Month: March 2014

Publication of 2014 ISDA Credit Derivatives Definitions

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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. READ MORE →

Bitcoin: The Virtual Currency Market Emerges

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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. READ MORE →

Dodd-Frank Trade Execution Developments

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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. READ MORE →

Lehman Court Finds Safe Harbors Protect Damage Calculation Provisions In Swap

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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

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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] READ MORE →