Repurchase Agreements (Repos)

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In September 2019, repurchase agreement (repo) rates spiked, rising as high as 10% intraday. The spike was significant as rates were more than 300 basis points above the federal funds target range–thirty times larger than the preceding week. The United States Department of Treasury’s Office of Financial Research (OFR) conducted a study on the spike…

The United States Department of Treasury’s Office of Financial Research (OFR) conducted a pilot survey to determine why primary dealers prefer trading in the noncentrally cleared bilateral repurchase agreement (NCCBR) market segment of the United States repurchase agreement (repo) market. Primary dealers serve as the trading counterparties for the Federal Reserve’s open market operations. The OFR Brief suggests primary dealers prefer to trade in NCCBR over other repo market segments because it provides them with much greater flexibility.…

Continue Reading Netted Packages Drive Large Trading Volumes in Noncentrally-Cleared, Bilateral Repos

By Stephen A. Keen & Andrew P. Cross

This is the sixth installment of our discussion of the compliance requirements of new Rule 18f‑4 and wraps up our discussion of paragraph (d) of the new rule and its application to business development companies (“BDCs”), closed-end funds and open-end funds other than money market…

This is the fifth installment of our discussion of the compliance requirements of new Rule 18f‑4 and completes our consideration of paragraph (d) of the new rule and its application to business development companies, closed-end funds and open-end funds other than money market funds (“Funds”). Our two previous posts considered the application of…

By Stephen A. Keen and Andrew P. Cross

This post is the third installment of our discussion of the compliance requirements of new Rule 18f‑4. From this point forward, we will be dealing with exemptions that apply only to business development companies (“BDCs”), closed-end funds and open-end funds other than money market funds…

This post is Part 2 of a series of posts that addresses the impact of recent regulatory developments on the use of limited recourse provisions in futures customer agreements entered into between a futures commission merchant (an “FCM”) and an investment manager on behalf of one or more of the manager’s clients.

In this post, we provide an overview of 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 that prohibit the use of limited recourse provisions in futures customer agreements.
Continue Reading Limited Recourse Provisions in Futures Customer Agreements: Part 2 – I Cannot Guarantee Your Client’s Losses

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

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