Learning Curve

It is now over two years since the term swap execution facility first appeared in Title VII of the Dodd-Frank Act as part of the reform to bring more transparency to swaps trading.

On Nov. 16 the Department of the Treasury issued a determination that foreign exchange swaps and fx forwards should not be regulated under the Commodity Exchange Act and therefore should be exempted from the definition of swap under the CEA as amended by the Dodd Frank Wall Street Reform and Consumer Protection Act. The Determination is a wholesale adoption of the proposed determination issued by the Treasury last year and took effect immediately.

Do you have sufficient possession or control for your security interest to qualify for protection under the Financial Collateral Arrangement (No.2) Regulations 2003? Since the decision in Gray v G-T-P Group two years ago, the meaning of those terms has been debated at length.

On Nov. 1 the regulation of the European Parliament and Council of the European Union on short selling and certain aspects of credit default swaps became effective. The regulation may have a substantive impact on U.S. issuers of structured products linked to securities that trade in the European Union, as well as other participants in structured product transactions, and this Learning Curve will discuss the impact.

The implementation of new regulations including the Dodd-Frank Act, the Markets in Financial Instruments Directive II, the European Market Infrastructure Regulation and Basel III is significantly increasing the cost of capital and forcing banks to re-evaluate the economics of their over-the-counter trading businesses.

On May 31, 2012, Standard & Poor’s published Counterparty Risk Framework Methodology and Assumptions containing its requirements for managing counterparty risk relating to certain structured finance securities. It replaces its 2010 criteria. The 2012 criteria apply to all new and existing relevant transactions. Although the 2012 criteria apply to several types of transactions, this article provides a brief overview of certain provisions therein relating to derivative transactions.

Investors often look to commodities as a way to gain enhanced portfolio diversification, protection against inflation and equity-like returns. As such, commodities have gained traction among institutional and retail investors in recent years, either as a separate asset class or as part of a real assets allocation.

The default of Lehman Brothers in 2008 brought attention to counterparty risk and collateral management in the financial markets, to the extent that they are now board-level issues for both banks and fund managers. The regulatory reform that is underway, and which resulted from the need to reduce systemic risk, has, in many ways, increased the number of challenges related to accessing and managing collateral. This Learning Curve explores those challenges and examines how they can be addressed.

Last week's Learning Curve discussed the consultation conclusions published by the Hong Kong Monetary Authority and the Securities and Futures Commission on July 11 in relation to comments received from market participants and other industry bodies on a public consultation paper relating to the proposed regulatory regime for the OTC derivatives market in Hong Kong on Oct. 17, 2011. The aim is to introduce a new regulatory regime in Hong Kong in line with the G-20's goal of reducing systemic risk in the global OTC derivatives market.

The Hong Kong Monetary Authority and the Securities and Futures Commission launched a public consultation paper relating to the proposed regulatory regime for the OTC derivatives market in Hong Kong on Oct. 17, 2011. The aim is to introduce a new regulatory regime in Hong Kong in line with the G20's goal of reducing systemic risk in the global OTC derivatives market.

In December changes to the rules of the Commodity Futures Trading Commission relating to funds and other collective investment vehicles will require many investment managers, banks and other financial institutions to register for the first time as commodity pool operators if they operate such funds, or as commodity trading advisers if they advise funds with respect to regulated commodity investments and are not the relevant fund's CPO.

Derivatives markets are being simultaneously reshaped by two separate forces. On one side, MiFID’s long-planned extension into derivatives has been given additional impetus by a global regulatory agenda that aims to reduce systemic risk especially in the over-the-counter derivatives space. On the other, technology is empowering new liquidity venues, faster trading styles and providing new tools to navigate the resultant big data swamp.