Publication of 2014 ISDA Credit Derivatives Definitions

On February 21, the International Swaps and Derivatives Association, Inc. (“ISDA”) announced the publication of the 2014 ISDA Credit Derivatives Definitions (the “2014 CD Definitions”), which amend several terms that existed in the 2003 version of the definitions, and introduce several new terms based on “lessons learned.”

The most important new terms in the 2014 CD Definitions are in response to events affecting financial institutions and sovereign entities that have occurred since the introduction of the 2003 version of definitions, including governmental interventions in bank debt.  These new terms include an entirely new credit event known as “Governmental Intervention,”[1] which is intended to be triggered upon a government-initiated “bail-in”[2] or debt restructuring, as well as a provision for delivery of instruments resulting from a government-initiated debt exchange.

In recent years, concerns have been expressed that the credit event for “Restructuring” may not cover certain measures actually taken by governments to support struggling entities, especially banks.  For example, there was uncertainty as to whether a Restructuring had been triggered by the February 2013 nationalization of SNS Bank NV, the fourth largest bank in the Netherlands, by the Dutch government and the expropriation of all of its subordinated bonds.[3]  This uncertainty was caused primarily because “expropriation” was not expressly included as a triggering event in the 2003 definition of Restructuring.

The Governmental Intervention credit event is intended to fill this gap in protection.  Governmental Intervention is defined to include actions or announcements by a “Governmental Authority”[4] that result in, inter alia, the reduction in the rate or amount of interest payable by a reference entity, an expropriation or other event which mandatorily changes the beneficial holder of the relevant obligation, or a mandatory cancellation, conversion or exchange.  This event is similar to Restructuring in certain respects (for example, the reduction in the rate or amount of interest of an obligation may trigger both events).  However, unlike Restructuring, deterioration in creditworthiness is not required to trigger the Governmental Intervention credit event.

In addition to the new credit event, the 2014 CD Definitions also introduce the ability to settle certain credit events by delivery of assets into which debt is converted.  This change was prompted, at least in part, by Greece’s 2012 debt restructuring, in which the Greek government used a “collective action clause” under domestic law to exchange certain debt before an auction to settle credit default swaps could be held.  A final settlement price for contracts is typically determined by holding an auction for the defaulted bonds.  The result of the debt exchange was that there were fewer bonds constituting “deliverable obligations” for purposes of the auction.  As we have previously highlighted, credit protection buyers were spared serious losses in connection with the credit event caused by the Greek debt restructuring because the price for the new bonds delivered at the auction closely approximated the level of loss sustained by private investors on the old bonds.[5]  Nevertheless, the Greek debt exchange highlighted the need to address a potential disconnect in prices under similar circumstances in the future.

In response, the 2014 CD Definitions provide for new “Asset Package Delivery” provisions.  These provisions generally apply upon the occurrence of an “Asset Package Delivery Event,” which is defined to include events such as a Restructuring with respect to a sovereign entity.  Under the new provisions if, for example, a sovereign Restructuring credit event occurs, the assets that will be deliverable into an auction will be based on “Package Deliverable Bonds,” which are obligations that qualified as deliverable obligations at the time the Asset Package Delivery Event became effective and that are selected by ISDA based on certain specified criteria and published on its (or a third party designee’s) website.

ISDA has stated that it expects market participants to begin confirming transactions using the 2014 CD Definitions starting in September 2014.  A protocol will also be established to allow parties to utilize the 2014 CD Definitions for existing transactions.

[1] This new credit event, is defined as follows:

“(a) ‘Governmental Intervention’ means that, with respect to one or more Obligations and in relation to an aggregate amount of not less than the Default Requirement, any one or more of the following events occurs as a result of an action taken or an announcement made by a Governmental Authority pursuant to, or by means of, a restructuring and resolution law or regulation (or any other similar law or regulation), in each case, applicable to the Reference Entity in a form which is binding, irrespective of whether such event is expressly provided for under the terms of such Obligation:

(i) any event which would affect creditors’ rights so as to cause:

(A) a reduction in the rate or amount of interest payable or the amount of scheduled interest accruals (including by way of redenomination);

(B) a reduction in the amount of principal or premium payable at redemption (including by way of redenomination);

(C) a postponement or other deferral of a date or dates for either (I) the payment or accrual of interest, or (II) the payment of principal or premium; or

(D) a change in the ranking in priority of payment of any Obligation, causing the Subordination of such Obligation to any other Obligation;

(ii) an expropriation, transfer or other event which mandatorily changes the beneficial holder of the Obligation;

(iii) a mandatory cancellation, conversion or exchange; or

(iv) any event which has an analogous effect to any of the events specified in Sections 4.8(a)(i) to (iii).”

