Posts Tagged ‘Derivatives’

Addressing the Lack of Transparency in the Security-Based Swap Market

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on Tuesday January 27, 2015 at 9:04 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 remarks 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 [January 14, 2015], the Commission considers rules that are designed to address the lack of transparency in the security-based swaps (SBS) market that substantially contributed to the 2008 financial crisis. These rules are the result of the Congressional mandate in the Dodd-Frank Act, which directed the SEC and the CFTC to create a regulatory framework to oversee this market.

The global derivatives market is huge, at an amount estimated to exceed $692 trillion worldwide—and more than $14 trillion represents transactions in SBS regulated by the SEC. The continuing lack of transparency and meaningful pricing information in the SBS market puts many investors at distinct disadvantages in negotiating transactions and understanding their risk exposures. In addition, as trillions of dollars have continued to trade in the OTC market, there is still no mandatory mechanism for regulators to obtain complete data about the potential exposure of individual financial institutions and the SBS market, in general.

…continue reading: Addressing the Lack of Transparency in the Security-Based Swap Market

Key Points from Congress’s Roll-Back of the Swaps Push-Out

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday January 11, 2015 at 9:00 am
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Editor’s Note: The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Mr. Ryan, Armen Meyer, and David Kim.

On December 13, 2014, the US Senate passed an appropriations bill for the President’s signature that included a provision to roll back much of Dodd-Frank’s section 716 (i.e., the Swaps Push-Out). The initial version of the Swaps Push-Out was proposed by Senator Blanche Lincoln (Democrat of Arkansas) in 2010, during her re-election campaign, and would have prohibited bank swap dealers from receiving federal assistance from the FDIC or from the discount window of the Federal Reserve. After intense negotiation in the last days of congressional debate on Dodd-Frank, Lincoln’s version was substantially narrowed to only prohibit banks from dealing in swaps that were viewed by Congress as the most risky.

The Swaps Push-Out that ultimately passed as part of Dodd-Frank prohibited bank swap dealers (with access to FDIC insurance or the discount window) from dealing in certain swaps (or security-based swaps), including most credit default swaps (CDS), equity swaps, and many commodity swaps. Swaps related to rates, currencies, or underlying assets that national banks may hold (e.g., loans) were allowed to remain in the bank, as were swaps used for hedging or similar risk mitigation activities.

…continue reading: Key Points from Congress’s Roll-Back of the Swaps Push-Out

New ISDA Protocol Limits Buy-Side Remedies in Financial Institution Failure

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday December 14, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Stephen D. Adams, associate in the investment management and hedge funds practice groups at Ropes & Gray LLP, and is based on a Ropes & Gray publication by Mr. Adams, Leigh R. Fraser, Anna Lawry, and Molly Moore.

The ISDA 2014 Resolution Stay Protocol, published on November 12, 2014, by the International Swaps and Derivatives Association, Inc. (ISDA), [1] represents a significant shift in the terms of the over-the-counter derivatives market. It will require adhering parties to relinquish termination rights that have long been part of bankruptcy “safe harbors” for derivatives contracts under bankruptcy and insolvency regimes in many jurisdictions. While buy-side market participants are not required to adhere to the Protocol at this time, future regulations will likely have the effect of compelling market participants to agree to its terms. This change will impact institutional investors, hedge funds, mutual funds, sovereign wealth funds, and other buy-side market participants who enter into over-the-counter derivatives transactions with financial institutions.

Among the key features of the Protocol are the following:

…continue reading: New ISDA Protocol Limits Buy-Side Remedies in Financial Institution Failure

CFTC Clarifies and Expands Relief Relating to Delegation of CPO Responsibilities

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday November 1, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Cary J. Meer, partner in the Investment Management practice group at K&L Gates LLP, and is based on a K&L Gates publication by Ms. Meer and Lawrence B. Patent.

On October 15, 2014, the Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (“CFTC” or “Commission”) issued CFTC No-Action Letter No. 14-126 (“Letter 14-126”), which sets forth a number of conditions with which commodity pool operators (“CPOs”) that delegate their CPO responsibilities (the “Delegating CPO”) to registered CPOs (the “Designated CPO”) must comply in order to take advantage of no-action relief from the requirement to register as a CPO. The CPO community has anxiously awaited this letter because it clarifies the activities in which a Delegating CPO may engage and still qualify for relief from the requirement to register as a CPO. Essentially, the Letter makes more liberal several of the conditions set forth in CFTC Letter No. 14-69 (May 12, 2014) (“Letter 14-69” and, together with Letter 14-126, the “Letters”), [1] with which many Delegating CPOs could not comply. In addition, Letter 14-126 makes the relief self-executing, i.e., no form requesting relief or even a notice need be filed.

…continue reading: CFTC Clarifies and Expands Relief Relating to Delegation of CPO Responsibilities

Financial Market Infrastructures

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday October 6, 2014 at 8:56 am
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Editor’s Note: The following post comes to us from Guido A. Ferrarini, Professor of Business Law at University of Genoa, Department of Law, and Paolo Saguato at Law Department, London School of Economics.

In the paper Financial Market Infrastructures, recently made publicly available on SSRN and forthcoming as a chapter of The Oxford Handbook on Financial Regulation, edited by Eilís Ferran, Niamh Moloney, and Jennifer Payne (Oxford University Press), we study the impact of the post-crisis reforms on financial market infrastructures in the securities and derivatives markets.

