A Buy-Side Guide to Regulatory and Transactional Issues Related To Derivatives and Repurchase Agreements
In Episode #3 of the Derivatives and Repo Report podcast, Steve Keen joins Todd Zerega and Andrew Cross to discuss the requirements of Rule 18f-4, the new “derivatives rule” under the Investment Company Act of 1940.
Particular attention is given to the rule’s limits on the use of derivatives by registered investment companies and what…
In this episode, Todd Zerega and Andrew Cross discuss three timely topics:
1) Recent market developments that may result in an effective 18-month deferral of the transition from LIBOR to a replacement reference rate;
2) Changes to CFTC Regulation 4.5 related to the designation of a registered investment company’s commodity pool operator; and
3)…
Re-Proposed Rule 18f-4: How Not to Distinguish Commitments from Derivatives is the second in a series of posts about the proposed treatment of so-called “unfunded commitment agreements” under re-proposed Rule 18f-4 under the Investment Company Act of 1940.
We thank our colleague Stephen A. Keen, who originally published this post at our sister blog, the…
Does Re-Proposed Rule 18f-4 Have Commitment Issues? is the first in a series of posts about the proposed treatment of so-called “unfunded commitment agreements” under re-proposed Rule 18f-4 under the Investment Company Act of 1940.
We thank our colleague Stephen A. Keen, who originally published this post at our sister blog, the Asset Management ADVocate…
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
As we explained in an earlier post, the CFTC has recently amended its Regulation 4.5 to clarify that the commodity pool operator (“CPO”) of a registered investment company is the entity that serves as the registered investment adviser (“RIA”) to that company.
In this post, we will explore practical implications of this recent rule amendment.
Mutual fund complexes relying on the exemption under Commodity Futures Trading Commission (“CFTC”) Regulation 4.5 from commodity pool operator (CPO) registration have to file:
(1) An initial notice of eligibility to claim that exemption; and
(2) An annual affirmation of continued reliance on the exemption within 60 days of each calendar year end.
In our experience, many mutual fund complexes “update” their Regulation 4.5 eligibility notices during the last two weeks of February.
This blog post is a reminder to clients and friends that the CFTC has recently amended its Regulation 4.5 to clarify that the registered investment adviser (the “RIA”) to a registered investment company is that company’s CPO. This clarification will be of interest to any mutual fund complex that may have had an entity other than the RIA claim the CPO exemption with respect to the operation of a registered investment company.
On February 10th, the National Futures Association (NFA) published three Notices to Members identifying common deficiencies noted in examinations of commodity pool operators (CPOs), commodity trading advisors (CTAs), futures commission merchants (FCMs), forex dealer members (FDMs), introducing brokers (IBs), and swap dealers (SDs).
This blog post summarizes these notices and the identified deficiencies.
In addition, we have prepared A Summary of Deficiencies Found in NFA Exams February 2020 to supplement the information presented in this blog post.
The Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) announced parallel enforcement orders against an investment adviser (the “Adviser”) and its Chief Executive Officer for derivatives-related oversight failures. The alleged failures related to the Adviser’s management of a registered investment company that invested primarily in options on stock-index futures contracts. The Adviser was regulated by the SEC and the CFTC as a registered investment adviser and registered commodity pool operator (“CPO”), respectively.
This blog post will summarize these enforcement orders, since we believe that they are relevant to investment advisers subject to joint oversight by the SEC and the CFTC. As a general matter, we also believe that this matter highlights the importance of disclosure and consistent risk management practices in connection with any advisory client’s derivatives-based investment strategy.
On February 5, the International Swaps and Derivatives Association (“ISDA“) announced that it will seek additional information from market participants about the development of contractual language that can be used to replace references to LIBOR and other interbank offered rates in swaps and other the over-the-counter (“OTC“) derivative contracts. ISDA refers to this replacement contractual language as “fallback language”.
On February 6, ISDA provided an updated timeline that relates to the development and implementation of this fallback language. Also, ISDA confirmed that buy-side firms will not be charged a fee, if they adhere to the final fallback protocol within three months of its publication.
This post will provide additional information about these two developments.
