derivatives

The Week in Review: Major Suits and Proposed Legislation

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The director of the U.S. Consumer Financial Protection Bureau may be facing a challenge the constitutionality of his “recess appointment,” following a January 25 ruling by the D.C. Circuit Court of Appeals.  In that case, the court held three of President Obama’s appointments to the NLRB were unconstitutional.  The party challenging director Richard Cordray’s status would likely argue that the opinion applies to him as well, as he was appointed via the same process.  For more, see Bloomberg.

The Justice Department has sued Anheuser-Busch InBev in Washington D.C. district court, attempting to block the company’s proposed $20.1 billion merger with Modelo.  The head of the DOJ’s antitrust division, William J. Baer, said the deal would reduce competition in the American beer industry, as InBev would control 46 percent of the country’s annual sales.  “Even small price increases could lead to significant harm,” Baer said.  For more, see the NYTimes.

The Commodity Futures Trading Commission is drafting rules for “swaps,” under the directive of the Dodd-Frank financial markets overhaul.  The stakes are high, as the complex instruments account for eight-ninths of the derivatives market—and Wall Street banks have been jockeying to frame the proposals as too burdensome for their respective industries.  For more, see Reuters.

Capitol Hill may again take up a system of voluntary cybersecurity standards.  According to a new Senate Commerce Committee report, there is strong support among Fortune 500 companies.  U.S. Senator Jay Rockefeller (D., W.Va.) has spearheaded the effort, and his data suggests differing perspectives from industry leaders and the U.S. Chamber of Commerce.  Sen. Rockefeller hopes to pass a bill this year.  For more, see the Wall Street Journal.

Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

While much attention has been paid to increasing taxes on high-income earners as a result of the fiscal cliff compromise (the American Taxpayer Relief Act of 2012), less attention has been paid to the compromise’s corporate tax provisions. In a recent Tax Department Update, Latham & Watkins summarizes the effects of the compromise on both individuals and businesses. The Update also covers the compromise’s effects for various energy-related credits, including the extension of a tax credit for qualified wind facilities. The Update is available for download here.

As part of the Dodd-Frank Act’s requirement for regulated and centralized derivatives trading, many nonfinancial companies that use derivatives may be required to register with the CFTC. However, there is an exception for a “nonfinancial end user.” In general, to qualify as a non-financial end user, the company must not be a swap dealer, major swap participant or other “financial entity.” Additionally, the derivatives must be used as for commercial, rather than investment, purposes. WilmerHale’s recent Corporate and Futures and Derivatives Alert provides a thorough explanation of the application of this exception for nonfinancial companies.

Gibson Dunn recently hosted its ninth-annual webcast, “Challenges in Compliance and Corporate Governance.” Corporate Counsel viewed the webcast and derived seven takeaways for 2013.  Among these lessons is that firms should broaden their focus. Between the SEC’s regulations on conflict minerals and sanctions on Iran, broad-based compliance efforts are necessary.  Another lesson is that firms should not forget the compliance tone in the middle. While many compliance officers focus on setting the tone for upper management, it is often middle managers who receive tips and should be trained on proper compliance procedures.  Check out the other takeaways here.

 

Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

Late last year, the Federal Reserve issued guidance on its new framework for supervising large financial institutions.  The Federal Reserve’s primary objectives will be to increase the resiliency of financial institutions, and to reduce the impact of an institution’s failure on the broader economy.   Changes include a greater emphasis on recovery and orderly resolution planning as required by Dodd-Frank.  In a recent publication, Sullivan & Cromwell reviews the specifics of the recent changes and explains how their implementation may differ from the previous regulatory framework.

The expectation that courts will recognize and enforce the insolvency proceedings of foreign courts is essential to certainty and predictability of cross-border transactions.  This is especially important where the two nations’ bankruptcy laws materially differ.  Three recent decisions in the U.S. and U.K. call into question whether such an expectation is reasonable.  In one of the cases, the Fifth Circuit held unenforceable a $3.4 billion restructuring plan approved by a Mexican court as “manifestly contrary to the public policy of the United States.”  The Fifth Circuit took issue with the Mexican court’s decision that shareholders receive $500 million in value while higher-ranking creditors receive only 40 percent of their claims.  In a recent client alert, DLA Piper explains the implications of these decisions for certainty and predictability of cross-border transactions.

