I. DERIVATIVES ISSUES

1. Inventory “relationship level” considerations in legal documentation that governs your derivatives trading relationships (ISDA Master Agreements, Futures Customer Agreements, Master Securities Forward Transaction Agreements, etc.)

a. Example: Decline in Net Asset Value Provisions (Common in ISDAs)

i. Identify the trigger decline levels and time frames at which transactions under the agreement can be terminated (25% over a 1-month period – is that measured on a rolling basis or by reference to the prior month’s end?)

ii. Confirm whether all or only some transactions can be terminated (typically, it is all transactions)

iii. Identify the notice requirements that apply when a threshold is crossed

iv. Identify whether the agreement includes a “fish or cut bait clause” that restricts the ability of the other party to designate the termination of the transactions under the trading agreement

Continue Reading Market Volatility Regulatory Outline for Asset Managers

This post will address a question that we have been receiving from many contacts, clients and colleagues in recent days (particularly in light of the rate cut announced yesterday afternoon by the Federal Reserve Board).

  • What will happen to an interest rate swap in a zero or negative interest rate environment?

We first addressed this question in a May 2015 post entitled, Dealing with “Deemed Zero Rates” in Loan Agreements and Related Interest Rate Swap Documentation.

Continue Reading Interest Rate Swaps in “Zero” and Negative Interest Rate Environments

As we explained in an earlier post, the CFTC has recently amended its Regulation 4.5 to clarify that the commodity pool operator (“CPO”) of a registered investment company is the entity that serves as the registered investment adviser (“RIA”) to that company.

In this post, we will explore practical implications of this recent rule amendment.

Continue Reading Mutual Fund Corner: Practical Implications of the Recent Amendments to CFTC Regulation 4.5

Mutual fund complexes relying on the exemption under Commodity Futures Trading Commission (“CFTC”) Regulation 4.5 from commodity pool operator (CPO) registration have to file:

(1) An initial notice of eligibility to claim that exemption; and

(2) An annual affirmation of continued reliance on the exemption within 60 days of each calendar year end.

In our experience, many mutual fund complexes “update” their Regulation 4.5 eligibility notices during the last two weeks of February.

This blog post is a reminder to clients and friends that the CFTC has recently amended its Regulation 4.5 to clarify that the registered investment adviser (the “RIA”) to a registered investment company is that company’s CPO.  This clarification will be of interest to any mutual fund complex that may have had an entity other than the RIA claim the CPO exemption with respect to the operation of a registered investment company.   

Continue Reading Mutual Fund Corner: A Reminder for Firms Updating CFTC Regulation 4.5 Exemptions – The Fund’s Adviser is Its CPO

On February 10th, the National Futures Association (NFA) published three Notices to Members identifying common deficiencies noted in examinations of commodity pool operators (CPOs), commodity trading advisors (CTAs), futures commission merchants (FCMs), forex dealer members (FDMs), introducing brokers (IBs), and swap dealers (SDs).

This blog post summarizes these notices and the identified deficiencies.

In addition, we have prepared A Summary of Deficiencies Found in NFA Exams February 2020 to supplement the information presented in this blog post.

Continue Reading NFA Announces Common Deficiencies Identified During Examinations of CPOs, CTAs, FCMs, FDMs, IBs and Swap Dealers

The Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) announced parallel enforcement orders against an investment adviser (the “Adviser”) and its Chief Executive Officer for derivatives-related oversight failures.  The alleged failures related to the Adviser’s management of a registered investment company that invested primarily in options on stock-index futures contracts.  The Adviser was regulated by the SEC and the CFTC as a registered investment adviser and registered commodity pool operator (“CPO”), respectively.

This blog post will summarize these enforcement orders, since we believe that they are relevant to investment advisers subject to joint oversight by the SEC and the CFTC.  As a general matter, we also believe that this matter highlights the importance of disclosure and consistent risk management practices in connection with any advisory client’s derivatives-based investment strategy.

Continue Reading Mutual Fund Corner: SEC and CFTC Charge Investment Adviser and Portfolio Manager for Derivatives-Related Failures

On February 5, the International Swaps and Derivatives Association (“ISDA“) announced that it will seek additional information from market participants about the development of contractual language that can be used to replace references to LIBOR and other interbank offered rates in swaps and other the over-the-counter (“OTC“) derivative contracts.  ISDA refers to this replacement contractual language as “fallback language”.

On February 6, ISDA provided an updated timeline that relates to the development and implementation of this fallback language.  Also, ISDA confirmed that buy-side firms will not be charged a fee, if they adhere to the final fallback protocol within three months of its publication.

This post will provide additional information about these two developments.

Continue Reading LIBOR Transition Planning: ISDA Makes Important Annoucements About LIBOR Replacement Language for Swaps

The Alternative Reference Rates Committee (“ARRC”) has published a Buy-Side/Asset Owner Checklist (the “Buy-Side Checklist”) that is intended to assist asset managers and asset owners transition from U.S. Dollar (USD) LIBOR to the Secured Overnight Financing Rate (“SOFR”).

The Buy-Side Checklist establishes goals and concrete implementation steps for 10 “work categories”.  This blog post will provide asset management firms with an overview of this checklist. Attached to this post is a A Summary of The ARRC’s Buy-Side Checklist.   Continue Reading The ARRC Publishes a Buy-Side Checklist and Vendor Survey for LIBOR Transition / SOFR Adoption

In my initial post on the SEC’s reproposed rules for regulating the use of derivatives by investment companies (“funds”), I noted favorably that the regulations would extend beyond funds to registered broker/dealers and investment advisers. I think this reflects a more comprehensive, less piecemeal, approach to these proposed rules. I also appreciate the coordination of the Divisions of Investment Management and Trading and Markets in drafting the proposed rules. Read the full post on our sister blog Asset Management ADVocate.