[2] A “bail-in” is when a borrower’s creditors are forced to partially bear some of the burden of assistance through a write-off (in contrast, a “bail-out” is when a government or external investors rescue a borrower, whether by infusing cash or assisting in the servicing of debt).  See What is a bail-in?, The Economist (April 7, 2013).

[3] See generally Letter of Minister of Finance Dijsselbloem to Parliament (English translation), dated February 1, 2013 (stating that “[i]t has been decided to expropriate the securities and other assets not only of SNS Bank but also SNS REAAL (the holding company). . . . the expropriation extends to both shares and subordinated creditors.”).  After deferring a decision on two separate occasions, the relevant ISDA determinations committee ultimately decided by a vote of 14 to 1 that a Restructuring had occurred.

[4] “Governmental Authority” is defined in Section 4.9(b) of the 2014 CD Definitions to include the following:

“(i) any de facto or de jure government (or any agency, instrumentality, ministry or department thereof);

(ii) any court, tribunal, administrative or other governmental, inter-governmental or supranational body;

(iii) any authority or any other entity (public or private) either designated as a resolution authority or charged with the regulation or supervision of the financial markets (including a central bank) of the Reference entity or some or all of its obligations; or

(iv) any other authority which is analogous to any of the entities specified in Sections 4.9(b)(i) to (iii).”

[5] See [DIR May 7, 2012].

Bitcoin: The Virtual Currency Market Emerges

Bitcoin is a “virtual” currency that was developed in 2008 and has gained increased acceptance as a form of payment and as a recognized asset in currency exchange markets, as reflected by the granting in 2013 of “XBT” as its ISO currency code.  Alternative virtual currencies also have been established, but none has approached the popularity of bitcoin.

The founder (or, perhaps, founders) of bitcoin used the pseudonym of “Satoshi Nakamoto” and remains unknown, although certain news sources recently claimed to have identified him.  However, this founder was present on bitcoin blogs for some time, where he articulated that bitcoin was intended to be immune from the possibility of corruption by governments, central banks and other third parties because such entities would not be empowered to directly affect the issuance or exchange of the currency.  Instead, as further described below, bitcoin is a decentralized, peer-to-peer digital-payments system.  The Bitcoin Foundation, an advocacy group, “standardizes, protects and promotes” the use of bitcoin.  It has been primarily funded by grants from for-profit companies that depend on bitcoin, such as CoinLab (an investor in new technologies and business in the bitcoin marketplace), Mt. Gox (formerly a bitcoin exchange based in Tokyo) and BitInstant (formerly a means to rapidly pay traditional funds to bitcoin exchanges).  The latter two companies are now defunct.

Similar to traditional currencies, bitcoin is accepted by an increasing number of merchants and others.  For example, began accepting bitcoin on January 9, 2014 and expects bitcoin sales to reach between $10 million and $15 million this year.  Also, similar to traditional currencies, bitcoin may be traded in the currency markets; the current USD/XBT exchange rate is approximately 0.0017.  Significantly, spikes in that exchange rate sometimes have coincided with insecurity about traditional currencies.  For example, when the Cypriot government announced in March 2013 that citizens would be assessed a 6.75% tax on bank deposits in response to the banking crisis, the value of bitcoin rose abruptly and substantially; it has been suggested that this spike was caused, at least in part, by citizens of other struggling nations desperate for safekeeping of their savings.

There are currently some 12 million bitcoins in (virtual) circulation, worth over US$7.2 billion.  Through the use of “public key cryptography,” each bitcoin user is assigned a private key and a public key (also known as a “bitcoin address”).  When a user transfers bitcoins to another user’s virtual “wallet,” a transaction message is created that contains both users’ public keys but is “signed” using the transferring user’s private key.  The transaction, including the two public keys, is recorded in a “block chain,” which is publicly viewable.  Because the public keys are not tied to anyone’s identity, however, the block chain allows for a certain degree of anonymity.  Meanwhile, the use of private keys, of course, helps protect against theft and fraud.

A process known as “mining” causes both bitcoins to be generated and transactions to be validated.  Generally, a peer-to-peer network of some twenty thousand independent nodes—i.e., very powerful and expensive computer systems—act as virtual “miners,” competing to find sequences of data (referred to as “blocks”) within a complex mathematical problem.  As noted above, all transactions in bitcoin are publicly viewable in a universal ledger called the block chain; a transaction can be added to the block chain only if a miner certifies it by including a block (again, a sequence of data that has been found in the complex mathematical problem).  Thus, every ten minutes, miners attempt to use their blocks to add recently-broadcast proposed transactions to the block chain for a reward consisting of a certain number of bitcoins as well as an additional transaction fee.  Authentication by the miners is critical to the legitimacy and integrity of the system and, among other things, prevents double-spending of the same bitcoin.

