Documentation and Transactions

Historically, many investment managers have negotiated limited recourse provisions into derivatives trading agreements entered into by the managers on behalf of their clients with banks, broker-dealers, and futures commission merchants (FCMs).  In short, these provisions state that only the assets in the specified account under the control of that particular manager can be used to make the other party to the agreement whole for losses and costs that relate to the specified account.

However, recent regulatory pronouncements from two divisions of the Commodity Futures Trading Commission (the “CFTC”) and the Joint Audit Committee (the “JAC”) of several large futures exchanges and the National Futures Association prohibit the use of limited recourse provisions in futures customer agreements.  This blog post is Part 1 of a series of posts that will address the impact of these recent regulatory developments on investment managers.

We start with the basics – investment management relationships and the use of limited recourse provisions in derivatives trading documents.  Additional posts in this series will address the regulatory pronouncements and how those pronouncements may impact relationships that investment managers have with their clients and the FCMs through which the managers are trading on behalf of their clients.
Continue Reading Limited Recourse Provisions in Futures Customer Agreements: Part 1 – I Only Control My AUM

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 September 19, 2017, the Financial Industry Regulatory Authority (“FINRA”) published a proposed rule change (available here) to delay implementation of certain margin requirements in respect of what are referred to as “Covered Agency Transactions,” including To Be Announced (“TBA”) transactions and other specified delayed delivery transactions involving mortgage-backed securities.

The delay will move the implementation date of the margin requirements from December 15, 2017 until June 25, 2018.  
Continue Reading FINRA Publishes Proposed Rule Change to Delay Implementation of TBA Margining Until June 25, 2018

One great thing about a new Congress is that bills pending at the end of the prior Congress must be reintroduced. This wipes the slate clean of problematic proposals and reduces the risk of something slipping through without sufficient debate. For example, the proposed Bankruptcy Fairness Act of 2016 (BFA) expired with the 114th Congress. The BFA would have required the Office of Financial Research (OFR) to produce a biannual report to Congress regarding, among other things:

whether amendments to the Bankruptcy Code … and other laws relating to insolvency to modify the treatment of qualified financial contracts and master netting agreements in future situations of insolvency could reduce—

(i)         losses in the value of the financial company and its assets;

(ii)        losses to other parties in interest;

(iii)       moral hazard; and

(iv)       risks to financial stability in the United States.”

While such a report may seem innocuous, it might have provided a gateway for eliminating the safe harbors for qualified financial contracts (such as securities contracts, repurchase agreements and derivatives contracts) from the Bankruptcy Code and the Federal Deposit Insurance Act.
Continue Reading Defending Bankruptcy Exemptions for Repos and Sec Lending

On January 14, 2016, the Securities and Exchange Commission (“SEC”) solicited comments on a proposal by Financial Industry Regulatory Authority, Inc. (“FINRA”) to revise its proposed changes to FINRA Rule 4210.   If implemented, FINRA’s proposal will result in the margining of certain trades in the To Be Announced (“TBA”) market.  This posting will provide a summary of FINRA’s proposed amendments, which relate to:

1) the types of transactions that will be subject to the new margin requirements; and

2) the implementation schedule for the margin proposal.

This posting will give specific consideration to the issue of how these proposed amendments could affect buy side firms.

Comments on the partial amendments are due to the SEC by February 11, 2016 with any rebuttal comments subsequently due on March 7, 2016.
Continue Reading FINRA Proposes Amendments to Its TBA Margin Proposal: Much Ado About Nothing or Meaningful Amendments?

The short answer is it is not clear, but we do not expect the new margin rules to apply to trades any earlier than June 2016 or later than January 2018, assuming that the proposed rules are approved by the SEC.  Although, we recommend that market participants consider dealing with any open negotiations of Master Securities Forward Transaction Agreements (MSFTAs) and re-papering of existing MSFTAs well in advance of the actual implementation date.

The remainder of this posting will deal with the mechanics and procedures behind the determination of these dates and provide our readers with additional information in respect of our recommendation to “dust off” their MSFTA files sooner rather than later.
Continue Reading When Will FINRA’s New TBA Margin Proposal Go Into Effect and Be Implemented?

Increasingly, some banks have been including a provision in their commercial loan agreements that deems the variable interest rate on a loan to be zero, if the reference rate on the loan (for example, LIBOR) goes negative.  This type of a provision is sometimes referred to as a “deemed zero” clause.  This blog posting looks at issues that banks and borrowers alike may want to consider with respect to the documentation of an interest rate swap that is used to hedge the borrower’s interest rate exposure on a loan that contains a “deemed zero” clause.

Continue Reading Dealing with “Deemed Zero Rates” in Loan Agreements and Related Interest Rate Swap Documentation