Posts by: Editorial Board

Gensler Urges Congress to Drop Exemptions on Derivatives Rules

Posted on

 

In November 18, 2009 testimony, Gary Gensler, Chairman of the Commodity Futures Trading Commission, urged Congress not to include broad exemptions from regulation as Congress moves toward producing a single proposal for the comprehensive regulation of derivatives. Among other things, Chairman Gensler stated that “[s]tandard transactions involving end-users, such as corporations and hedge funds, should not be exempt from the transparency afforded by regulated exchanges and trade execution facilities.” Chairman Gensler’s comments appear to be in response primarily to the House Financial Services Committee’s proposed legislation that would exempt certain end-users from many of the new regulatory requirements.

House Financial Services Committee and House Agriculture Committee Propose Draft Derivatives Legislation

Posted on

 

The march towards comprehensive regulation of the over-the-counter (“OTC”) derivatives market continued over the past month with the release of discussion drafts of the Over-the-Counter Derivatives Markets Act of 2009 by each of the House Financial Services Committee on October 2nd and the House Agriculture Committee on October 9th.  The former discussion draft was approved by the House Financial Services Committee, with some amendments, on October 15, 2009 (as approved, the “Financial Services Proposal”).  An “Amendment in the nature of a substitute” to the Financial Services Proposal was then introduced and approved by the House Agriculture Committee, with some amendments, on October 21, 2009 (as approved, the “Agriculture Proposal”).[1] Although the two proposals are similar in many respects to each other and to the Obama Administration’s initially proposed legislation (the “Treasury Proposal”), which was released in August 2009, there are significant differences between them, and between each of them and the Treasury Proposal. READ MORE →

Industry Groups Announce Publication of Whitepaper on Initial Margin for Derivatives

Posted on

 

On October 22, 2009, the International Swaps and Derivatives Association, Inc. (“ISDA”), the Securities Industry and Financial Markets Association (“SIFMA”) and the Managed Funds Association (“MFA”) announced the publication of the “Independent Amount Whitepaper” (the “Whitepaper”).  The Whitepaper is one of the deliverables described in the derivatives industry letter to the Federal Reserve Bank of New York and certain other regulators dated June 2, 2009.  The purpose of the Whitepaper, which was produced by the ISDA Collateral Committee, is to describe the use and risks of over-collateralization and under-collateralization associated with initial margin posted by derivatives market participants, commonly referred to in ISDA-based documentation as the “Independent Amount.” READ MORE →

FASB Re-Opens for Comment Guidance on Embedded Credit Derivatives Exception

Posted on

 

On October 13, 2009, the Financial Accounting Standards Board (“FASB”) re-opened for comment a proposed Accounting Standards Update, Scope Exception Related to Embedded Credit Derivatives (the “Update”),[1] which is intended to clarify when companies using financial instruments with embedded credit derivatives features do not have to apply derivatives accounting rules that require separate accounting of the credit derivative from the contract in which it is embedded. READ MORE →

Lehman Bankruptcy Court Addresses Withholding Scheduled Swap Payments to a Bankrupt Counterparty

Posted on

 

On September 15, 2009, the United States Bankruptcy Court for the Southern District of New York (the “Court”) determined that Metavante Corporation (“Metavante”), a counterparty to an interest rate swap agreement with Lehman Brothers Special Financing (“LBSF”), a bankrupt Lehman entity, was no longer excused from performing under the swap (to the extent it had been at all) and no longer had the ability to terminate the swap. READ MORE →

SEC Extends Temporary Exemptions Granted to Facilitate Central Clearing and Settlement of CDS

Posted on

 

On September 14, 2009, the Securities and Exchange Commission (“SEC”) issued a release (the “Extension Release”) which extended the expiration dates of five interim final temporary rules (the “Interim Rules”) it had adopted in January 2009 under the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Trust Indenture Act of 1939, as amended, relating to credit default swaps (“CDS”).  The Interim Rules were adopted in connection with temporary exemptive orders issued by the SEC to foster the development and facilitate the operation of central clearing counterparties (“CCPs”) for eligible types of CDS.  Among other things, the Interim Rules temporarily (i) exempt from all provisions of the Securities Act (except the anti-fraud provisions) eligible CDS transactions that are offered and sold only to “eligible contract participants” (as defined in Section 1a(12) of the Commodities Exchange Act of 2000, as amended) and that are cleared by either a CCP satisfying specified conditions for exemption set forth in its exemptive order or a clearing agency registered under Section 17A of the Exchange Act; (ii) exempt any exchange that effects transactions in eligible CDS from the requirements of Sections 5 and 6 of the Exchange Act to register as a “national securities exchange” and (iii) exempt any broker or dealer that effects transactions on an exchange in eligible CDS from the requirements of Section 5 of the Exchange Act. READ MORE →

