Posts Tagged ‘OTC derivatives’

Nationalize the Clearinghouses!

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday August 8, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Stephen J. Lubben, Harvey Washington Wiley Chair in Corporate Governance & Business Ethic at Seton Hall University School of Law.

A clearinghouse reduces counterparty risks by acting as the hub for trades amongst the largest financial institutions. For this reason, Dodd-Frank’s seventh title, the heart of the law’s regulation of OTC derivatives, requires that most derivatives trade through clearinghouses.

The concentration of trades into a very small number of clearinghouses or CCPs has obvious risks. To maintain the vitality of clearinghouses, Congress thus enacted the eighth title of Dodd-Frank, which allows for the regulation of key “financial system utilities.” In plain English, a financial system utility is either a payment system—like FedWire or CHIPS—or a clearinghouse.

But given the vital place of clearinghouses in Dodd-Frank, it is perhaps surprising that Dodd-Frank makes no provision for the failure of a clearinghouse. Indeed, it is arguable that the United States is not in compliance with its commitment to the G-20 on this point.

…continue reading: Nationalize the Clearinghouses!

The Extraterritorial Effect of the EU Regulation of OTC Derivatives

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday June 14, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Alexandria Carr, Of Counsel with the Financial Services Regulatory & Enforcement group at Mayer Brown LLP, and is based on a Mayer Brown Legal Update; the complete publication, including footnotes, is available here.

1. On 10 April 2014 some of the legislation that provides for the extraterritorial effect of the European Markets Infrastructure Regulation (“EMIR”) came into force. The remaining legislation will come into force on 10 October 2014. This post considers this legislation and the counterparties to which it applies. It also considers whether some counterparties might be able to avoid the extraterritorial effect as a result of the European Commission making an equivalence decision in respect of third country jurisdictions. It considers the European Securities and Market Authority (“ESMA”) advice to date on the equivalence of the regulatory regimes in the US, Japan, Australia, Canada, Hong Kong, India, Singapore, South Korea and Switzerland and notes that even in the US ESMA did not find full equivalence. Finally this post also considers the requirements that third country central counterparties (“CCPs”) and trade repositories must meet in order respectively to provide clearing services to their EU clearing members and to provide reporting services to EU counterparties which enable those counterparties to satisfy their clearing reporting requirements under EMIR.

…continue reading: The Extraterritorial Effect of the EU Regulation of OTC Derivatives

Toward a Global Regulatory Framework for Cross-Border OTC Derivatives Activities

Posted by Michael S. Piwowar, Commissioner, U.S. Securities and Exchange Commission, on Saturday March 22, 2014 at 9:00 am
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Editor’s Note: Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s remarks at the Alternative Investment Management Association Global Policy & Regulatory Forum; the full text is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

International engagement has long been a fundamental aspect of effective capital markets regulation. As Kathy [Casey] noted in a speech she gave while Commissioner in 2007: “If we, as regulators, are to remain effective and relevant in meeting our mission of protecting investors, fostering capital formation and maintaining competitive, fair and orderly markets, we will need to be more nimble and responsive to market developments and rely more on cooperation and collaboration with our international counterparts.” [1]

It has become clear to me over these past few months that at no time in the Commission’s history have we been more engaged with the international community or more involved in collaborative workstreams with our fellow regulators from around the globe.

…continue reading: Toward a Global Regulatory Framework for Cross-Border OTC Derivatives Activities

The Twilight Zone: OTC Regulatory Regimes and Market Quality

Posted by Christian Leuz, The University of Chicago Booth School of Business, on Tuesday October 22, 2013 at 9:13 am
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Editor’s Note: Christian Leuz is the Sondheimer Professor of International Economics, Finance and Accounting at the University of Chicago.

In 2010, more than 8,000 domestic equity securities traded in the U.S. OTC market. Yet, research studying this market is limited. Stocks in this market tend to be small. The OTC market generally offers less investor protection than the traditional exchanges, and fraudulent and abusive practices in this market cause significant economic harm to investors. Thus, this market illustrates the trade-off that securities regulators face between their charter to ensure investor protection and their desire to create a viable market for small growth firms. This trade-off has come into focus with the passage of the JOBS Act in 2012, which intends to lower the regulatory burden on firms when they access public capital markets. One of its key provisions is to loosen the ownership limits for SEC registration, which will likely increase the number of unregistered securities in the OTC market. This change raises significant concerns with respect to investor protection. In light of these initiatives, it is important to understand the efficacy of existing regulatory regimes in the OTC market. In our paper, The Twilight Zone: OTC Regulatory Regimes and Market Quality, which was recently made publicly available on SSRN, my co-authors (Ulf Bruggemann, Aditya Kaul, and Ingrid Werner) and I analyze the association between these regulatory regimes and market quality.

