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It was a busy morning at the intersection of derivatives and virtual currencies.  Here is an overview of what happened and some thoughts about what it means for the world of virtual currencies.
Continue Reading CBOE and CME Self-Certify Bitcoin Futures, Cantor Self-Certifies Bitcoin Binary Options and NFA Issues Investor Alert

Yesterday, CFTC Chairman Christopher Giancarlo testified before the House Agricultural Committee. The following are highlights of “Fin Tech” issues addressed during the course of that testimony. Continue reading “FinTech Highlights from CFTC Chairman Giancarlo’s Testimony Before House Agricultural Committee” from the FinTech Report here.

Good day.  Good to stay current on these very current

Earlier today, the International Swaps and Derivatives Association (ISDA) sponsored a webinar, “The Foundations of an Efficient Market Infrastructure,” that focused on an initiative by ISDA’s Market Infrastructure and Technology Committee to facilitate the adoption of emerging technologies (DLT, smart contracts)into the trading, documentation and processing of derivatives.

The focus of the conference was on derivatives processing and reporting; however, the issues that plague derivatives are relevant to many other financial market processes and activities.  Specifically, the primary challenge with respect to derivatives – a strained infrastructure that is too costly and inefficient to be sustainable – is common throughout the financial markets.  Or, put  differently, the development of technological solutions within the derivatives sector has the potential to become a template for the resolution of similar issues in other sectors of the financial marketplace.  For this reason, today’s webinar may have an appeal that is broader than market participants with an interest in the process of derivatives.

The remainder of this message contains a summary of the information discussed at this informative webinar.
Continue Reading Summary: ISDA Webinar on the Use of DLT and Smart Contracts in Market Infrastructure for Derivatives Processing

There were two important market infrastructure developments in May:  (1) the approval of the Depository Trust and Clearing Corporation’s (DTCC) Centrally Cleared Institutional Triparty Service (CCIT Service); and (2) the establishment of BNY Mellon Government Securities Services Corp., a new wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon).
Continue Reading Repo Market Infrastructure Update – May 2017

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

In an earlier post, I noted that Release No. IC-10666 was issued before interest rate swaps were invented. This may have been unfortunate, because swaps present unique challenges to Release 10666’s approach to asset segregation. I believe that difficulty with applying Release 10666 to swaps has contributed to inconsistency in the segregation requirements for different derivatives.

Swaps: The Revenge of Middle School Algebra
Continue Reading Release 10666 and the Problem of Swaps

I’ve been discussing comments on the SEC’s proposed Rule 18f-4 in light of the SEC’s initial regulation of derivatives in Release No. IC-10666 (“Release 10666”). As explained in my first post, the objectives of the proposed rule include limiting the “speculative character” of funds that use derivatives and assuring they have sufficient assets to cover their obligations. Release 10666 used one means, asset segregation, to achieve both ends. Several comment letters appear to question whether this approach is still tenable.
Continue Reading Should Asset Segregation Do Double Duty?

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Release No. IC-10666 (“Release 10666”), issued in 1979 under the direction of my partner Marty Lybecker, was the starting point for the SEC’s regulation of derivatives under Section 18 of the Investment Company Act. This release would provide the basis for proposed Rule 18f‑4’s regulation of “financial commitment transactions.” Many of the comment letters on the proposed rule refer to Release 10666, and many of these assert that subsequent no-action letters extended Release 10666 to derivatives. Their assertion underestimates the original scope of Release 10666, which extended to all derivative contracts commonly used at the time.
Continue Reading 10666 and All That

This post continues my consideration of some conceptual questions underlying the SEC’s proposed Rule 18f-4. The following comment on the proposal caught my attention:

Congress is stating [in Section 1(b) of the Investment Company Act] that there is a problem when leverage unduly increases the “speculative character” (what we now call risk) of the investments. This was particularly a problem back in the 1930s … [when the] combination of opaque products, complex capital structures, pyramiding, bad corporate governance, and leverage created a toxic brew that resulted in serious losses for unwary investors.

Although this wasn’t the commenter’s point, it struck me that derivatives have the potential to present today all of the problems that senior securities presented in the 1930.
Continue Reading Could the Use of Derivatives Create a “Toxic Brew?”