Posts Tagged ‘Swaps’

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, Chairman of the Financial Services Regulatory 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

CFTC Provides Streamlined No-Action Relief Filing Procedure

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday June 21, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Carolyn A. Jayne, partner in the Investment Management, Hedge Funds and Alternative Investments practice at K&L Gates LLP, and is based on a K&L Gates publication by Ms. Jayne, Cary J. Meer, and Lawrence B. Patent; the complete publication, including footnotes, is available here.

The Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (“CFTC” or the “Commission”) recently issued CFTC Letter No. 14-69 (May 12, 2014) (the “Letter”), which provides to certain commodity pool operators (“CPOs”) who delegate (the “Delegating CPO”) their CPO responsibilities to registered CPOs (the “Designated CPO”) a standardized, streamlined approach to apply for no-action relief from the requirement to register as a CPO. The Division previously has granted no-action relief to many Delegating CPOs on an individualized basis. However, the Division recently has seen a substantial increase in the number of no-action requests after the rescission of the CPO exemption from registration in Regulation 4.13(a)(4) and the adoption of a broad definition of the types of swaps subject to CFTC regulation. This streamlined approach will eliminate the need for many, but not all, Delegating CPOs to apply for individualized no-action relief, a more labor-intensive and time-consuming endeavor. However, this approach is available only under certain circumstances described below, and not all Delegating CPOs will qualify.

…continue reading: CFTC Provides Streamlined No-Action Relief Filing Procedure

Clearinghouses as Liquidity Partitioning

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday June 20, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Richard Squire, Professor of Law at Fordham University School of Law.

The Dodd-Frank Act established that certain swap contracts which previously were traded bilaterally (directly between buyers and sellers) must be traded through clearinghouses instead. Critics of this clearing mandate have mounted two main objections: a clearinghouse shifts risk instead of reducing it; and a clearinghouse could fail, requiring a bailout. In my article Clearinghouses as Liquidity Partitioning, recently published in the Cornell Law Review, I counter both objections by showing that clearinghouses engage in a socially valuable function that I term liquidity partitioning. Liquidity partitioning means that when one of its member firms becomes bankrupt, a clearinghouse keeps a portion of the firm’s most liquid assets, and a matching portion of its short‑term debt, out of the bankruptcy estate. The clearinghouse then applies the first toward immediate repayment of the second. Economic value is created because the surviving clearinghouse members are paid much more quickly than they would be in a bankruptcy proceeding. Meanwhile, the bankrupt member’s outside creditors are not paid any less quickly: they still are paid at the end of the bankruptcy proceeding, which the clearinghouse does nothing to prolong. These rapid cash payouts for clearinghouse members reduce illiquidity and uncertainty in the financial sector, the main causes of contagion in a crisis. And because the clearinghouse holds only liquid assets, it avoids the maturity mismatch between short‑term liabilities and long‑term assets that characterizes the balance sheets of many financial institutions. A clearinghouse therefore is much less likely than its members to fail during a crisis.

A clearinghouse achieves liquidity partitioning by engaging in netting. Thus, when a member fails, the clearinghouse uses short‑term debts owed to the member to immediately repay short‑term debts owed by the member. In this way, cash is intercepted on its way toward the bankruptcy estate and redirected toward other financial firms, who may be suffering their own liquidity shortages. The clearinghouse thereby shifts cash from lower-value to higher-value uses, decreasing liquidity pressure on the financial sector and thus the need during a crisis for a taxpayer-funded bailout.

…continue reading: Clearinghouses as Liquidity Partitioning

Segregation of Initial Margin Posted in Connection with Uncleared Swaps

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday April 19, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Leigh R. Fraser, partner and co-head of the hedge funds group at Ropes & Gray LLP, and is based on a Ropes & Gray publication by Ms. Fraser, Isabel K.R. Dische, and Molly Moore.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act and Commodity Futures Trading Commission (“CFTC”) Rules 23.702 and 23.703 thereunder (together, the “Rules”), swap dealers are required to notify their counterparties that they have the right to require segregation with a third-party custodian of any initial margin (also known as “independent amounts”) posted to the swap dealer in connection with uncleared swaps. As a result of these new rules, the International Swaps and Derivatives Association (“ISDA”) recently published a form of notification and a set of frequently asked questions regarding these rules. All buy-side entities that trade in uncleared swaps with swap dealers (including buy-side entities that already post their margin with a third-party custodian, such as registered investment companies, and buy-side entities that do not post initial margin) should receive a copy of the notification from their swap dealer counterparties in the coming weeks or months and should plan to respond promptly to the notification in order to avoid any trading disruptions.

…continue reading: Segregation of Initial Margin Posted in Connection with Uncleared Swaps

Why the Market Should Care About Proposed Clearing Agency Requirements

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 an article by Ms. Nazareth and Jeffrey T. Dinwoodie that first appeared in Traders Magazine.