…continue reading: The Twilight Zone: OTC Regulatory Regimes and Market Quality

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

Implications of New U.S. Derivatives Regulations on End-Users of Swaps

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday January 16, 2013 at 9:13 am
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Editor’s Note: The following post comes to us from John White, partner in the Corporate Department and co-chair of the Corporate Governance and Board Advisory practice at Cravath, Swaine & Moore LLP. This post is based on a Cravath memorandum by William P. Rogers Jr.; the full version, including footnotes, is available here.

Introduction

In the wake of the financial crisis, both the U.S. and the EU have enacted legislation to regulate the “over-the-counter” (“OTC”) swaps market and are in the process of adopting implementing rules that will make such legislation fully effective. In the U.S., Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July 21, 2010, provides for the regulation of the swaps market and grants to the Commodity Futures Trading Commission (the “CFTC”) and the Securities and Exchange Commission (the “SEC,” and with the CFTC, each a “Commission” and together, the “Commissions”) broad authority to regulate the swaps market and its principal participants. In the EU, the European Market Infrastructure Regulation (“EMIR”) is expected to become effective during 2013 and will create a regulatory framework for the swaps markets in all EU member states.

…continue reading: Implications of New U.S. Derivatives Regulations on End-Users of Swaps

Regulation of OTC Derivatives Markets — EU vs US Initiatives

Posted by David Felsenthal, Clifford Chance LLP, on Sunday September 23, 2012 at 10:32 am
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Editor’s Note: David Felsenthal is a partner at Clifford Chance LLP focusing on financial transactions. This post is based on a Clifford Chance publication by Mr. Felsenthal and Christopher Bates, partner at Clifford Chance; and Mary Johannes and Richard Metcalfe of International Swaps and Derivatives Association, Inc. The full report is available for download here.

Both the EU and the US have now adopted the primary legislation which aims to fulfill the G20 commitments that all standardised over-the-counter (OTC) derivatives should be cleared through central counterparties (CCPs) by end 2012 and that OTC derivatives contracts should be reported to trade repositories (and the related commitments to a common approach to margin rules for uncleared derivatives transactions). The US Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in July 2010 and the text of the EU Regulation on OTC Derivatives, CCPs and Trade Repositories (EMIR) was finally published in the Official Journal on 27 July 2012.

There is a significant commonality of approaches between EMIR and the Dodd-Frank Act in relation to the regulation of OTC derivatives markets, but there are also some significant differences. This paper summarises the way in which the two regimes treat different categories of counterparty and highlights certain other major differences between EMIR and the Dodd-Frank Act in relation to OTC derivatives regulation.

…continue reading: Regulation of OTC Derivatives Markets — EU vs US Initiatives

FSB Reports Regulatory Reform Is Advancing, But Slowly

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday July 20, 2012 at 9:21 am
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Editor’s Note: The following post comes to us from Heath Tarbert, partner and head of the Financial Regulatory Reform Working Group at Weil, Gotshal & Manges LLP, and is based on a Weil alert by Mr. Tarbert, Sylvia Mayer, and Scott Bowling.

On June 19, 2012, the Financial Stability Board (FSB) issued a progress report to the G20 Leaders on the steps FSB member nations have taken to implement financial reforms designed to improve the stability of the global financial system. The FSB reviewed, among other things, its members’ Basel implementation, adoption of resolution-planning regimes, oversight of the so-called “shadow banking system,” reform of the OTC derivatives market, and the effectiveness of the FSB itself. The FSB concluded that its member nations have made significant progress in implementing globally agreed financial reforms, but large strides are still necessary – particularly regarding recovery and resolution planning – to protect the global economy against future financial crises.

What is the FSB?

The FSB is an informal body of financial regulatory authorities from the G20 nations and the former members of the Financial Stability Forum. It was established in 2009 – in the wake of the 2008 financial crisis – with the intent of improving global financial stability by coordinating the way in which the world’s major economies implement their own financial reforms. At present, the FSB is not an independent legal entity but acts under the auspices of the Bank for International Settlements (BIS), an international organization that assists central banks in promoting financial stability and serves as an international central bank itself. The FSB has no enforcement authority; it derives its legitimacy from the cooperative participation of its member nations. As described below, however, the FSB’s institutional power may be growing: the G20 Leaders recently granted the FSB authority to organize itself as an independent legal entity.

…continue reading: FSB Reports Regulatory Reform Is Advancing, But Slowly

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