Court Cases Regarding Derivatives

English Supreme Court Brings an End to Dexia-Prato Swap Dispute

On January 18 the English Supreme Court refused to grant Comune di Prato (“Prato”), an Italian local authority with responsibility for the municipality of Prato in Tuscany, permission to appeal a 2017 decision of the Court of Appeals in favor of Dexia Creditop SpA (“Dexia”), Prato’s swap counterparty.[1] This decision brings to an end a long-standing dispute that was one of many involving swaps entered into by Italian municipalities between 2001 and 2008, when the onset of the financial crisis triggered defaults and brought increased scrutiny to the derivatives market.[2]

The decision of the Court of Appeals, together with the determination by the Supreme Court not to allow further appeal, may provide greater certainty as to the narrow scope of Article 3(3) of the Rome Convention, particularly in respect of derivatives agreements documented under standard documentation that are governed by English law. READ MORE

District Court Holds that Assignee is Not Entitled to Safe Harbor Protections


On May 28, 2015, the United States District Court for the Central District of California affirmed a bankruptcy court order finding that a post-termination assignee of remaining rights under an interest rate swap with a debtor was not a “swap participant” under the Bankruptcy Code (the “Bankruptcy Code”) and, therefore, was not entitled to the safe harbors from the automatic stay provisions of the Bankruptcy Code.[1] READ MORE

English Court Addresses Derivatives Close-outs


On July 29th, the High Court of Justice, Queen’s Bench Division, Commercial Court, issued an opinion[1] that addressed several issues regarding the calculation of early termination amounts under a standard derivatives master agreement, as well as the calculation of default interest under the master agreement.

In the case at issue, Lehman Brothers Finance S.A. (“LBF”) claimed that Sal. Oppenheim Jr. & Cie, KGAA (“Oppenheim”) had improperly calculated the early termination amount payable to LBF in connection with the termination of transactions governed by a 1992 ISDA Master Agreement under which “Market Quotation” had been selected as the payment measure. The transactions at issue were equity puts and calls that referred to the Nikkei 225 Stock Average Index (the “Index”). Pursuant to the terms of the master agreement between the parties, all transactions thereunder automatically terminated upon the bankruptcy filing of LBF’s parent, Lehman Brothers Holdings Inc. (“LBHI”), at 1:44 a.m. New York time on Monday, September 15, 2008. LBF itself went into liquidation in December 2008. READ MORE

SIFMA v. CFTC Cross-Border Lawsuit Dismissed


The U.S. District Court for the District of Columbia dismissed, with certain exceptions, the lawsuit filed by the Securities Industry and Financial Markets Association and others challenging the CFTC’s final cross-border guidance (the “Guidance”) issued in July 2013 and the extraterritorial application of the various CFTC rulemakings under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Title VII Rules”).[1] The court held that the Guidance was not a legislative rule but rather was, in part, a policy statement and, in part, an interpretive rule and, therefore, generally not subject to judicial review under the Administrative Procedure Act.[2] This holding was based largely on the court’s finding that the Guidance “reads like a non-binding policy statement and has been neither characterized nor treated in practice as binding by the CFTC.”[3]

The court also concluded that the CFTC has discretion to define the extraterritorial reach of the Title VII Rules through case-by-case adjudication rather than by rulemaking, and therefore the CFTC was not required to address within each Title VII Rule the scope of that Rule’s extraterritorial application.[4] However, the court agreed with the plaintiffs that the CFTC was required but failed to consider adequately the costs and benefits of the extraterritorial applications of certain of the Title VII Rules.[5] Without vacating them, the court remanded those rules – specifically, the Real-Time Reporting,[6] Daily Trading Records,[7] Portfolio Reconciliation and Documentation,[8] Entity Definition,[9] Swap Entity Registration,[10] Risk Management,[11] Chief Compliance Officer,[12] SDR Reporting,[13] Historical SDR Reporting,[14] and SEF Registration Rules[15] – to the CFTC to conduct an adequate cost-benefit analysis under 7 U.S.C. § 19(a).[16]

[1] Sec. Indus. & Fin. Mkts. Ass’n., et al., v. CFTC, 13-CV-1916 slip op. (D.D.C. Sept. 14, 2014) (the “Opinion”).

[2] Id. at 71-72.

[3] Id. at 69.

[4] See id. at 76.

[5] See id. at 80.

[6] Real-Time Public Reporting of Swap Transaction Data, 77 Fed. Reg. 1,182 (January 9, 2012) (codified at 17 C.F.R. Part 43).

[7] Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 Fed. Reg. 20,128, 20,133 (April 3, 2012) (codified at 17 C.F.R. § 23.202).

[8] Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 Fed. Reg. 55,904 (September 11, 2012) (codified at 17 C.F.R. §§ 23.500-506).

[9] Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, 77 Fed. Reg. 30,596 (May 23, 2012) (codified in various sections of 17 C.F.R.).

[10] Registration of Swap Dealers and Major Swap Participants, 77 Fed. Reg. 2,613 (January 19, 2012) (codified at 17 C.F.R. §§ 23.21-22).

[11] Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 Fed. Reg. 20,128, 20,205-11 (April 3, 2012) (codified at 17 C.F.R. §§ 23.600-606).