ECB Releases Report Regarding OTC Derivatives Post-Trading Infrastructure

Posted on

 

In September 2009, the European Central Bank (“ECB”) released a report entitled OTC Derivatives and Post-Trading Infrastructures (the “Report”).  In 2008, the ECB launched an analysis of the over-the-counter (“OTC”) derivatives market and its infrastructure for the primary products entered into in the marketplace (i.e., interest rate swaps, equity derivatives, credit default swaps, foreign exchange derivatives and, although they are not typically categorized as derivatives, repurchase agreements).  This analysis, which focused on the euro-segment of the market, was initiated as a result of concerns over the limited development of post-trading infrastructure for these products, particularly against the backdrop of the recent financial turmoil, and its possible effect on the euro area.  The Report presents the main findings of this analysis, including a summary of the general market characteristics and the current state of post-trading infrastructure, and discusses the policy implications relating to its findings. READ MORE →

ISDA Announces Results of Mid-Year 2009 Market Survey

Posted on

 

The International Swaps and Derivatives Association, Inc. (“ISDA”) announced the results of its Mid-Year 2009 Market Survey (the “Survey”) of privately-negotiated derivatives at its regional conference in New York City on September 15, 2009. The Survey results indicated that the notional amounts outstanding over the past six months of interest rate derivatives increased by 3% to $414.1 trillion, of equity derivatives remained flat at $8.8 trillion and of credit derivatives decreased by 19% to $31.2 trillion. Each of these products has seen a decline in notional amounts outstanding over the past year by 11%, 26% and 43%, respectively.

The Survey cautioned that the notional amounts outstanding reflected only approximate market activity, not risk. It also pointed out that, as of December 2008, according to the Bank for International Settlements, the gross market value (i.e., the cost of replacement) of all derivatives was approximately 5.7% of outstanding notional amount and the net credit exposure (i.e., after netting of exposures but before the application of any collateral) of all derivatives was approximately 0.80 percent of outstanding notional amount. Applying these percentages to the total notional amount outstanding of $454.1 trillion for the trade types covered by the Survey results in a gross mark-to-market value of $26 trillion and a net credit exposure of $3.8 trillion. The Survey results were based on responses from ISDA’s “primary membership”: 86 firms provided responses on interest rate derivatives, 77 firms provided responses on equity derivatives and 78 firms provided responses on credit derivatives.

Obama Administration Proposes Over-the-Counter Derivatives Markets Act of 2009

Posted on

 

On August 11, 2009, the Obama Administration proposed the Over-the-Counter Derivatives Markets Act of 2009 (the “Proposed Act”), the long-awaited bill intended to comprehensively regulate for the first time dealers and major counterparties engaged in the over-the-counter (“OTC”) derivatives market.  The Proposed Act would overhaul the framework for regulation of OTC derivatives transactions, effectively reversing the exclusions and exemptions afforded to many such contracts under the Commodity Futures Modernization Act of 2000, which modified the Commodity Exchange Act, as amended (“CEA”). READ MORE →

ISDA Launches CDS Marketplace

Posted on

 

On August 11, 2009, the International Swaps and Derivatives Association, Inc. (“ISDA”) launched CDS MarketplaceSM, a website relating to the credit default swap (“CDS”) market. The website serves many purposes, including educating viewers about the use and function of the CDS market and providing viewers with current market trading and pricing information. The website consists of four sections: (i) About the CDS Market (which provides a description of CDS transactions and the CDS market generally), (ii) Daily Prices (which provides links to prices for and spread changes on various indices and single-name credits), (iii) Exposures & Activity (which provides information about CDS trading volumes and trading activity) and (iv) Market Statistics (which provides information on certain CDS contract terms and links to data sources publishing CDS-related statistics).

CDS MarketplaceSM was developed with the support of a subsidiary of The Depository Trust & Clearing Corporation, Markit and Moody’s Analytics.