Since bitcoin’s development, computer systems with ever-increasing power have been engaged in mining, as the more powerful systems are better equipped to be the first to solve the mathematical problem and, of course, win the bitcoins reward.  As bitcoins are mined, the difficulty of the math problem is increased while the amount of the reward is reduced.

Unlike typical currencies, bitcoin is completely independent of any national or trading block central bank or system, such as the Federal Reserve System in the United States or the European Central Bank.  This means that, among other things, bitcoins are not “printed” or generated by a government or central bank and they are not directly impacted by the actions of such an entity (for example, a decision to print more currency).  As the Financial Crimes Enforcement Network of the United States Treasury Department (“FinCen”) has stated: “In contrast to real currency, ‘virtual’ currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.  In particular, virtual currency does not have legal tender status in any jurisdiction.”[1]

Nevertheless, global financial regulators have begun implementing measures that are intended to curb the use of virtual currency for money laundering and other criminal activities and, to some extent, regulate the virtual currency market.  For example, in March 2013, FinCen issued guidance clarifying that “the definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies.  Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the [Bank Secrecy Act].”[2]  In addition, in May 2013, the Government Accountability Office published a report to the U.S. Senate Finance Committee stating that income earned by trading virtual currencies is taxable.[3]  More recently, the CFTC announced in March 2014 that it is studying whether it should use its anti-manipulation authority to regulate virtual currencies such as bitcoin, and also whether derivatives contracts based on bitcoin should come under regulation.  In her testimony before the Senate Banking Committee on February 27, U.S. Federal Reserve Chair Janet Yellen added: “The Fed does not have authority with respect to Bitcoin . . . but certainly it would be appropriate for Congress to ask questions about what the right legal structure would be for digital currencies.”[4]  Moreover, Russian authorities recently issued warnings against using Bitcoin, stating that the virtual currency could be used for money laundering or financing terrorism and that treating it as a parallel currency is illegal.[5]  In December, the People’s Bank of China decreed that merchants may not accept bitcoin and forbade banks and payment processors from converting bitcoin into yuan.[6]  Promptly thereafter the price of bitcoin fell below US$500 per bitcoin.

Further, on January 27, the Manhattan U.S. Attorney announced charges against the CEO of a bitcoin exchange company and a co-conspirator for engaging in a scheme to sell over $1 million in bitcoins to users of “Silk Road,” an underground website that enabled users to buy and sell illegal drugs anonymously.[7]  On March 11, the New York State Department of Financial Services announced that it would begin considering proposals and applications for virtual currency exchanges based in New York and expected, by the end of the second quarter, to propose guidance on the regulation of virtual currencies.[8]

The maximum number of bitcoins is set at 21 million, with the final mining projected to occur in 2140.  After the final bitcoin is mined, it is contemplated that the transaction fees described above will continue to motivate miners to verify transactions.  The very limited supply of bitcoins is viewed by some as protection from inflation.

Bitcoin has experienced crises and bouts of high volatility during its brief existence.  For example, in June 2011, hackers caused the price of bitcoin on Mt. Gox, then the most popular exchange, to nearly collapse within minutes.  In recent weeks, Mt. Gox filed for bankruptcy after revealing that almost $500 million in bitcoins stored by the exchange had been stolen, apparently by hackers.

The financial community continues to debate the potential of bitcoin, with some questioning its sustainability and others suggesting it could have the potential not only to compete with traditional money-transfer services for remittances, but also to compete with gold as an asset for investors to store value.  (Of course, unlike gold, the uses of which span jewelry, medicine and electronics, bitcoins are “virtual” and do not have alternative uses.)

Investments in bitcoin can be made in several ways, in addition to sourcing the bitcoins through mining.  First, an investor could purchase bitcoins outright from one of several websites located globally.  Such a purchase could have resulted in an enormous payoff for speculators in 2013, as bitcoin values began at around US$14 per bitcoin and reached a high in November 2013 of around US$980 per bitcoin.[9]  However, this wide differential also evidences the extreme volatility of bitcoin, at least at this stage of its existence.

