five years combined, and has already recovered approximately $1.8 billion in total sanctions. As CFTC Chairman Gary Gensler has stated, “Dodd-Frank expands the CFTC’s arsenal of enforcement tools. We will use these tools to be a more effective cop on the beat, to promote market integrity, and to protect market participants.” Notwithstanding budgetary constraints, the next four years are likely to show continued emphasis on expanded enforcement efforts as the agency implements its new rules. This post focuses on the CFTC’s new rulemakings and how Title VII has increased the CFTC’s power to create and police the derivatives markets.

I. Expanding the CFTC’s Enforcement Actions

Over the past two years, the agency has hit record levels of enforcement actions and civil penalties imposed. Figure 1 below details the types of enforcement actions that the CFTC has brought from 2006 through 2012, as well as the total amounts of monetary penalties it recovered during each fiscal year.

…continue reading: The Changing Landscape of the CFTC’s Enforcement Actions

Proposed Rules for Global Derivatives Market

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on Thursday May 2, 2013 at 9:41 am
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s statement at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [May 1, 2013], the Commission considers issuing a release proposing rules and interpretive guidance applicable to certain market intermediaries, participants, clearing agencies, data repositories, and trade execution facilities that are involved in cross-border transactions of security-based swaps. The proposed release is over 1,000 pages, contains over 2,000 footnotes, and requests comments on more than 630 questions with many subparts. Although the questions posed are many, they are intended to be balanced and fair to solicit views from all sides. This is a welcome approach, because it contributes to a healthy debate and dialogue that is vital to the Commission’s processes.

Today, the Commission also votes to reopen the comment period on the various outstanding rulemaking releases and policy statement concerning security-based swaps and market participants to allow the public additional time to analyze and provide comments in light of our cross-border release.

The length of the cross-border release and the reopening of the comment periods reflect the complexity and importance of the issues involved in securities-based swap transactions. In issuing today’s proposal and asking for comments on the Commission’s proposed approach to regulating the securities-based swap market, the Commission recognizes the interactions among many important rules in this area. It is important, therefore, that our rules avoid gaps and loopholes, and that they work together to provide the needed transparency, accountability, and protection to our economy, the markets, and, most importantly, to investors.

…continue reading: Proposed Rules for Global Derivatives Market

Navigating Key Dodd-Frank Rules Affecting Swaps End Users

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday April 30, 2013 at 9:22 am
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Editor’s Note: The following post comes to us from Penelope Christophorou, counsel focusing on commercial financing, secured transactions and bankruptcy law at Cleary Gottlieb Steen & Hamilton LLP. The following post is based on a Cleary Gottlieb memorandum; the full text, including footnotes and appendices, is available here.

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) enacted a new regime of substantive regulation of over-the-counter (“OTC”) derivatives under U.S. securities and commodities laws. Over the course of 2013, many key provisions of Dodd-Frank are being implemented by the Commodity Futures Trading Commission (the “CFTC”) with respect to “swaps.” While many of the regime’s requirements focus on “swap dealers” (“SDs”) and “major swap participants” (“MSPs”), commercial entities that enter into OTC derivatives transactions to hedge or mitigate risk, referred to as “end users,” will also become subject to a wide range of substantive requirements.

In particular, end users will need to:

…continue reading: Navigating Key Dodd-Frank Rules Affecting Swaps End Users

Regulation of Cross-Border OTC Derivatives Activities: Finding the Middle Ground

Posted by Elisse Walter, Commissioner, U.S. Securities and Exchange Commission, on Wednesday April 24, 2013 at 9:29 am
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Editor’s Note: Elisse B. Walter is a Commissioner at the U.S. Securities and Exchange Commission and was the Chairman of the SEC from December 2012 to April 2013. This post is based on Commissioner Walter’s recent remarks at the American Bar Association Spring meeting, available here. The views expressed in this post are those of Commissioner Walter and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today at the SEC and in government agencies around the world, regulators are shaping the rules that will govern the way over-the-counter derivatives are transacted. It’s a crucial task given the magnitude and importance of this market to the international financial system.

In the process, all of us are grappling with the fact that these transactions rarely respect national boundaries. They are complex transactions that routinely cross borders, and are potentially subject to multiple sets of rules.

To ensure our regimes work effectively, we need to have a common sense, flexible approach to the cross-border regulation of derivatives.

…continue reading: Regulation of Cross-Border OTC Derivatives Activities: Finding the Middle Ground

Swap Trading in the New Regulatory World

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on Monday April 1, 2013 at 9:26 am
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Editor’s Note: Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. This post discusses a Davis Polk memorandum, available here; an accompanying timeline is available here.