[12] Id. at 20,200-01 (codified at 17 C.F.R. §§ 3.3).

[13] Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2,136 (January 13, 2012) (codified at 17 C.F.R. Part 45).

[14] Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps, 77 Fed. Reg. 35,200 (June 12, 2012) (codified at 17 C.F.R. Part 46).

[15] Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 33,476 (June 4, 2013) (codified at 17 C.F.R. Part 37).

[16] See the Opinion at 91-92.

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.

Industry Groups File Lawsuit Challenging Cross-Border Guidance


On December 4, 2013, the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association, Inc., and the Institute of International Bankers filed a lawsuit challenging the CFTC’s final cross-border guidance issued in July of 2013 (the “Guidance”).[1]  The amended complaint[2] primarily argues that, in issuing the Guidance, the CFTC issued “a sweeping, international compliance directive that it characterized as mere ‘guidance,’”[3] instead of promulgating an actual rule governing the extraterritorial reach of the rules under Title VII of the Dodd-Frank Act that complied with the requirements of the Administrative Procedure Act (“APA”) and the Commodity Exchange Act (“CEA”), such as cost-benefit analysis.[4]  Put simply, the plaintiffs argue that the CFTC “purposefully circumvented the congressionally-required procedures for CFTC rulemaking.”[5]  Despite its purported status as mere non-binding guidance, the amended complaint notes that the CFTC has repeatedly made clear that the Guidance is intended to bind the CFTC staff and the public in the manner of a rule.[6]  The amended complaint further argues that, in promulgating many Title VII rules (such as the clearing requirement rule and the swap data repository reporting rule), despite public comments, the CFTC failed to address how those rules would apply extraterritorially and failed to consider the costs and benefits of the application of the rules to foreign entities and entities engaged in cross-border transactions.[7]


Detroit Commences the Largest Chapter 9 Ever – What’s Next*


On July 18, 2013, the City of Detroit, Michigan became the largest city to file for rehabilitation under Chapter 9 of the United States Bankruptcy case.  Detroit, through its financial manager, is seeking to restructure approximately $18 billion in accrued liabilities, including unsecured debt and other liabilities of $11.5 billion, and secured obligations—including swap obligations—of $7.3 billion.  READ MORE

Bloomberg Case Against CFTC Dismissed


On June 7, 2013, a federal district court dismissed a lawsuit[1] brought by Bloomberg L.P. (“Bloomberg”) against the Commodity Futures Trading Commission (“CFTC”) challenging the recent adoption of CFTC Rule 39.13(g)(2)(ii) (the “Rule”), which establishes minimum initial margin requirements to be assessed by derivatives clearing organizations (“DCOs”) on customers. The court ruled that Bloomberg lacked standing because it had failed to demonstrate an actual or imminent injury-in-fact caused by the Rule that the court could redress.[2] The court also stated that Bloomberg, apart from its lack of standing, could not satisfy the “high standard for irreparable injury” required for a preliminary injunction. READ MORE

LIBOR Manipulation and Municipal Derivatives


On July 6th, the Serious Fraud Office of the United Kingdom announced an investigation into alleged manipulation of the London interbank offered rate (“LIBOR”), which is the benchmark rate referenced in hundreds of trillions of U.S. dollars of securities, loans and transactions, including interest rate derivatives having some US$350 trillion in outstanding notional amount.

In June, U.S. and U.K. regulators agreed to a US$450 million settlement with Barclays plc in connection with allegations relating to the manipulation of LIBOR.  Since the announcement of that settlement, dozens of civil lawsuits have been filed against dealers.  Many of those filing suit are municipal issuers that receive LIBOR-based payments under interest rate swaps with dealers, typically related to their variable rate debt obligations.  These issuers argue that suppression of the LIBOR rate has led to artificially low amounts being calculated on the floating rate legs of their swaps, resulting in losses. READ MORE

City of Milan Settles with Banks in Derivatives Fraud Case


The City of Milan, Italy, has reached a settlement relating to a dispute involving fees charged by four foreign banks relating to the sale of derivatives.  The City had entered into swaps with each of UBS AG, Deutsche Bank AG, JPMorgan Chase & Co. and Depfa Bank PLC that were linked to, among other things, a €1.68 billion bond issued by the City.  On April 27, 2009, Italian financial police, acting on the order of a judge, seized assets (including the banks’ stakes in certain Italian companies, real estate assets and bank accounts) valued at approximately €476 million from the four banks in connection with an investigation into whether the banks fraudulently received some €100 million in fees which were not properly disclosed.  Subsequently, on March 17, 2010, public prosecutors formally charged the four banks, as well as eleven bankers and two former city officials, with fraud in connection with these transactions.[1]

Under the terms of the €455 million settlement deal, the banks reportedly will unwind the transactions and pay to the City the current mark-to-market of the swaps, with a substantial discount.  In exchange, the City agreed to release certain seized assets and drop claims for damages in a civil suit it had brought.  The City also agreed to withdraw as a plaintiff in the related criminal suit, although that case is continuing in the Italian courts.  The banks did not admit any responsibility in connection with their fees as part of the settlement

[1] For additional information regarding these transactions and the related investigation, click here and here.