In addition to direct purchases, in the future investors may gain exposure to the bitcoin asset class through public investment vehicles.  For example, the Winklevoss Bitcoin Trust (Trust) has filed a registration statement (not yet effective) with the Securities and Exchange Commission to issue Winklevoss Bitcoin Shares (Shares), which will represent units of fractional undivided beneficial interest in and ownership of the Trust whose purpose is to hold bitcoins.  Also, the Bitcoin Investment Trust by SecondMark is an open-ended private trust that invests only in bitcoin, but is not publicly traded.  Moreover, Fortress Investment Group, Pantera Capital and two venture capital firms together are creating a fund for investments focused on virtual currencies, which will be known as Pantera Bitcoin Partners LLC.

Besides funds and ETFs, derivatives based on bitcoin are beginning to develop.  For example, ICBIT, a bitcoin exchange based in Russia, has introduced a market in futures contracts on the USD/XBT rate.  Predictious, an Ireland-based prediction market, offers an option spread market in bitcoin, where users may speculate that the price of bitcoin will be above or below certain thresholds at specified future dates.  Using, a bitcoin trading platform based in Singapore and London, customers can short bitcoin and may use bitcoin to open leveraged positions, allowing them to profit from small market movements.

[1] Financial Crimes Enforcement Network of the United States Treasury Department, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001 (March 18, 2013).

[2] Id.

[3] See Government Accountability Office, Report to the Committee on Finance, U.S. Senate, Virtual Economies and Currencies:  Additional IRS Guidance Could Reduce Tax Compliance, GAO-13-516 (May 2013).

[4] Semiannual Monetary Policy Report to the Congress: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs.

[5] For example, according to Reuters, the Russian Prosecutor General’s Office stated on February 6, 2014: “Systems for anonymous payments and cyber currencies that have gained considerable circulation – including the most well-known, Bitcoin – are money substitutes and cannot be used by individuals or legal entities.” Russian Authorities Say Bitcoin Illegal, Reuters, February 9, 2014 (available at:

[6] See, e.g., Gerry Mullany, China Restricts Banks’ Use of Bitcoin, New York Times, December 5, 2013 (available at:

[7] See Press Release, the United States District Attorney’s Office, Southern District of New York, Manhattan U.S. Attorney Announces Charges Against Bitcoin Exchangers, Including CEO of Bitcoin Exchange Company, for Scheme to Sell and Launder Over $1 Million in Bitcoins Related to Silk Road Drug Trafficking, January 27, 2014 (available at:

[8] See, e.g., Saumya Vaishampayan, New York Opens Door to Regulated Bitcoin Exchanges,, March 11, 2014 (available at:

[9] As of the date of this publication, values are around US$615 per bitcoin.

Dodd-Frank Trade Execution Developments

In February 2014, certain categories of interest rate swaps and index credit default swaps became subject to the trade execution requirement under Dodd-Frank.  As a result, those product types may no longer be traded bilaterally over-the-counter but, rather, must be executed on a swap execution facility (“SEF”) or designated contract market (“DCM”), unless an exemption or exception applies.  A product type becomes subject to the trade execution requirement when (i) it is required to be cleared under a CFTC clearing determination[1] and (ii) a SEF or DCM has made it “available to trade” (i.e., the SEF or DCM must demonstrate that it lists or offers that swap for trading on its trading system or platform and has considered various factors such as “whether there are ready and willing buyers and sellers”), as approved by the CFTC.[2]  If, however, a particular swap qualifies for an exemption or exception from the Dodd-Frank clearing requirement, it generally will be exempt or excepted from the trade execution requirement as well.

Generally, a SEF or DCM may submit its determination to the CFTC that a swap is “made available to trade” and self-certify compliance with the Commodity Exchange Act (“CEA”) and rules thereunder pursuant to CFTC Regulation 40.6.[3]  The CFTC then has 10 business days plus between 30 and 120 calendar days to deem the submission certified and effective.[4]

To date, the following swaps have been submitted to the CFTC by various organizations, all of which have been certified and made effective:

Effective Date
Products Affected
Javelin SEF, LLC
February 15, 2014
Certain interest rate swaps:
See CFTC Press Release
trueEX LLC
February 21, 2014
Certain interest rate swaps:
See CFTC Press Release
February 26, 2014
Certain index credit default swaps and certain interest rate swaps:
See CFTC Press Release
MarketAxess SEF Corporation
February 27, 2014

Certain index credit default swaps:

• CDX.NA.IG On-The-Run 5Y
• CDX.NA.IG Most Recent Off-The-Run 5Y
• DX.NA.HY On-The-Run 5Y
• CDX.NA.HY Most Recent Off-The-Run 5Y
• iTRAXX Europe On-The-Run 5Y
• iTRAXX Europe Most Recent Off 5Y
• iTRAXX Europe Crossover On-The-Run 5Y
• iTRAXX Europe Crossover
Bloomberg SEF LLC
March 9, 2014

