In Anticipation of LIBOR Transition, IASB Proposes Amendments To Hedge Accounting Standards

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

ISDA Survey Highlights Growth in Initial Margin Collection In 2018 As Final Phases Draw Near

In April 2019, the International Swaps and Derivatives Association, Inc. (“ISDA”) published the results of its latest survey of the margin amounts collected by market participants. The publication identifies key themes derived from a 2018 survey of firms that are subject to the Prudential Regulator or U.S. Commodity & Futures Trading Commission (“CFTC”) initial margin (“IM”) requirements. In this post, we summarize themes presented in the survey summary in the context of the margin requirements. Continue Reading

ISDA Publishes Guidelines for Smart Derivatives Contracts

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

FINRA (Officially) Extends Effective Date for Rule 4210 Margin Requirements to March 25, 2020

FINRA has made it official.  Earlier today, FINRA published Regulatory Notice 19-05, delaying TBA margin requirements until March 25, 2020.  FINRA explained:

FINRA is issuing this Notice to announce that FINRA is extending by an additional year, until March 25, 2020, the effective date of the margin requirements that otherwise would have become effective on March 25, 2019.

As we explained in a January 29th post, the purpose of this delay is to allow FINRA to consider whether any revisions to the TBA margin requirements are appropriate.  According to Regulatory Notice 19-05,

FINRA’s consideration of potential revisions is ongoing.

In other words, the text of the revisions (if any) will be published in the future.

Good day.  Good to know that it is an official delay. DR2

 

2019 Priorities: Reg SHO/Short Selling

Both the SEC and FINRA recently released their 2019 Examination priorities, (available here and here) highlighting primary areas of focus for 2019.  While there are no surprises, there are some items that have a unique twist that warrant attention.  In this post we provide an overview of the regulators focus on Reg SHO and short selling.

Both regulators will continue to focus on aspects of Reg SHO compliance.  FINRA will be focused on the exception to the netting required in Rule 200(c).  Rule 200(c) states that a person shall be deemed to own securities only to the extent that he has a net long position in such securities.  Rule 200(f) grants an exception to the netting requirement by allowing broker-dealers to break into independent aggregation units for purposes of determining the trading unit’s net position.  To take advantage of the exception, broker-dealers must demonstrate four criteria to establish separateness and independence.  Of note, only broker-dealers can rely on 200(f).  During the adoption of Reg SHO Rule 200, commenters requested that the SEC extend the relief beyond broker-dealers, and the SEC declined to do so, stating that the lack of oversight by a self-regulatory organization might facilitate the creation of units that are not truly independent or separate. The SEC will be looking at Reg SHO compliance more broadly in the context of microcap securities.  Continue Reading

FINRA Rule 4210 Update: New Proposed Implementation Date of March 25, 2020 for TBA Margining

On January 29th, FINRA released the following statement:

Financial Industry Regulatory Authority, Inc. (“FINRA”) is filing with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to extend, to March 25, 2020, the implementation date of the amendments to FINRA Rule 4210 (Margin Requirements) pursuant to SR-FINRA-2015-036, other than the amendments pursuant to SR-FINRA-2015-036 that were implemented on December 15, 2016. 

FINRA has indicated that it will file the proposed rule change with the Securities and Exchange Commission (“SEC”) with a request for “immediate effectiveness,” which means that FINRA is recommending to the SEC that the deferred implementation date will become effective  immediately upon filing of the rule change by FINRA with the SEC.   Continue Reading

SEC Brings First Enforcement Actions against Robo-Advisers

On December 21, 2018, the U.S. Securities and Exchange Commission (“SEC”) announced enforcement actions against two robo-advisers, Wealthfront Advisors LLC (“Wealthfront”) and Hedgeable Inc. (“Hedgeable”), for making false statements about investment products and publishing misleading advertising. “Robo-advisers” are investment advisers that provide automated, software-based portfolio management services. In a press release related to these actions, the Chief of the SEC Enforcement Division’s Asset Management Unit stated that “[t]echnology is rapidly changing the way investment advisers are able to advertise and deliver their services to clients … [but] [r]egardless of their format … all advisers must take seriously their obligations to comply with the securities laws, which were put in place to protect investors.” These enforcement actions, the first by the SEC against robo-advisers, highlight the nuanced risks and requirements for robo-advisers under U.S. securities laws. Read the full article on our sister blog Asset Management ADVocate.

LIBOR Benchmark Transition Planning: ISDA Benchmarks Supplement

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

SEC Chairman Weighs in on the Transition to SOFR

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

CFTC Chairman and Market Participants Weigh 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

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