The 2007-2009 financial crisis led to large-scale reforms to the regulation of securities and derivatives markets. Regulators around the world acknowledged the need for structural reforms to the financial system and to market infrastructures in particular. Due to the global dimension of the crisis and the extent to which financial markets had been revealed to be closely interconnected, national regulators moved the related policy debate to the supranational level. This approach led to the international regulatory guidelines and principles adopted by the G20 and then developed by the Financial Stability Board (FSB). The new global regulatory framework which has followed has institutionalized financial market infrastructures (FMIs) as key supports for financial stability and as cornerstones of the crisis-era regulatory reform agenda for financial markets.

…continue reading: Financial Market Infrastructures

US Basel III Supplementary Leverage Ratio

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday October 5, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Luigi L. De Ghenghi and Andrew S. Fei, attorneys in the Financial Institutions Group at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum; the full publication, including diagrams, tables, and flowcharts, is available here.

The U.S. banking agencies have finalized revisions to the denominator of the supplementary leverage ratio (SLR), which include a number of key changes and clarifications to their April 2014 proposal. The SLR represents the U.S. implementation of the Basel III leverage ratio.

Under the U.S. banking agencies’ SLR framework, advanced approaches firms must maintain a minimum SLR of 3%, while the 8 U.S. bank holding companies that have been identified as global systemically important banks (U.S. G-SIBs) and their U.S. insured depository institution subsidiaries are subject to enhanced SLR standards (eSLR).

…continue reading: US Basel III Supplementary Leverage Ratio

Regulators Re-Propose Uncleared Swap Margin, Capital and Segregation Rules

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on Sunday September 28, 2014 at 8:04 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. The following post is based on a Davis Polk client memorandum; the complete publication, including sidebars and appendix, is available here.

On September 3, 2014, U.S. banking regulators re-proposed margin, capital and segregation requirements applicable to swap entities [1] for uncleared swaps. [2] The new proposed rules modify significantly the regulators’ original 2011 proposal in light of the Basel Committee on Banking Supervision’s and the International Organization of Securities Commissions’ (“BCBS/IOSCO”) issuance of their 2013 final policy framework on margin requirements for uncleared derivatives and the comments received on the original proposal. The revised proposal:

…continue reading: Regulators Re-Propose Uncleared Swap Margin, Capital and Segregation Rules

New ISDA 2014 Credit Derivatives Definitions

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday August 24, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Fabien Carruzzo, partner and head of the derivatives practice at Kramer Levin Naftalis & Frankel LLP, and is based on a Kramer Levin publication.

September 22, 2014 (the “Implementation Date”) will mark a new chapter in the credit derivatives market with the implementation of the new 2014 ISDA Credit Derivatives Definitions (the “New Definitions”). The New Definitions constitute a major reform of the terms governing credit derivatives products and address numerous issues identified this past decade with regard to credit and succession events and in the context of the Eurozone crisis. Most new credit derivatives trades entered into after the Implementation Date will follow the New Definitions, which are expected to ultimately fully replace the 2003 ISDA Credit Derivatives Definitions (the “Old Definitions”) in the market. Market participants will also have the opportunity to adopt the New Definitions for their portfolio of existing trades.

This post provides an overview of the most significant amendments made to the Old Definitions and describes how the market will migrate to the New Definitions.

…continue reading: New ISDA 2014 Credit Derivatives Definitions

End-User Exception from Dodd-Frank Clearing Mandate and Trade Execution Requirement

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday August 23, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Michele Ruiz, partner in the Derivatives practice at Sidley Austin LLP, and is based on a Sidley publication by Ms. Ruiz, Nathan A. Howell, Kenneth A. Kopelman, and Michael S. Sackheim.

For most commercial end-users of swaps, the mandatory clearing requirement under Dodd-Frank first became applicable on September 9, 2013. Since then, many commercial end-users have relied on the so called “end-user exception” from the clearing mandate to continue executing uncleared swaps with their dealer counterparties. The end-user exception is subject to several conditions, which for SEC filers include undertaking certain corporate governance steps. The generally applicable conditions include reporting of certain information including how the entity relying on the exception generally meets its financial obligations, which reporting may be done annually. In discussing the corporate governance steps that SEC filers must undertake to avail themselves of the exception, the CFTC noted that it expects policies governing the relevant entity’s use of swaps under the end-user exception to be reviewed at least annually (and more often upon triggering events). With the one year anniversary of the initial clearing mandate approaching, this post reviews the scope of the mandate as well as important related requirements and exceptions (including the annual reports and reviews that may be undertaken in the course of qualifying for the exception).

…continue reading: End-User Exception from Dodd-Frank Clearing Mandate and Trade Execution Requirement

Adoption of Cross-Border Securities-Based Swap Rules under the Dodd-Frank Act

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Thursday August 21, 2014 at 9:06 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [June 25, 2014], the Commission will consider a recommendation of the staff to adopt core rules and critical guidance on cross-border security-based swap activities under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Title VII of the Dodd-Frank Act created an important and entirely new regulatory framework for the over-the-counter derivatives market. Transforming this framework into a series of strong rules is one of the most important tasks remaining before the Commission in discharging our responsibility to address the lessons of the last financial crisis. The events of 2008 and 2009—and the significant role derivatives played in those events—still reverberate throughout our economy.

Properly constructed, the Commission’s rules under Title VII should mitigate significant risks to the U.S. financial system, bring transparency to previously opaque bilateral markets, and provide critical new protections for swap customers and counterparties. And the vital regulatory protections of Title VII are not confined to large multi-national banks and other market participants—they are also essential to preserving the stability of a financial system that is vital to all Americans.

…continue reading: Adoption of Cross-Border Securities-Based Swap Rules under the Dodd-Frank Act

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