Certain index credit default swaps:

• CDX.NA.IG 5Y: The then current On-The-Run series
• iTraxx Europe 5Y: The then current On-The-Run series

Certain interest rate swaps:

• USD LIBOR IRS with 2, 3, 5, 7, 10, 15, 20 and 30-year tenors: Fixed Notional, Spot Starting and Par only
• EUR EURIBOR IRS with 2, 3, 5, 7, 10, 15, 20 and 30-year tenors: Fixed Notional, Spot Starting and Par only
(The foregoing Bloomberg SEF LLC products were made available to trade via earlier determinations, specifically those effective February 15, 2014, February 21, 2014, and February 26, 2014, as summarized above in this table.)

However, “made available to trade” determinations have not yet been made for many of the swaps that are currently required to be cleared, including various basis swaps and forward rate agreements, and certain indices and tenors of index credit default swaps.

In addition, on February 10, 2014, in connection with the commencement of the trade execution requirement, the Division of Market Oversight of the CFTC announced the following measures intended “to promote trading on swap execution facilities and support an orderly transition to mandatory trading”:

  • Swap Data Repositories – Access to SDR Data by Market Participants,” interim final rule.  Market participants are generally prohibited access to swap data maintained by a swap data repository.[5]  However, the swap data and other information maintained by a swap data repository related to a particular swap may be accessed by either counterparty to that swap.[6]  This interim final rule clarifies that such swap data available to a counterparty to a swap does not include the identity of the other counterparty (or its clearing member) if the swap is: (i) executed anonymously on a SEF or DCM; and (ii) cleared in accordance with the CFTC’s “straight-through processing” requirements.[7]
  • CFTC Letter No. 14-12, “No-Action Relief from the Commodity Exchange Act Sections 2(h)(8) and 5(d)(9) and from Commission Regulation § 37.9 for Swaps Executed as Part of a Package Transaction”.  This no-action letter provides that, until May 15, 2014, a swap executed as part of a “package transaction” will be not subject to the trade execution requirement.  A “package transaction” is a transaction involving two or more instruments: (i) that is executed between two counterparties; (ii) that is priced or quoted as one economic transaction with simultaneous execution of all components; (iii) that has at least one component that is a swap that is made available to trade and, therefore, is subject to the trade execution requirement; and (iv) where the execution of each component is contingent upon the execution of all other components.[8]
  • Division of Market Oversight Guidance on Swap Execution Facility Jurisdiction”.  Under the CEA, a SEF must establish and enforce rules such as terms and conditions of swaps traded or processed through the SEF.[9]  CFTC Regulation 37.202(b) further requires a SEF to obtain the consent of any market participant before that market participant may access the SEF’s facilities.  Guidance clarifies that a SEF may obtain such consent simply by providing in its rulebook that any person initiating or executing a transaction on or subject to the rules of the SEF directly or through an intermediary, and any person for whose benefit such a transaction has been initiated or executed, consents to the jurisdiction of the SEF.[10]

The range of product types to which the trade execution requirement applies is expected to expand as SEFs and DCMs make further submissions and “made available to trade” determinations are made.

[1] CEA § 2(h)(8).

[2] CFTC Rules 37.10 and 38.12.

[3] Id.

[4] See CFTC Regulation 40.6.

[5] CFTC 49.17(f).

[6] Id.

[7] Swap Data Repositories – Access to SDR Data by Market Participants (February 10, 2014) (available at:

[8] Some common types of interest rate swap package transactions include swap curves (package of two swaps of differing tenors), swap butterflies (package of three swaps of differing tenors), swap spreads (government securities vs. swaps typically within similar tenors), invoice spreads (Treasury-note or Treasury-bond futures vs. swaps), cash/futures basis (Eurodollar futures bundles vs. swaps), offsets/unwinds, delta neutral option packages (caps, floors, or swaptions vs. swaps), and mortgage-backed security basis (to-be-announced swaps (agency mortgage-backed securities) vs. swap spreads). Common credit default swap package transactions include transactions commonly known as index options vs. index, tranches vs. index, and index vs. single name credit default swaps.

[9] 7 U.S.C. § 5h(f)(2)(A).

[10] Division of Market Oversight Guidance on Swap Execution Facility Jurisdiction (February 10, 2014) (available at:

Lehman Court Finds Safe Harbors Protect Damage Calculation Provisions In Swap

An important opinion involving swaps was issued recently in the Lehman litigation.  Specifically, this opinion protects a non-debtor counterparty’s right to rely on a contractually agreed methodology for damages calculations upon the liquidation of a safe harbored swap agreement, even if the debtor’s bankruptcy triggers the provision.  For a summary of this opinion and its implications, click here.

