Todd P. Zerega

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While working out the possible impact of the SEC’s proposal to require central clearing of triparty repurchase agreements, we realized that we short-changed the analysis of multilateral netting in our last post. Our explanation of the SEC’s example focused on just the cash side of the trades, which is to say the amounts to be paid. To appreciate multilateral netting fully, we need to consider the security side of the trades, what is to be delivered, as well. This post seeks to rectify our oversight.…

Continue Reading Treasury Clearing Proposal:  More on Multilateral Netting

Our previous post explained the SEC’s proposal (the Proposal) to require central clearing of all “eligible secondary market transactions” with a participant in the Fixed Income Clearing Corporation (FICC). In this post we review the benefits of central clearing cited by the SEC to justify its Proposal. We also discuss “hybrid clearing” and “multilateral netting.”…
Continue Reading Central Clearing of Treasury Trades—What the SEC Hopes to Accomplish

On September 14, 2022, the SEC proposed amendments (the Proposal) to regulations for clearing agencies under the Securities Exchange Act of 1934 (the Exchange Act). The Proposal would increase the central clearing of U.S. Treasury securities, to be defined as “any security issued by the U.S. Department of the Treasury.” According to the…

I. DERIVATIVES ISSUES

1. Inventory “relationship level” considerations in legal documentation that governs your derivatives trading relationships (ISDA Master Agreements, Futures Customer Agreements, Master Securities Forward Transaction Agreements, etc.)

a. Example: Decline in Net Asset Value Provisions (Common in ISDAs)

i. Identify the trigger decline levels and time frames at which transactions under the agreement can be terminated (25% over a 1-month period – is that measured on a rolling basis or by reference to the prior month’s end?)

ii. Confirm whether all or only some transactions can be terminated (typically, it is all transactions)

iii. Identify the notice requirements that apply when a threshold is crossed

iv. Identify whether the agreement includes a “fish or cut bait clause” that restricts the ability of the other party to designate the termination of the transactions under the trading agreement…

Continue Reading Market Volatility Regulatory Outline for Asset Managers

In its November 25, 2019 Open Meeting, U.S. Commodity Futures Trading Commission (“CFTC”) commissioners voted to approve final rules amending Part 4 of the CFTC rules addressing registration and compliance requirements for commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”). The CFTC proposed amendments to Part 4 in October 2018. The final rule will be effective thirty days after publication in the Federal Register.

This post summarizes select key amendments in the rule and what action must be taken by firms intending to take advantage of the new amendments, if any.…

Continue Reading CFTC Votes To Codify CPO/CTA Registration Relief at Open Meeting

Repo rates were steadier last week, as compared to the wild swings of the prior week,  as the Secured Overnight Financing Rate (SOFR)—a broad measure of the overnight Treasury repo market—fluctuated between 1.82% and 2.01%. The week started with the SOFR rate at 1.85% on Monday, it then increased a bit on Tuesday and Wednesday to 1.96% and 2.01% respectively before falling back to 1.85% on Thursday and to 1.82% on Friday.…
Continue Reading Repo Rates Steady Last Week Thanks to Fed Liquidity

Last week saw a wild ride for repo rates as the Secured Overnight Financing Rate (SOFR)—a broad measure of the overnight Treasury repo market—fluctuated between 1.95% and 5.25%. The week started with the SOFR rate moving higher to a range of 2.43-4.60% on Monday which was a significantly higher range from the prior Friday (2.16-2.40%). Then on Tuesday SOFR spiked to 5.25% with a print in the 99% percent of the range of trades at 9.00%. The rate stabilized a bit on Wednesday falling to a range of 2.10-5.00% with a rate of 2.55%. Then following the Fed Reserves announcement on Wednesday of a 0.25% rate cut to the Fed Funds Rate, SOFR fell to 1.95% on Thursday and to 1.86% on Friday.
Continue Reading Wild Week for Repo Rates

On Monday, June 24, 2019, U.S. Securities and Exchange Commission Chairman Jay Clayton, U.S. Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo, and U.K. Financial Conduct Authority Chief Executive Andrew Bailey issued a joint statement (“Joint Statement”) regarding collaboration to monitor the credit derivatives markets.  The Joint Statement states, in part, that:

The continued pursuit of various opportunistic strategies in the credit derivatives markets, including but not limited to those that have been referred to as “manufactured credit events,” may adversely affect the integrity, confidence and reputation of the credit derivatives markets, as well as markets more generally.  These opportunistic strategies raise various issues under securities, derivatives, conduct and antifraud laws, as well as public policy concerns.

The Joint Statement also notes that the agencies’ collaborative efforts would not preclude any of the agencies from taking independent actions under their respective authority.
Continue Reading U.S. and UK Regulators Make Joint Commitment to Combat “Manufactured Credit Events” in CDS Market

On May 23, 2019, the Office of Compliance Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) issued a Risk Alert to summarize frequent mistakes and effective practices by broker-dealers and investment advisers relating to the storage of clients’ data. In particular, OCIE warned that issues relating to cloud storage arose even when firms had cybersecurity measures for their data storage because firms did not utilize the available security features.
Continue Reading OCIE Issues Risk Alert on Data and Cloud Storage Practices

On May 3, 2019, the International Accounting Standards Board (“IASB”) proposed amendments (“Exposure Draft”) to two accounting standards in response to concerns raised by the transition away from the London Interbank Offered Rate (“LIBOR”). Specifically, the Exposure Draft addresses International Financial Reporting Standard (“IFRS”) 9 Financial Instruments and International Accounting Standard (“IAS”) 39 Financial Instruments: Recognition and Measurement. The IASB is accepting comments on the Exposure Draft until June 17, 2019 and plans to issue final amendments later this year.
Continue Reading In Anticipation of LIBOR Transition, IASB Proposes Amendments To Hedge Accounting Standards