FINRA recently submitted a filing with the SEC that will effectively delay the mandatory margining of TBAs pursuant to FINRA Rule 4210 until October 26, 2021.   In that filing, FINRA indicated that it is considering whether there should be additional revisions to FINRA Rule 4210 (i.e., beyond those that are now scheduled to go into effect on October 26th).

Notwithstanding this delay and potential for additional rule revisions, many buy-side market participants are finalizing their negotiation of Master Securities Forward Transaction Agreements (MSFTAs) with broker-dealers.  These agreements often include provisions that defer the exchange of margin until such time as FINRA finalizes its rules.

This approach to negotiation mitigates counterparty risk in so far as it provides the buy-side firm with the benefits of events of default and established close-out and netting procedures if a broker-dealer becomes insolvent or defaults under the MSFTA for other reasons.  (At the risk of stating the obvious, asset managers that take such an approach can only do so if their client agreements do not require the margining of TBAs.)

A previous post, with a link to another post, on this regulatory saga is available here.

Good day.  Good delay(s)…we ask again? DR2


By Stephen A. Keen and Andrew P Cross

This post is the second installment of our discussion of the compliance requirements of new Rule 18f-4.

The comments on proposed Rule 18f-4 revealed a significant lacuna in the rule resulting from two unrelated changes to current regulations. First, the SEC will rescind Investment Company Act Release No. 10666 (“Release 10666”) as of August 19, 2022, the same day funds must comply with Rule 18f-4. Second, money market funds are excluded from the exemptions for derivatives transactions provided by Rule 18f-4. This post will explain why this was a problem and how the final rule addresses it.  Continue reading at The Asset Management ADVocate.

Originally published at The Asset Management ADVocate, and available here.

Good day.  Good that January is almost over (recognizing that our friends and readers in Australia and other Southern Hemisphere locales are enjoying the blissful days of early to mid-summer – enjoy it for us “up here”).  DR2

In Episode #3 of the Derivatives and Repo Report podcast, Steve Keen joins Todd Zerega and Andrew Cross to discuss the requirements of Rule 18f-4, the new “derivatives rule” under the Investment Company Act of 1940.

Particular attention is given to the rule’s limits on the use of derivatives by registered investment companies and what happens when those limits are exceeded.

  • You can access Episode #3 here.

Good day.  Good or excessive use of the word exceedance? DR2

Perkins Coie attorneys Anna Smith-Sandy and Ernest Simons contributed to the recent update to the American Bar Association (ABA) Derivatives and Futures Law Committee “Digital and Digitized Assets: Federal and State Jurisdictional Issues” white paper which was the result of a significant collaborative effort and provides a comprehensive updated legal analysis of the jurisdictional issues concerning digital products. Topics covered include the following:

  • Background on digital assets and blockchain technologies and characteristics of digital assets and virtual currencies;
  • Regulation by the Commodity Futures Trading Commission (CFTC) and the CFTC’s approach to classifying and regulating virtual currencies and related derivatives;
  • Regulation by the Securities and Exchange Commission’s (SEC) under securities laws, including the SEC’s approach to classifying a digital asset as a “security”;
  • The interplay between SEC and CFTC regulations;
  • Financial Crimes Enforcement Network (FinCEN) regulation of digital assets, including in relation to anti-money laundering and know-your-customer requirements;
  • International regulation of digital assets and blockchain technology throughout Europe, Asia, and Australia; and
  • State law considerations with respect to digital assets and blockchain technologies, including state law licensing requirements and state-specific regulations.

The International Swaps and Derivatives Association (ISDA) has further supplemented its Legal Guidelines for Smart Derivatives Contracts series with guidelines focused on credit and foreign exchange (FX) derivatives contracts.

A “smart derivatives contract” is a derivative contract that incorporates software code to automate aspects of the derivative transaction and operates on a distributed ledger, such as a blockchain. As discussed in our post of February 14, 2019, the series marks long-term efforts and discussions between the ISDA and industry participants on the complexities involved in considering how to apply new technologies to existing derivatives processes such as clearing and settlement to make derivatives transactions more efficient.

The newest legal guidelines on the credit derivatives and FX derivatives markets, which make up the sixth and seventh in the series, respectively, are intended to (1) provide high-level background; (2) identify opportunities for the potential application of smart contract technology; and (3) highlight important issues for technology developers to consider when designing technology-enabled solutions for trading and processing these contracts and associated processes.

Below is a summary of the guidelines making up the series so far:

Published Subject
January 2019 Introduction Link
February 2019 ISDA Master Agreement Link
September 2019 Collateral Link
February 2020 Interest Rate Derivatives Link
February 2020 Equity Derivatives Link
November 2020 Credit Derivatives Link
November 2020 Foreign Exchange Derivatives Link

ISDA also plans to host a virtual conference on January 28, 2021, that will “explore how legal documentation is being digitized for implementation within technology solutions and the legal and regulatory issues that may arise when implementing new technology in the derivatives market.”

You can find the Legal Guidelines for Smart Derivatives Contracts: Credit Derivatives here.

You can find the Legal Guidelines for Smart Derivatives Contracts: Foreign Exchange (FX) Derivatives here.

Good day DR2.

By Andrew Cross and Kari Larsen

Original post is from 12/18 in the Virtual Currency Report.

The Commodity Futures Trading Commission (CFTC) recently released a Digital Assets Primer that provides updated information to the public about emerging concepts in digital assets. The primer is part of a series issued by the CFTC’s innovation office, LabCFTC, and is the second to delve into issues surrounding digital assets.

The Digital Assets Primer is a helpful high level overview of the digital asset marketplace, and regulatory considerations under the U.S. Commodity Exchange Act and related CFTC regulations.

Here are a few observations that we believe are noteworthy:

  • The Primer establishes Digital Assets as a broad term that may encompass physical or virtual assets, a value, or a use right/service, and can include smart contracts.
  • While the CFTC has referred to Digital Assets before, such as in the Final Interpretive Guidance regarding Retail Commodity Transactions Involving Certain Digital Assets, this is the first time that a CFTC document specifically identifies Virtual Currencies, Digital Tokens, and Digital Assets.
    • The primer describes Virtual Currency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value”, and places it as a subset of Digital Assets, alongside Digital Tokens.
    • A Digital Token is defined as a “digital asset that requires another blockchain network to operate and may serve a variety of functions beyond virtual currency, e.g., utility tokens.”
  • The CFTC Primer specifies that : “Depending on its design, function, and use, a digital asset may be characterized differently, including as a commodity, swap or other derivative” depending upon its characteristics, and describes potential considerations in any evaluation of a Digital Asset to determine which regulatory frameworks may apply.
  • The Primer also walks through its jurisdiction over Digital Assets and Digital Asset market oversight.

A full press release from the CFTC announcing the release of the Primer can be found here.

In this episode, Todd Zerega and Andrew Cross discuss three timely topics:

1) Recent market developments that may result in an effective 18-month deferral of the transition from LIBOR to a replacement reference rate;

2) Changes to CFTC Regulation 4.5 related to the designation of a registered investment company’s commodity pool operator; and

3) Margining of delayed delivery mortgage backed securities under FINRA Rule 4210.

Good (snowy) day.  Good to stay current. DR2