No-Action Relief Relating to the Inter-Affiliate Exemption Under Dodd-Frank

On March 6, 2014, the Commodity Futures Trading Commission (“CFTC”) issued two no-action letters relating to the April 2013 inter-affiliate exemption from the clearing requirement (the “Inter-Affiliate Exemption”).[1]  Pursuant to the Inter-Affiliate Exemption, the clearing requirement generally will not apply to any swap for which either (i) the counterparties have a common majority-owning parent or (ii) one counterparty is a majority owner of the other (“Eligible Affiliate Counterparties”), provided that certain additional requirements are met.[2]  One such requirement is that each Eligible Affiliate Counterparty, whether or not a U.S. person, clear all outward-facing swaps to which the clearing requirement applies[3] (“Designated Swaps”) or be eligible for an exception or exemption from clearing.[4]  Consequently, a non-U.S. Eligible Affiliate Counterparty that elects to use the Inter-Affiliate Exemption may be required to clear its outward-facing Designated Swaps with non-U.S. counterparties that otherwise, pursuant to the CFTC Cross-Border Guidance,[5] would not be subject to CFTC jurisdiction.  However, the Inter-Affiliate Exemption provided that, subject to certain conditions described below, the requirement that outward-facing swaps be cleared would not apply until March 11, 2014.[6]

The first no-action letter provides relief by extending that date to December 31, 2014.  To be eligible for this relief: (i) the Eligible Affiliate Counterparties claiming the Inter-Affiliate Exemption must satisfy the various requirements of the Inter-Affiliate Exemption, including, for example, that the risks associated with the Designated Swap be monitored and managed under a centralized risk management program and that certain information be reported to a swap data repository; (ii) a counterparty to the swap must not be located in a non-U.S. jurisdiction in which the CFTC has determined that a “comparable and comprehensive” clearing requirement exists;[7] and (iii) the Eligible Affiliate Counterparties must promptly provide to the CFTC Division of Clearing and Risk, upon request, documentation regarding their compliance with any aspect of the no-action letter and the Inter-Affiliate Exemption.  The no-action letter notes that the time extension may promote the adoption by other jurisdictions of comparable and comprehensive clearing requirements.

The second no-action letter provides that, until December 31, 2014, the trade execution requirement generally will not apply to a swap between Eligible Affiliate Counterparties even if they do not elect the Inter-Affiliate Exemption.  (The CFTC previously determined that swaps entered into between Eligible Affiliate Counterparties that elect to use the Inter-Affiliate Exemption will not be subject to the trade execution requirement.)[8]  Generally, all Designated Swaps must be executed through a swap execution facility or a designated contract market, unless an exemption or exception is available or the type of swap has not yet been determined by the CFTC to have been “made available to trade.”[9]  During the period of relief, the CFTC Division of Market Oversight will continue to evaluate whether applying the trade execution requirement to inter-affiliate swaps would promote price transparency in the market, since such swaps often are not entered into on an arm’s-length basis.

[1] CFTC Letter No. 14-25, Re: Time-Limited No-Action Relief from Certain Provisions of the Treatment of Outward-Facing Swaps Condition in the Inter-Affiliate Exemption (March 6, 2014); CFTC Letter No. 14-26, Time-Limited No-Action Relief from the Commodity Exchange Act Section 2(h)(8) for Swaps Executed Between Certain Affiliated Entities Not Electing Commission Regulation § 50.52 (March 6, 2014).

[2] See Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 Fed. Reg. 21,749 (April 11, 2013).

[3] That is, pursuant to the 2012 clearing determination, currently certain index credit default swaps and interest rate swaps.

[4] CFTC Regulation 50.52(b)(4).

[5] Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45,292 (July 26, 2013).

[6] CFTC Regulation 50.52(b)(4).

[7] To date, the CFTC has not announced that any non-U.S. jurisdiction has a comparable and comprehensive clearing requirement.

[8] Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under the Commodity Exchange Act, 78 Fed. Reg. 33,606, 33,606 n.1 (June 4, 2013).

[9] See, e.g., 7 U.S.C. § 2(h)(8).  See also “Dodd-Frank Trade Execution Developments,” posted March 20, 2014.

Volcker Rule: An Overview and Highlights of Certain Key Provisions

On December 10, 2013, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission promulgated the final rule implementing the prohibitions and limitations imposed on banking entities by Section 13 of the Bank Holding Company Act of 1956, known as the “Volcker Rule.”  Click here for a general overview of the Volcker Rule.

