Month: July 2014

Extension of Certain Dodd-Frank No-Action Relief

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On May 1, 2014, the Commodity Futures Trading Commission (“CFTC”) established a phased compliance timeline for the implementation of the trade execution requirement[1] currently applicable to certain interest rate swaps and credit default swaps executed as part of a “package transaction.”[2]  Earlier this year, the CFTC had provided no-action relief that would have required all swaps that are part of a package transaction to be traded either on a designated contract market or on a swap execution facility after May 15, 2014.[3] READ MORE →

CFTC Establishes Expedited Process for Relief for Certain Delegating CPOs

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On May 12, 2014, the Commodity Futures Trading Commission (“CFTC”) issued guidance[1] (the “CPO Guidance”) establishing the circumstances under which it intends to provide registration no-action relief through a streamlined process where a commodity pool operator (“CPO”) has delegated investment management authority with respect to a commodity pool to another person registered as a CPO.  The CFTC had historically received requests for, and in some cases issued, such no-action relief, but without the benefit of a streamlined approach.

A CPO is generally defined under the U.S. Commodity Exchange Act to include a person engaged in a business that is of the nature of a commodity pool or similar form of enterprise and who markets interests in a commodity pool and solicits, accepts or receives customer funds for investment in the pool for the purpose of trading in “commodity interests.”  Pursuant to modifications made in connection with Dodd-Frank, “commodity interests” are now defined to include swaps.[2]

In the CPO Guidance, the CFTC included a form of request for no-action relief, which provides for certifications and acknowledgements to be made by both the delegating and designated CPOs.  Significantly, the delegating CPO is to represent that the applicable “criteria” for relief, as set forth in the CPO Guidance, are met.  Similarly, the designated CPO is to acknowledge that it meets all the applicable “criteria.”  These criteria include, inter alia, that: (i) the delegation of investment management authority has been made (from the delegating CPO to the designated CPO) with respect to the commodity pool pursuant to a “legally binding document”; (ii) the designated CPO is registered as a CPO; (iii) there is a business reason for the designated CPO being a separate entity from the delegating CPO that is not solely to avoid registration by the delegating CPO; and (iv) the books and records of the delegating CPO with respect to the commodity pool are maintained by the designated CPO in accordance with CFTC Regulation 1.31.

[1] CFTC Staff Letter No. 14-69, Requesting Registration No-Action Relief on an Expedited Basis for Commodity Pool Operators who Delegate Certain Activities to a Registered Commodity Pool Operator under Certain Circumstances (May 12, 2014).

[2] See 7 U.S.C. 1a(11)(A)(i)(I).  The corresponding definition of “commodity pool” was amended to read, in relevant part, “any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests, including any . . . swap.”  7 U.S.C. § 1a(10) (emphasis added).

Collateral Segregation Notices for Uncleared Swaps

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Consistent with a final rule issued by the Commodity Future Trading Commission last year (the “IM Segregation Rule”),[1] registered swap dealers have begun to notify counterparties prior to the execution of uncleared swaps that counterparties may require that any initial margin be “segregated,” that is, held at an independent custodian in an individual account separate from margin posted by other swap dealer counterparties. READ MORE →

NYS Bar Association Tax Session Issues Report on Section 871(m) Regulations

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On May 20, 2014, the New York State Bar Association Tax Session issued a Report on Proposed Regulations under Section 871(m) of the Internal Revenue Code of 1986.  The report addresses proposed regulations that the Internal Revenue Service issued in December 2013 concerning withholding on equity-linked financial instruments that reference U.S. stocks.[1]  The report, available here, was co-authored by Orrick partner Peter J. Connors.

[1] A past issue of Derivatives in Review (available here) also reported on those proposed regulations.

 

ISDA Publishes Section 2(a)(iii) Form of Amendment

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In June 2014, the International Swaps and Derivatives Association, Inc. (“ISDA”) published a form of amendment relating to Section 2(a)(iii) of the preprinted form of ISDA Master Agreement.  Section 2(a)(iii) generally permits a contracting party to withhold performance indefinitely if an event of default or potential event of default has occurred and is continuing (or an early termination date has been designated) with respect to its counterparty.  ISDA initially announced an initiative to evaluate and address issues arising under Section 2(a)(iii) in 2011.

As previously discussed in Derivatives in Review, Section 2(a)(iii) has been treated inconsistently by courts across various jurisdictions in recent years, leading to market uncertainty regarding the ability of a non-defaulting party to indefinitely withhold performance.  The form of amendment effectively allows a defaulting party to impose a limit on the non-defaulting party’s right to suspend performance by designating a “condition end date” to that suspension of performance (the form of amendment suggests 90 days after notice by the defaulting party for this period), after which a non-defaulting party either must perform (together with payment of interest[1] on withheld amounts or other compensation in respect of withheld delivery), or terminate.

[1] Such interest would be payable at the “Non-default Rate,” which is defined: (i) under the 1992 ISDA Master Agreement, as a rate equal to the cost (without proof or evidence of any actual cost) to the non-defaulting party if it were to fund the relevant amount, as certified by it; and (ii) under the 2002 ISDA Master Agreement, as a rate offered to the non-defaulting party, as certified by it, by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such banks selected in good faith by the non-defaulting party for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market.