The U.S. District Court for the District of Columbia recently dismissed a lawsuit challenging recent amendments to CFTC Rule 4.5. With limited exceptions, the amendments require registration by investment companies that trade in futures, options, and commodities. The plaintiffs, the Investment Company Institute and the U.S. Chamber of Commerce, argued the amendments were arbitrary and capricious in violation of the Administrative Procedure Act and that the CFTC failed to perform adequate cost-benefit analysis. In rejecting these arguments, the court found that the link between unregulated derivatives and the financial crisis provided an adequate basis for the amendments. In a recent Client Alert, Ropes & Gray explains the court’s reasoning and the decision’s implications for registered investment companies.

SEC Adopts Rules On Clearing House Standards

By Flore Poughon, LL.M. Candidate 2013 | Posted on

The Securities and Exchange Commission recently adopted a new, stricter rule governing risk management and operation standards for registered clearing activities.  This new Rule, 17 Ad-22, will become effective 60 days after its publication in the Federal Register.

The Rule requires registered clearing agencies that perform central counterparty services to establish, maintain and enforce written policies and procedures reasonably designed to limit their exposure. At minimum, they must measure their credit exposure at least once per day and maintain margin requirements to limit their credit exposure to participants, using risk-based models and parameters. The procedures must be reviewed monthly, and the models must be validated annually.

The Rule is an attempt “to ensure that clearing agencies will be able to fulfill their responsibilities in the multi-trillion dollar derivatives market and more traditional securities market.”  It is part of an effort to promote financial stability by improving accountability and transparency in the financial system. It was adopted in accordance with the Dodd-Frank Act, which gave the SEC greater authority to establish standards for clearinghouses.

In general, clearing agencies act as middlemen to the parties in a securities transaction. They play a crucial role in the securities markets by ensuring the successful completion of operations and avoiding the risk of a defaulting operator.  In addition, they ensure transactions are settled on time and on the agreed-upon terms.

The rule is similar to the Supervisory Capital Assessment Program, publicly described as the bank “stress tests.”  This examination, conducted by the Federal Reserve System, measured the financial strength of the nation’s 19 largest financial institutions.  The stress tests measured whether banks had enough capital to weather a downturn with enough funds to continue lending.  Like the new Rule, the stress tests were intended to reduce uncertainty surrounding the financial system, while building up transparency and investor confidence.

Under the new Rule, clearing agencies will have to maintain sufficient financial resources to withstand, at a minimum, a default by the participant group to which it has the largest exposure in extreme (but plausible) market conditions.  In addition, the clearing agencies will now be required to calculate and maintain a record of the financial resources that would be needed in the event of a participant default.  Clearing agencies must perform the calculation quarterly, or at any time upon the SEC’s request, and must post on their websites annual audited financial statements within 60 days of fiscal year-end.

The Rule also requires clearing agencies to implement membership standards for central counterparties reasonably designed to: 1) provide membership opportunities to persons who are not dealers or security-based swap dealers, 2) not require minimum portfolio size or transaction volume. Those who have a $50 million portfolio should also be able to obtain membership, provided they comply with other reasonable membership standards.

Firm Advice: Your Weekly Update

By jsantiesteban | Posted on

On December 3rd, the SEC approved FINRA Rule 5123, which requires firms that sell a security in a private placement to file with FINRA a copy of any private placement memorandum, term sheet or other offering document used by the firm within fifteen days of the sale. The Rule provides for limited exemptions. FINRA also issued “frequently asked questions” regarding the substantive and procedural requirements of the filings. Morrison & Foerster has summary of these requirements and exemptions in a recent News Bulletin.

On December 6, 2012, the SEC lifted the two-year-old moratorium on active exchange-traded funds’ (“ETF”) use of derivatives. The news came during a speech by Norm Champ, the SEC’s Director of the Division of Investment Management. During the moratorium, the SEC would only approve ETFs that represented that they did not make any investments in options, futures, or swaps. In a recent Legal Update, Dechert discusses the implications and limitations of the proposal.