On March 15, President Biden signed, as part of a larger appropriations act, legislation known as the “Adjustable Interest Rate (LIBOR) Act,” which addresses “tough legacy” contracts that do not provide for the use of clearly defined or practicable replacement benchmark rates when LIBOR is discontinued. This development was welcomed by the market as it inches towards LIBOR discontinuation. Although certain states – most notably New York – have passed or are considering passing similar legislation, this federal legislation expressly supersedes “any provision of any State or local law, statute, rule, regulation, or standard” and establishes a uniform process, on a nationwide basis, for replacing LIBOR in tough legacy contracts.
Prudential Regulators Amend Swap Margin Rules
On July 1, 2020, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency (together, the “agencies”) published a final rule adopting amendments to the agencies’ regulations imposing margin requirements on swap dealers and security-based swap dealers (“covered swap entities”).[1] On the same date, the agencies also published an interim final rule prompted by the COVID-19 crisis, postponing certain initial margin implementation deadlines.[2]
ISDA Publishes Additional IBOR Consultations
On May 16, the International Swaps and Derivatives Association, Inc. (“ISDA”) published two consultations in connection with the potential discontinuation of certain interbank offered rates (“IBORs”), seeking input on (i) the replacement of USD LIBOR, CDOR and HIBOR (the “Second Benchmark Consultation”)[1] and (ii) the preferred approach for addressing pre-cessation issues in derivatives that reference certain IBORs (the “Pre-Cessation Consultation”). [2] These Consultations follow an earlier consultation published by ISDA in July 2018 (the “First Benchmark Consultation”[3] and, together with the Second Benchmark Consultation and the Pre-Cessation Consultation, the “Consultations”) relating to the potential discontinuation of numerous IBOR benchmark rates. READ MORE
SA-CCR Proposal Receives Forceful Public Comments
On March 18, the extended comment period ended for the Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (“SA-CCR”) rule (the “Proposed Rule”)[1] proposed by the Federal Reserve Board (“Board”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency (“OCC” and together with the Board and the FDIC, the “Agencies”). SA-CCR would, in some cases, supplant the calculations currently used by banking organizations for derivatives under the existing regulatory capital rule,[2] and may have significant implications for commercial end-users. READ MORE
ACIC Releases Model Provision for Swap Breakage
On April 18, the American College of Investment Counsel (the “ACIC”) released a final version of its Model Form Make-Whole and Swap Breakage Indemnity Language (the “Model Provision”),[1] as well as a substantially similar Swap Indemnity Letter Form (the “Letter Form”).[2] These final versions of the Model Provision and the Letter Form revise the initial drafts, released for comment on May 20, 2018, which were prepared to replace the existing 2007 versions. The purpose of both the Model Provision and the Letter Form is to place noteholders purchasing non-U.S. dollar denominated notes and entering into a cash-flow hedge with a swap counterparty in a similar economic position as if they had purchased a U.S. dollar denominated note.[3] READ MORE
An End User’s Practical Guide to the QFC Stay Rules
The Board of Governors of the Federal Reserve System (Board), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) adopted rules (together, the QFC Stay Rules) in 2017 requiring amendments to certain qualified financial contracts (QFCs). The compliance dates for these rules depend on the type of QFC counterparty facing a “covered entity” (as defined below), and are being phased in beginning on January 1, 2019 and ending on January 1, 2020.[1] Notwithstanding this compliance phase-in, dealers subject to the QFC Stay Rules have been requesting that all of their counterparties, including end users, take action to facilitate compliance as though the initial compliance date, January 1, 2019, applied to all types of QFC counterparties. This article is intended to help buy-side participants navigate the compliance process, with emphasis on describing (i) the various types of contracts that constitute “covered” QFCs subject to the rules and (ii) the various alternative methods for compliance.
Smart Contracts That Violate the Commodity Exchange Act: What Parties Are Liable?
In recent years, the U.S. Commodity Futures Trading Commission (CFTC) has devoted significant resources to addressing how the requirements of the Commodity Exchange Act (CEA) and the regulations thereunder apply to transactions involving Bitcoin and other virtual currencies.[1] The CFTC has not adopted any rules specific to virtual currencies, but rather has made clear that derivatives contracts based on a virtual currency are subject generally to the same CFTC regulations that apply to other types of derivatives contracts that have traditionally been within the CFTC’s jurisdiction.[2] Additionally, the CFTC has noted that derivatives contracts are susceptible to automation through smart contracts and distributed ledger technology (DLT) and “[e]xisting law and regulation apply equally regardless what form a contract takes . . . [even to] contracts [or parts of contracts] that are written in code[.]”[3]
LIBOR . . . Coming to an End?
Orrick lawyers authored an article titled “LIBOR . . . Coming to an End?” discussing the transition to the post-LIBOR era, with focus on legacy contracts that reference LIBOR. The article is available here.
Getting Smarter: CFTC Publishes Smart Contracts Primer
An Orrick lawyer authored an article titled “Getting Smarter: CFTC Publishes Smart Contracts Primer,” addressing LabCFTC’s recently released “Primer on Smart Contracts.” The Primer provides (i) a high-level overview of smart contract technology and applications, (ii) a discussion of the potential role of the CFTC in smart contract regulation and (iii) a discussion of the unique risks and governance challenges posed by smart contracts. The article is available here.
The Evolution of Proxy Generation PPAs
An Orrick lawyer co-authored a white paper titled “Proxy Generation PPAs: The Next Evolution of PPA for the Corporate & Industrial Buyer,” discussing new contractual architecture for power purchase agreements that better enables corporate and industrial purchasers of renewable energy to hedge weather and commodity pricing risk inherent in their current transactions. The article is available here.