My initial posts on re-proposed Rule 18f-4 reflect my generally favorable reactions to the SEC’s attempt to develop a practical, hence imperfect, means of implementing the limitations on senior securities required by Section 18 of the Investment Company Act of 1940. My initial series of post written at the time Rule 18f-4 was first proposed
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
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 the heels of remarks by his U.S. Commodity Futures Trading Commission (“CFTC”) counterpart, U.S. Securities and Exchange Commission (“SEC”) Chairman Jay Clayton recently commented on ongoing benchmark reform and the transition to the Secured Overnight Financing Rate (“SOFR”). As we noted earlier this week, Chairman J. Christopher Giancarlo of the CFTC recently advocated for the adoption of SOFR as the appropriate replacement for LIBOR and added that the CFTC is already working on the transition. He implored market participants and firms to immediately begin transacting in SOFR derivatives for the health of the transition.
In remarks on December 6, 2018, Chairman Clayton mentioned the transition away from LIBOR as a market risk that the SEC is currently monitoring. For Chairman Clayton, the key risk stems from the fact that there are approximately $200 trillion in notional transactions referencing the U.S. Dollar LIBOR and that more than $35 trillion will not mature by the end of 2021, when banks currently reporting information used to set LIBOR are scheduled to stop doing so. Listing potential issues with a transition away from LIBOR, Chairman Clayton raised questions such as what happens to the interest rates of the instruments that will not mature before 2021 but reference LIBOR? Does an instrument’s documentation include any fallback language? If not, will consents be required to amend the documentation?
Continue Reading SEC Chairman Weighs in on the Transition to SOFR
On November 29, 2018, in remarks before the 2018 Financial Stability Conference in Washington, D.C., Chairman J. Christopher Giancarlo of the U.S. Commodity Futures Trading Commission (“CFTC”) supported the adoption of the Secured Overnight Financing Rate (“SOFR”) as the new benchmark for short-term unsecured interest rates. SOFR is currently produced by the Federal Reserve Bank of New York (“New York Fed”) and is based on transactions in the repurchase agreement transaction (“repo”) markets. Chairman Giancarlo’s statements and support of SOFR come on the heels of a series of market and regulatory developments relating to benchmark reform.
Since 2017, regulators and financial market industry leaders have been working to design alternative interest rate benchmarks. Significantly, in June 2017, the Alternative Reference Rates Committee (“ARRC”), an organization convened by the Federal Reserve Board (“FRB”) and the New York Fed, selected a broad repo rate as its preferred alternative reference rate. In choosing a broad repo rate, ARRC considered factors including the depth of the underlying market and its likely robustness over time; the rate’s usefulness to market participants; and whether the rate’s construction, governance, and accountability would be consistent with the IOSCO Principles for Financial Benchmarks.
Continue Reading CFTC Chairman and Market Participants Weigh in on the Transition to SOFR
On November 6, 2018, the U.S. Securities and Exchange Commission (“SEC”) brought an enforcement action against a (formerly) registered investment adviser (“Adviser”), for failing to meet its diligence and compliance responsibilities under the Investment Advisers Act (“IAA”) relating to certain repurchase agreement (“repos”) facilities it offered to…
The Federal Reserve Bank of New York (FRBNY) released their monthly statistics of the U.S. tri-party repo market for March 2017. Beginning with the March 2017 data, the FRBNY will no longer publish the PDF and excel files containing single month statistics to which we ordinarily provide a hyperlink. Instead, tri-party repo statistics will only…
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 October 22, 2015, the prudential banking regulators (which includes the OCC, FDIC and the Federal Reserve Board) approved the final version of the non-cleared swap margin rule (available here). We will be considering many aspects of this rule in a series of postings, but in this posting we focus on a single discrete issue:
Whether a money market mutual fund (“MMF”) constitutes eligible collateral that can be posted in respect of a non-cleared swap.
The answer, of course, is it depends. In sum, a MMF will constitute eligible collateral, as long as the following conditions are met:…
Continue Reading Margin on Non-Cleared Swaps – Are Money Market Funds Eligible Collateral?