On February 25, 2016, the Energy and Environmental Markets Advisory Committee (EEMAC) of the Commodity Futures Trading Commission (CFTC) released a report, advising the CFTC to abandon its plan for position limits on the number of futures contracts a trader can hold on certain commodities such as oil and natural gas. The EEMAC was created under the 2010 Dodd Frank Act and functions “to advise the Commission on important new developments in energy and environmental derivatives markets that may raise new regulatory issues, and the appropriate regulatory response to ensure market integrity and competition, and protect consumers.”
Advisory Committee of CFTC Suggests an Abandonment of Option Limits
Flash Boys–Concerns Over High Frequency Trading
High frequency trading is gaining significant media attention recently as Michael Lewis published his book, Flash Boys: A Wall Street Revolt, on the subject. While high frequency trading (HFT) was introduced into the markets in 1999, this platform for conducting rapid electronic trades of securities has been gaining significant attention by federal regulators including the Securities and Exchange Commission (“SEC”), the Commodity Futures Trading Commission (“CFTC”), and most recently, the Senate.
Credit Derivatives, Re-Defined
The International Swaps and Derivatives Association, Inc. (“ISDA”) will be updating its 2003 international credit derivatives definitions this September. Though the final definitions of this year’s update have yet to be published, some details have already emerged. For example, there will be a new credit event that would occur as a result of a governmental debt write-offs of a financial reference entity. The update will also include basic, commonly used terms associated with credit derivatives transactions.
Event Recap: Systemic Risk and the Financial Crisis
On February 25, 2014, the Berkeley Center for Law, Business and the Economy (BCLBE) hosted a lunchtime talk on Systemic Risk and the Financial Crisis by Prof. Steven L. Schwarcz. Prof. Schwarcz is a Professor of Law & Business at Duke University and is well known for his research and scholarship in the area of financial regulation and systemic risk. In his lecture, Prof. Schwarcz focused on how regulations should address systemic risk – “the risk that the failure of financial markets or firms harms the real economy by increasing the cost of capital or decreasing its availability.”
Europe Reaches Deal on Derivatives Trading
Risk-transfer Deals Pose Roadblocks to Federal Reserve’s New Minimum Liquidity Proposal
As banks structure deals to circumvent the Federal Reserve System’s new liquidity coverage ratio proposal (‘LCR’), regulators scramble to protect the financial industry from another fiscal meltdown.
Week in Review: JPMorgan Returns to the Hot Seat
Once again, JPMorgan found itself discussing yet another settlement and facing bad publicity linked to excessive risk-taking. Last week, news broke that the bank had agreed to a $920 million settlement in the “London Whale” derivatives trading case; plus, the Consumer Financial Protection Bureau ordered JPMorgan to refund over $300 million to customers based on alleged wrongdoing in its credit card and debt collection procedures.
Another settlement deal surfaced this week—and its numbers are much larger. The U.S. Department of Justice is seeking $11 billion (with a ‘B’) in compensation for JPMorgan’s actions leading up to the Financial Crisis, including selling mortgage backed securities the bank knew were essentially worthless. According to the Washington Post, it would be “the biggest settlement a single company has ever undertaken.” On Thursday, the bank’s visible CEO Jamie Diamond flew to Washington, D.C., to meet with Attorney General Eric Holder for nearly an hour. Instead of lobbying for looser restrictions on Wall Street, Diamond was seeking an end to federal and state probes (which still represent a large liability to the bank) and, perhaps more importantly, attempting to avoid criminal charges.
All of the rhetoric and press releases notwithstanding, the Administration’s handling of numerous JPMorgan investigations has been properly criticized for missing an opportunity to charge top Executives. The S.E.C., D.O.J., and other regulators have thus far failed to press criminal charges, even when financial disclosures have misrepresented the bank’s business or mortgage-backed products. To be sure, the government has charged front-line traders in the London Whale case, but those tasked with overseeing the bank’s actions have escaped indictment—perhaps for the very reason that Mr. Diamond is willing to personally negotiate with the nation’s top law enforcement official on their behalf.
While the financial penalties being discussed are stiff, they represent only a small fraction of the damage done to the global economy, JPMorgan shareholders, and (ultimately) dinner tables across the country. Columbia Law School professor John C. Coffee Jr. provided some insight to the back-and-forth. He told the Post: “If I was in [Holder’s] position, I would be concerned about my legacy. . . . There’s been a lot of criticism of officials in Justice being much too soft, timid.”
CFTC and European Commission Reach Deal on Cross-Border Derivatives
The Commodity Futures Trading Commission (CFTC) and European Commission (EC) have reached a landmark deal on regulating cross-border derivatives trading. The deal distributes responsibilities between US and European regulators in order to prevent the disruption of global markets.
The deal would allow European regulators to monitor the actions of international branches and subsidiaries of American companies and their derivatives deals that occur in the 28 countries of the European Union. The CFTC would defer regulatory monitoring of international derivatives to European agencies in cases where the rules are similar to those in the United States. (more…)
OCC Lending Limits Final Rule: Credit Exposures from Derivatives and Securities Financing Transactions
[Editor’s Note: The following post is authored by Davis Polk & Wardwell LLP]
The OCC has issued a final rule specifying the methods for calculating credit exposure arising from derivatives and securities financing transactions for purposes of the federal lending limits that apply to national banks, federal and state branches and agencies of foreign banks and federal and state savings associations. The final rule, like the June 2012 OCC interim final rule that it revises, implements Section 610 of the Dodd-Frank Act, which requires federal lending limits to take into account credit exposure arising from derivatives and securities financing transactions. (more…)
Class Action Complaint Alleges Conspiracy to Fix CDS Market
A group of institutional investors recently filed a class action complaint against some of the world’s largest banks alleging a conspiracy fix prices and monopolize the market for Credit Default Swaps (“CDS”) in violation of the Sherman Act § 1. Defendants include Bank of America, Barclays, Citibank, and Goldman Sachs. The complaint also names the International Swaps and Derivatives Association (“ISDA”), a financial trade association, which the complaint alleges is controlled by the defendant banks. The plaintiffs are claiming potentially billions of dollars in damages.
A credit default swap is a method of transferring the risk of default for a financial instrument. The purchaser pays a fixed payment to the seller in exchange for the promise to pay off the underlying debt in the event of a default. The complaint alleges that because of the CDS market structure is unregulated and over the counter, every transaction must be with one of the defendant banks.
The complaint characterizes the CDS market as “starkly divided” between the defendant banks “who control and distort the market” and the plaintiffs “who, in order to participate in the market, must abide their distortions.” The complaint alleges that this is the result of an opaque trading environment in which the defendant banks manipulate the bid-ask spreads through their negotiations with individual traders. These manipulations cost the plaintiffs billions of dollars, says the complaint. Plaintiffs allege that several of their attempts to create and regulated exchange were rebuffed by defendants.
Both the DOJ and the European Commission have been conducting their own investigations into these activities. In March, the EU indicated that “ISDA may have been involved in a coordinated effort of investment banks to delay or prevent exchanges from entering the credit derivatives business.”