As a result of the Dodd-Frank Act, the over-the-counter derivatives markets have become subject to significant new regulatory oversight. As the markets respond to these new regulations, the menu of derivatives instruments available to asset managers, and the costs associated with those instruments, will change significantly. As the first new swap rules have come into effect in the past several months, market participants have started to identify risks and costs, as well as new opportunities, arising from this new regulatory landscape.

This memorandum and the accompanying timeline is designed to provide asset managers, and those interested in the activities of asset managers, with background information on key aspects of the swap regulatory regime that may impact their derivatives trading activities. The memorandum highlights practical considerations and potential opportunities for asset managers, as they assess the impact these regulations will have on their trading activities.

In the short term, asset managers should be sure to:

…continue reading: Swap Trading in the New Regulatory World

The New Market in Debt Governance

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday April 1, 2013 at 9:24 am
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Editor’s Note: The following post comes to us from Yesha Yadav of Vanderbilt Law School.

Scholars have traditionally assumed that lenders that protect themselves using credit derivatives like credit default swaps (CDS) have limited interest in debt governance. The rationale behind this proposition seems straight-forward. Lenders that have bought credit protection should have little incentive to invest in monitoring and disciplining a borrower where they know they will be repaid under the CDS. Indeed, scholars argue, lenders that have purchased CDS protection have considerable interest in seeing a borrower fail. When this happens, they can easily and cheaply exit their investment by triggering repayment on the CDS.

This paper, the New Market in Debt Governance, recently made available on SSRN, challenges this consensus and proposes a new theory of governance in the context of credit derivatives trading. While scholars have traditionally focused on lenders that protect themselves using CDS, they overlook the role of financial firms that sell this credit protection and thereby assume economic risk on the underlying borrower. These protection sellers take on the risk of a borrower defaulting, but possess no legal tools with which they can discipline the borrower to stave off default. As a result, unlike ordinary lenders, protection sellers have no direct means to control a borrower’s risk-taking. They possess no legal powers to influence how much leverage a borrower takes on, its use of collateral, cash reserves or its acquisitions and enterprise strategy. Given this precarious position, it follows that protection sellers possess powerful incentives to seek out ways to influence how a borrower company is run to better control how risky it is allowed to become.

…continue reading: The New Market in Debt Governance

CFTC’s Progress on Wall Street Reform

Posted by Gary Gensler, Chairman of the Commodity Futures Trading Commission, on Monday March 4, 2013 at 9:25 am
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Editor’s Note: Gary Gensler is chairman of the Commodity Futures Trading Commission. This post is based on Chairman Gensler’s testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, available here.

The New Era of Swaps Market Reform

This hearing is occurring at an historic time in the markets. The CFTC now oversees the derivatives marketplace — across both futures and swaps. The marketplace is increasingly shifting to implementation of the common-sense rules of the road for the swaps market that Congress included in the Dodd-Frank Act.

For the first time, the public is benefiting from seeing the price and volume of each swap transaction. This post-trade transparency builds upon what has worked for decades in the futures and securities markets. The new swaps market information is available free of charge on a website, like a modern-day ticker tape.

For the first time, the public will benefit from the greater access to the markets and the risk reduction that comes with central clearing. Required clearing of interest rate and credit index swaps between financial entities begins next month.

For the first time, the public will benefit from specific oversight of swap dealers. As of today, 71 swap dealers are provisionally registered. They are subject to standards for sales practices, recordkeeping and business conduct to help lower risk to the economy and protect the public from fraud and manipulation. The full list of registered swap dealers is on the CFTC’s website, and we will update it as more entities register.

…continue reading: CFTC’s Progress on Wall Street Reform

Italy Introduces a Financial Transaction Tax as of 2013

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday January 20, 2013 at 10:00 am
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Editor’s Note: The following post comes to us from Vania Petrella, partner resident in the Rome office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum.

On December 21, 2012, the Italian Parliament approved the budget law for 2013 (the “Budget Law”) contemplating, among other things, the introduction of a new tax applicable to certain financial transactions (the “Financial Transaction Tax” or “FTT”).

While the Budget Law includes an articulate regime of the FTT, ”some of its features will be set with a Ministerial Decree to be issued by the Ministry of Economy and Finance (the “Ministerial Decree”) within 30 days from the entry in force of the Budget Law (which is subject to its publication in the Official Gazette, expected to occur in the coming days).

…continue reading: Italy Introduces a Financial Transaction Tax as of 2013

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