Posts Tagged ‘Swaps’

SEC’s Swaps Reporting and Disclosure Final Rules

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday March 1, 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 Troy Paredes, Samuel Crystal, and David Kim.

On February 11, 2015, the Securities and Exchange Commission (SEC) released two final rules toward establishing a reporting and public disclosure framework for security-based swap (SBS) transaction data. The SEC’s Commissioners had voted in January to approve the rules, 3 to 2. [1] These rules are the SEC’s first substantive SBS requirements since the SEC began laying out its cross-border position through final rules in June 2014. [2] Chair White has consistently stressed the need to complete substantive SBS requirements and now appears willing to do so even when the SEC Commissioners are divided.

The SEC rules diverge from existing Commodity Futures Trading Commission (CFTC) requirements in some key ways. These divergences will create technical complexity for dealers who have built systems and processes to meet already live CFTC regulations. For example, the SEC’s broader, more exhaustive, and possibly repetitive scope of “Unique Identifier Codes” (UIC) will be problematic for market participants. A less obvious problem will be the SEC’s requirement to report SBS data within 24 hours (until modified by the SEC as the rule suggests), as dealers will likely want to delay public dissemination for as long as possible which will run counter to their existing set-ups for the CFTC requirement to report to a swap data repository (SDR) “as soon as technologically practicable.”

…continue reading: SEC’s Swaps Reporting and Disclosure Final Rules

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

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

New Credit Default Swap Terms to Be Implemented in September 2014

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday August 9, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Isabel K.R. Dische and Leigh R. Fraser, partners at Ropes & Gray LLP, and is based on a Ropes & Gray publication by Ms. Dische, Ms. Fraser, and Molly Moore.

Earlier this year, the International Swaps and Derivatives Association Inc. (ISDA) published the 2014 Credit Derivatives Definitions (the 2014 Definitions). The 2014 Definitions introduce a new government bail-in Credit Event trigger for credit default swap (CDS) contracts on financial Reference Entities in non-U.S. jurisdictions and also modify the typical terms of sovereign CDS contracts in light of the Greek debt crisis, by allowing a buyer of protection to deliver upon settlement the assets into which the Reference Obligation has converted even if such assets are not otherwise deliverable. Further, they create a concept of a Standard Reference Obligation, which means that most CDS contracts on a given Reference Entity would have the same Reference Obligation, thereby increasing the fungibility of such CDS contracts.

…continue reading: New Credit Default Swap Terms to Be Implemented in September 2014

SEC’s Cross-Border Derivatives Rule

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday July 19, 2014 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.

The SEC provided the “who” but not much else in its final rule regarding cross-border security-based swap activities (“final rule”), released at the SEC’s June 25, 2014 open meeting. Although most firms have already implemented a significant portion of the CFTC’s swaps regulatory regime (which governs well over 90% of the market), the SEC’s oversight of security-based swaps means that the SEC’s cross-border framework and its outstanding substantive rulemakings (e.g., clearing, reporting, etc.) have the potential to create rules that conflict with the CFTC’s approach. The impact that the SEC’s regulatory framework will have on the market remains uncertain, but the final rule at least begins to lay out the SEC’s cross-border position.

…continue reading: SEC’s Cross-Border Derivatives Rule

Defining Dealers and Major Participants in the Cross-Border Context

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on Sunday June 29, 2014 at 9:00 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.

Dealers and major participants play a crucial role in the derivatives market, a market that has been estimated to exceed $710 trillion worldwide, of which more than $14 trillion represents transactions in security-based swaps. In the United States, the Commodity Futures Trading Commission (“CFTC”) and the SEC share responsibility for regulating the derivatives market. Out of the total derivatives market, the SEC is responsible for regulating security-based swaps. As evidenced in the most recent financial crisis, the unregulated derivatives market had devastating effects on our economy and U.S. investors. In response to this crisis, Congress enacted the Dodd-Frank Act and directed both the CFTC and SEC to promulgate an effective regulatory framework to oversee the derivatives market.

…continue reading: Defining Dealers and Major Participants in the Cross-Border Context

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