Policy and Research

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Perkins Coie attorneys Anna Smith-Sandy and Ernest Simons contributed to the recent update to the American Bar Association (ABA) Derivatives and Futures Law Committee “Digital and Digitized Assets: Federal and State Jurisdictional Issues” white paper which was the result of a significant collaborative effort and provides a comprehensive updated legal analysis of the jurisdictional…

FINRA and the CFTC each issued recent advisories on commodity-linked exchange traded products. Directed at retail investors and broker-dealers, the advisories each highlighted certain issues unique to commodity-linked exchange traded products that were recently demonstrated by market reactions to fluctuating oil prices caused by the COVID-19 pandemic. The advisories provided guidance on relevant considerations in…

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

The International Swaps and Derivatives Association (ISDA) has published the first in a series of guidelines for what it colloquially refers to as “smart derivatives contracts” (the Guidelines).* A smart derivatives contract is a derivative that incorporates software code to automate aspects of the derivative transaction and operates on a distributed ledger, such as a blockchain. This series of papers is intended to “provide high-level guidance on the legal documentation and framework that currently governs derivatives trading, and to point out certain issues that may need to be considered by technology developers when introducing technology into that framework.”

Derivatives have long been thought to be a fitting use case for smart contract solutions. It is little surprise that derivatives industry incumbents and startups alike are working on novel smart contract solutions to facilitate the execution and clearing of derivatives. Smart derivatives contracts have the potential to create significant efficiencies in the derivatives market by automating the performance of obligations and operations under a derivatives contract.   Derivatives settlement is largely reliant upon conditional logic informed by certain data points that can be made available via oracle. …
Continue Reading ISDA Publishes Guidelines for Smart Derivatives Contracts

On September 19, 2018, ISDA published the ISDA Benchmarks Supplement (the “Supplement”) to enable parties to include fall back provisions in their trades if a benchmark ceases to be provided by the administrator to the benchmark or if a regulator of the administrator, the applicable central bank or applicable resolution authority announces that the administrator shall cease to provide a benchmark  (an “index cessation event”). The Supplement covers the following ISDA definitions booklets:

  • 2006 ISDA Definitions;
  • 2002 ISDA Equity Derivatives Definitions;
  • 1998 FX and Currency Option Definitions;
  • 2005 ISDA Commodity Definitions.

The Supplement also introduces the concept of an “Administrator/Benchmark Event” which applies if a benchmark or an administrator is not approved and therefore cannot be used by the parties in accordance with applicable law.
Continue Reading LIBOR Benchmark Transition Planning: ISDA Benchmarks Supplement

On October 31st, the CFTC’s Office of the Chief Economist (the “OCE”) issued a report about “Phase 5” of the uncleared margin rules (“UMR”) that are slated to go into effect on September 1, 2020.  The purpose of the report was “to guide regulators in their responses to industry requests for relief” from the scheduled application of Phase 5.

This post will provide an overview of the main conclusions of the report.  Any potential implementation of revisions to the UMR consistent with the conclusions in the report would have the effect of reducing the number of market participants subject to UMR, thereby simplifying compliance processes and burdens on entities that may have otherwise been impacted by the UMR.  It is too early to forecast whether regulators will propose and ultimately implement revisions to the UMR based upon this report.  Although, we believe that its issuance is a noteworthy development.

At the outset, the UMR are complex and their application to any particular trading activities should be undertaken in consultation with counsel familiar with these rules.  This post is not legal advice.…

Continue Reading Initial Margin Phase 5: Report from CFTC’s Office of the Chief Economist