On March 12, the SEC issued a 400-page rule proposal that, if adopted as proposed, would impose a multitude of new compliance requirements on The Options Clearing Corporation (“OCC”), The Depository Trust Company (“DTC”), National Securities Clearing Corporation (“NSCC”), Fixed Income Clearing Corporation (“FICC”) and ICE Clear Europe. Since these clearing agencies play a fundamental role in the options, stock, debt, U.S. Treasuries, mortgage-backed securities and credit default swaps markets, the proposed requirements have important implications for banks, broker-dealers and other U.S. securities market participants, as well as securities exchanges, alternative trading systems and other trading venues.

…continue reading: Why the Market Should Care About Proposed Clearing Agency Requirements

Dodd-Frank Rules Impact End-Users of Foreign Exchange Derivatives

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday April 3, 2014 at 9:13 am
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Editor’s Note: The following post comes to us from Michael Occhiolini, partner focusing on corporate finance, corporate law and governance, and derivatives at Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert memorandum. The complete publication, including annexes, is available here.

This post is a summary of certain recent developments under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that impact corporate end-users of over-the-counter foreign exchange (FX) derivative transactions and should be read in conjunction with the four prior WSGR Alerts on Dodd-Frank FX issues from October 2011, September 2012, February 2013, and July 2013.

Title VII of Dodd-Frank amended the Commodity Exchange Act (CEA) and other federal securities laws to provide a comprehensive new regulatory framework for the treatment of over-the-counter derivatives, which are generally defined as “swaps” under Section 1a(47) of the CEA. Among other things, Dodd-Frank provides for:

…continue reading: Dodd-Frank Rules Impact End-Users of Foreign Exchange Derivatives

CFTC Issues Cross-Border Substituted Compliance Determinations

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on Tuesday January 28, 2014 at 9:14 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 appendices, is available here.

Just one day in advance of the December 21, 2013 expiration of the CFTC’s exemptive order delaying the applicability of some CFTC swap regulations for non-U.S. swap dealers and foreign branches of U.S. swap dealers, the CFTC approved a series of comparability determinations. These comparability determinations will allow CFTC-registered non-U.S. swap dealers and foreign branches of U.S. swap dealers to comply with local requirements rather than the corresponding CFTC rules in cases where substituted compliance is available under the CFTC’s cross-border guidance. [1] The CFTC made comparability determinations for some swap dealer entity-level requirements for Australia, Canada, the European Union (the “EU”), Hong Kong, Japan and Switzerland and for a limited number of transaction-level requirements for the EU and Japan.

…continue reading: CFTC Issues Cross-Border Substituted Compliance Determinations

Proposed CFTC Rules on Position Limits

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday December 20, 2013 at 10:07 am
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Editor’s Note: The following post comes to us from Byungkwon Lim, partner in the Corporate Department at Debevoise & Plimpton LLP and leader of the firm’s Hedge Funds and Derivatives & Structured Finance Groups. This post is based on a Debevoise & Plimpton Client Update by Mr. Lim and Aaron J. Levy; the complete publication, including footnotes and appendix, is available here.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) amended section 4a of the Commodity Exchange Act (the “CEA”) to require the Commodity Futures Trading Commission (the “CFTC”) to establish position limits on an aggregate basis for (1) futures and options contracts on agricultural and exempt commodities traded on or subject to the rules of a designated contract market (“DCM”) and (2) contracts based on the same underlying commodity as such futures and option contracts, including (a) swaps listed for trading by a DCM or swap execution facility (“SEF”), (b) swaps that are not traded on a DCM, SEF or other registered entity but which are determined to perform or affect a “significant price discovery function” (“SPDF swaps”) and (c) foreign board of trade (“FBOT”) contracts that are price-linked to a DCM or SEF contract and made available for trading on the FBOT by direct access from within the United States.

…continue reading: Proposed CFTC Rules on Position Limits

The Bankruptcy-Law Safe Harbor for Derivatives: A Path-Dependence Analysis

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday December 9, 2013 at 9:33 am
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Editor’s Note: The following post comes to us from Steven L. Schwarcz, Stanley A. Star Professor of Law & Business at Duke University School of Law. The post is based on a paper co-authored by Professor Schwarcz and Ori Sharon of Duke University School of Law.

Bankruptcy law in the United States, which serves as an important precedent for the treatment of derivatives under insolvency law worldwide, gives creditors in derivatives transactions special rights and immunities in the bankruptcy process, including virtually unlimited enforcement rights against the debtor (hereinafter, the “safe harbor”). The concern is that these special rights and immunities grew incrementally, primarily due to industry lobbying and without a systematic and rigorous vetting of their consequences.

Path Dependence

This type of legislative accretion process is a form of path dependence—a process in which the outcome is shaped by its historical path. To understand path dependence, consider Professor Mark Roe’s example of an 18th century fur trader who cuts a winding path through the woods to avoid dangers. Later travelers follow this path, and in time it becomes a paved road and houses and industry are erected alongside. Although the dangers that affected the fur trader are long gone, few question the road’s inefficiently winding route.

…continue reading: The Bankruptcy-Law Safe Harbor for Derivatives: A Path-Dependence Analysis

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