Financial Transaction Tax Developments

Since the first published proposal in 2011, we have tracked initiatives and developments regarding a possible European financial tax that would apply to derivatives, among other types of financial transactions.[1]  Despite the publication of a European Commission (“EC”) directive in February 2013 that would apply to eleven participating member-states, the scope and implementation of a financial transaction tax continues to be fiercely debated.  Among other things, the proposed directive would, after an initial “transitional” period, impose a tax rate of at least 0.01% of the notional amount on derivative transactions.

On November 21, 2013, PricewaterhouseCoopers LLC released a study—commissioned by 27 trade groups in the financial industry—that, based on existing literature surrounding a financial transaction tax, questioned the benefits of such a tax and highlighted its potential to negatively impact financial markets, as well as economic growth.[2]  With respect to the derivatives market, the study noted that the EC’s impact assessment estimated that a financial transaction tax would reduce trading volumes by between 70% and 90%.[3]  The study further noted that certain commentators have predicted that the tax could have a substantial (or, for some product types, profound) impact on the bid-offer spreads of derivative transactions.[4]

Most recently, it has been reported that the participating member-states have been discussing the implementation of a more narrow and modest tax, including one with more robust exemptions.  However, a revised proposal has not yet been published.


[1] See “Financial Transaction Tax Developments” posted on August 26, 2013; “Financial Transaction Tax Developments” posted on June 11, 2013; “Financial Transaction Tax” posted on February 15, 2012; and “Europe Proposes Financial Transaction Tax” posted on October 15, 2011.

[2] PricewaterhouseCoopers LLC, Financial transaction tax: the impacts and arguments, November 21, 2013 (available at:

[3] Id. at 24.

[4] Id.

CFTC Substituted Compliance Determinations and No-Action Letters

On December 20, 2013, the Commodity Futures Trading Commission (“CFTC”) approved substituted compliance in the European Union and five other jurisdictions for a range of “entity-level” and “transaction-level” requirements of Dodd-Frank.[1]  Pursuant to a substituted compliance determination, certain swap counterparties generally may comply with the requirements of a jurisdiction (e.g., those of the European Market Infrastructure Regulation in Europe) in lieu of comparable Dodd-Frank requirements.

These substituted compliance determinations appear to have been issued in connection with the expiration on December 21, 2013 of substantial portions of the July 21, 2013 CFTC cross-border exemptive order (the “Exemptive Order”),[2] which generally delayed application of the entity-level and transaction-level requirements of Dodd-Frank to certain non-U.S. swap counterparties.  The recent substituted compliance determinations covered the following requirements:

Entity-Level Requirements: Chief Compliance Officer (regulation 3.3); Swap Data Recordkeeping (regulations 23.201, 23.203); Risk Management Program (regulation 23.600); Monitoring of Position Limits (regulation 23.601); Diligent Supervision (regulation 23.602); Business Continuity (regulation 23.603); Research Conflicts (regulation 23.605(c)); Clearing Conflicts (regulation 23.605(d)); Undue Influence (regulation 23.605(e)); Availability of Information for Disclosure (regulation 23.606); Clearing Member Risk Management (regulation 23.609).

Transaction-Level Requirements: Swap Confirmation (regulation 23.501); Portfolio Reconciliation (regulation 23.502); Portfolio Compression (regulation 23.503); certain provisions of Daily Trading Records (regulation 23.202); certain provisions of Swap Trading Relationship Documentation (regulation 23.504).

            Also on December 20, 2013, the Division of Swap Dealer and Intermediary Oversight of the CFTC (the “Division”) issued two no-action letters related to the application of certain entity-level requirements.[3]  Pursuant to one of these letters, the Division stated that it will not recommend that the CFTC take enforcement action prior to March 3, 2014 against a non-U.S. swap dealer established in the European Union or four other jurisdictions for failure to comply with certain entity-level requirements of Dodd-Frank, specifically Risk Management Program (regulation 23.600(c)(2)) or Restrictions on Counterparty Clearing Relationships (regulation 23.608).[4]  The Division noted that it was providing this relief for swap dealers in those jurisdictions to have “an opportunity to prepare for compliance” with the relevant regulations.

Under the other no-action letter, the Division stated that it will not recommend that the CFTC take enforcement action against a non-U.S. swap dealer established in the European Union or four other jurisdictions (generally, unless its ultimate parent is a U.S. swap dealer) for failure to comply with: (i) the reporting requirements with respect to its swaps with a non-U.S. counterparty that, generally, is not guaranteed by a U.S. person until December 1, 2014 (or, if earlier, 30 days after the issuance of a relevant substituted compliance determination); and (ii) the reporting requirements with respect to its swaps with a non-U.S. counterparty that, generally, is guaranteed by a U.S. person until March 3, 2014 or April 2, 2014 (depending on when the swap was entered into).[5]

[1] See, e.g., Comparability Determination for the European Union: Certain Transaction-Level Requirements, 78 Fed. Reg. 78,878 (December 27, 2013).

