CFTC Grants CPO/CTA No-Action Relief to Oil and Gas Fund and Its Operating Subsidiaries

In CFTC Letter 17-48, the Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the “CFTC”) indicated that it would not recommend enforcement action against the manager of a oil and gas fund and its subsidiaries for failure to register as a commodity pool operator (“CPO”) or a commodity trading advisor (“CTA”).  As background, the manager intended to use over-the-counter swap transactions (“Swaps”) to hedge commodity price risks relating to oil and natural gas investments made by the fund and its subsidiaries (collectively, the “Fund”).  The following are the key facts presented in CFTC Letter 17-48: Continue Reading

CFTC Files Charges in Bitcoin Ponzi Scheme

On September 21st, the Commodity Futures Trading Commission (“CFTC”) announced the filing of charges against Nicholas Gelfman and Gelfman Blueprint, Inc. (the “Defendants”) for fraud, misappropriation, and issuing false account statements in connection with solicited investments in Bitcoin.  According to the allegations asserted by the CFTC, the Defendants operated a Ponzi scheme, misappropriated funds from investors, and took steps to conceal losses (including by staging a “hack” on its computer systems designed to conceal what were actually trading losses and depletion of funds due to misappropriation).

The enforcement action is notable for two reasons: Continue Reading

FINRA Publishes Proposed Rule Change to Delay Implementation of TBA Margining Until June 25, 2018

On September 19, 2017, the Financial Industry Regulatory Authority (“FINRA”) published a proposed rule change (available here) to delay implementation of certain margin requirements in respect of what are referred to as “Covered Agency Transactions,” including To Be Announced (“TBA”) transactions and other specified delayed delivery transactions involving mortgage-backed securities.

The delay will move the implementation date of the margin requirements from December 15, 2017 until June 25, 2018.   Continue Reading

Summary: ISDA Webinar on the Use of DLT and Smart Contracts in Market Infrastructure for Derivatives Processing

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

Tri-Party Repo Data: Summary for April 2017 to August 2017

The Federal Reserve Bank of New York (FRBNY) continues to track and release monthly statistics of the U.S. tri-party repo market.  This post concerns the April 2017 through August 2017 statistics (the “Five-Month Period”).

In March 2017, the FRBNY discontinued publishing the PDF and excel files containing single month statistics to which we have ordinarily provided a hyperlink.  Instead, tri-party repo statistics will only be available on a consolidated basis through the FRBNY’s tri-party repo interactive tool (available here) and master excel data file (current version here).  Continue Reading

A Look At the Quarter-End Repo Market

Recently the Liberty Street Economics blog on the Federal Reserve Bank of New York’s website published a post entitled: “Regulatory Incentives and Quarter-End Dynamics in the Repo Market.”  The post explores the quarter-end repo dynamics of the U.S. repo market for U.S. Treasury securities and primarily focuses on the impact that the leverage ratio has on quarter end dynamics.

Their evaluation of the U.S. tri-party repo market shows that European banks reduce their repo demand at quarter-end while little change is seen from banks in other jurisdictions, including Japan and the United States.   The post also shows that repo rates generally remain stable at quarter-end which they attribute to the Fed’s overnight reverse repo program soothing out the disruption in supply caused by the European banks by accepting cash that lenders cannot otherwise invest. Continue Reading

Fed Reserve Requests Comments on Proposed Repo Rates

On August 22, 2017 the Board of Governors of the Federal Reserve System (“Fed”) issued a notice and request for comment (the “Notice”) with respect to the proposed publication by the Federal Reserve Bank of New York (“FRBNY”) of three overnight repurchase agreement rates on U.S. Treasury securities.  The Notice states that publication of the rates is “targeted to commence by mid-2018” and is “intended to improve transparency into the repo market by increasing the amount and quality of information available about the market for overnight Treasury repo activity.” Continue Reading

Bankruptcy Court Affirms Auction Process Used Following Repo Counterparty Insolvency

In a remaining vestige of the financial crisis, the U.S. Bankruptcy Court for the District of Delaware (“Court”) recently issued an opinion upholding a repo counterparty’s sale of collateral following the insolvency of the counterparty to the repo. The Chapter 7 Trustee for the insolvent counterparty had challenged the sale on the basis that the sale, conducted through an auction, was not conducted in good faith or in a commercially reasonable manner and therefore violated the repurchase agreement.  At auction, an affiliated trading desk of the non-defaulting party submitted the winning bid (there were 2 bids submitted) and took possession of the securities upon payment of the auction price.  The issue was distilled and examined on the basis of the following three components:

  1. was the decision to determine the Net Asset Value of the securities held as collateral rationale or in good faith;
  2. was the auction process in accordance with industry standards;
  3. was the non-defaulting counterparty’s acceptance of the value obtained in the auction rationale or in good faith.

Continue Reading

Federal Reverse Repo Program Update

On June 14, 2017, the Federal Reserve Bank of New York (FRBNY) issued an update on the operation of their reverse repo program (RRP).  The update indicates that the offering rate on the RRP will be 1.00% following the Federal Open Market Committee’s (FOMC) meeting on June 13-14, 2017 and their decision to maintain the federal funds rate in a target range of 1% to 1.25%.  Each counterparty is subject to a $30 billion per day limit, and the FRBNY estimates the size of available Treasury securities for the RRP to be approximately $2 trillion.  If the total value of bids received in an overnight RRP operation exceeds the available supply (which the FRBNY indicates is highly unlikely), the FRBNY’s Open Market Trading Desk will allocate awards via a single-price auction.  The auction will be based on the stop-out rate at which the overall size limit is reached; all bids below the stop-out rate will be awarded in full at the stop-out rate, and all bids submitted at the stop-out rate will be awarded on a pro rata basis at the stop-out rate.  As of June 14, 2017, the total cash value of reverse repurchase agreements (excluding foreign official and international accounts) held by all Federal Reserve Banks was $163 billion.

Repo Market Infrastructure Update – May 2017

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