The “entity-level” requirements relate to: (i) capital adequacy; (ii) chief compliance officer; (iii) risk management; (iv) swap data recordkeeping; (v) swap data repository reporting; and (vi) physical commodity large swaps trader reporting.

The “transaction-level” requirements include: (i) required clearing and swap processing; (ii) margining (and segregation) for uncleared swaps; (iii) mandatory trade execution; (iv) swap trading relationship documentation; (v) portfolio reconciliation and compression; (vi) real-time public reporting; (vii) trade confirmation; (viii) daily trading records; and (ix) external business conduct standards.

[2] Exemptive Order Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 43,785 (July 22, 2013).

[3] CFTC Letter No. 13-78, Re: Time-Limited No-Action Relief from Certain Entity-Level Internal Business Conduct Requirements for Certain Swap Dealers and Major Swap Participants Established under the Laws of Australia, Canada, the European Union, Japan, and Switzerland (December 20, 2013); CFTC Letter No. 13-75, Re: Time-Limited No-Action Relief from Certain Requirements of Part 45 and Part 46 of the Commission’s Regulations for Certain Swap Dealers and Major Swap Participants Established under the Laws of Australia, Canada, the European Union, Japan or Switzerland (December 20, 2013).

[4] See CFTC Letter No. 13-78.  In this letter, the Division also stated that it will not recommend that the CFTC take enforcement action prior to March 3, 2014 against a non-U.S. swap dealer established in Switzerland for failure to comply with the entity-level requirements of Dodd-Frank relating to Clearing Member Risk Management (regulation 23.609).

[5] See CFTC Letter No. 13-75.

Further Delay of and Request for Comments on November 14, 2013 Staff Advisory Regarding Application of CFTC Regulations to U.S. Activities of Non-U.S. Swap Dealers

On January 3, 2014, the Commodity Futures Trading Commission (“CFTC”) issued a no-action letter further delaying until September 15, 2014 the effectiveness of a November 14, 2013 advisory regarding the applicability of certain Dodd-Frank requirements to activities that occur in the United States (the “Advisory”).[1]  A previous no-action letter, issued on November 26, 2013, had delayed the effectiveness of the Advisory until January 14, 2014.[2]

The Advisory generally provides that a non-U.S. swap dealer registered with the CFTC must comply with “transaction-level” requirements[3] of Dodd-Frank when entering into a swap with a non-U.S. person if the swap is “arranged, negotiated, or executed by personnel or agents” of the non-U.S. swap dealer located in the United States.[4]

In conjunction with the issuance of this latest no-action letter, the CFTC also issued a notice of request for public comment on all aspects of the Advisory.[5]

[1] CFTC Letter No. 14-01, Re: Extension of No-Action Relief: Transaction-Level Requirements for Non-U.S. Swap Dealers (January 3, 2014); CFTC Staff Advisory No. 13-69, Applicability of Transaction-Level Requirements to Activity in the United States (November 14, 2013).

[2] CFTC Letter No. 13-71, Re: No-Action Relief: Certain Transaction-Level Requirements for Non-U.S. Swap Dealers (November 26, 2013).

[3] The “transaction-level” requirements include: (i) required clearing and swap processing; (ii) margining (and segregation) for uncleared swaps; (iii) mandatory trade execution; (iv) swap trading relationship documentation; (v) portfolio reconciliation and compression; (vi) real-time public reporting; (vii) trade confirmation; (viii) daily trading records; and (ix) external business conduct standards.   These requirements are separated into “Category A” and “Category B” requirements, the latter of which includes solely external business conduct standards.

[4] See CFTC Staff Advisory No. 13-69, Applicability of Transaction-Level Requirements to Activity in the United States (November 14, 2013).

[5] Request for Comment on Application of Commission Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in the United States (available at:

IRS Issues Final Regulations and New Proposed Regulations Regarding Withholding on Derivatives on U.S. Stocks

On December 5, 2013, the Internal Revenue Service issued final regulations and proposed regulations under section 871(m), which address withholding on certain equity-linked notional principal contracts and other financial instruments.  These regulations are targeted at derivatives referencing U.S. stocks in which non-U.S. persons receive a “dividend equivalent” while arguably avoiding U.S. withholding tax but will impact many common corporate transactions, including merger and acquisition transactions and equity based compensation arrangements.  Click here to read more about this recent development.