Category: Publications

In anticipation of growing demand for swap clearing with the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Futures Industry Association (FIA) and the International Swaps and Derivatives Association, Inc. (ISDA) today published their first standardized form of agreement covering cleared swaps. The “Cleared Derivatives Execution Agreement” will allow parties entering into swaps that are intended to be cleared to address certain issues that may arise in connection with the execution of such transactions. In the near future FIA also will be publishing a standardized form of addendum for futures clearing agreements between customers and their futures commission merchants (FCMs) that addresses terms related to the clearing of swaps.

The Commodity Futures Trading Commission (“CFTC”) recently issued an interim final rule (the “Rule”) requiring the reporting of swap transactions that were open as of July 21, 2010, the date of enactment of the Dodd‐Frank Act (“Pre‐Enactment Unexpired Swaps”). Comments onthe Rule will be accepted by the CFTC until November 15, 2010.

CFTC, SEC to embark on unprecedented rulemaking effort to implement market reforms

This is the second article in a series about trading of environmental commodities. This article describes practical approaches used in trading documentation to mitigating the definitional risks inherent in OTC trades involving environmental commodities.

The lack of federal legislation establishing a greenhouse gas emissions cap-and-trade program has brought about the proliferation of voluntary programs and mandatory regional programs. This article discusses the importance of understanding the products being offered in the various programs in order to properly assess the risk and value of an investment in these programs.

In the NY Business Law Journal, Guylaine Charles discusses some of the special provisions of the Bankruptcy Code that are believed to address systemic risk and provides a brief overview of the legislative framework dealing with the bankruptcy of parties to over-the-counter (OTC) derivative contracts.

In a recent decision providing important reminders for participants in the OTC derivatives markets, a New York federal district court judge ruled in favor of Citibank in a case brought by one of its hedge fund clients. Notably the judge ruled that VCG Special Opportunities Fund Limited (“VCG”) had, by its conduct, effectively waived its right to claim that Citibank wrongfully demanded additional collateral in respect of a credit default swap.

A summary of the key resolutions that were incorporated into the revised order to establish procedures for assigning and settling various “Derivative Contracts” are set forth in the attached client alert.

Since the filing by Lehman Brothers Holdings Inc. (LBHI) and certain of its affiliated debtors of a motion to establish procedures for assigning and settling various “Derivative Contracts”, more than 80 parties have filed objections to the motion with the relevant bankruptcy court in New York. The deadline for objections was Friday, November 28, 2008. A hearing on the LBHI motion is scheduled to take place on Wednesday, December 3, 2008 at 10 a.m. (EST). A summary of the objections filed is provided in the attached client alert.

The new ISDA oil annex, which is expected to be published in spring 2008 and will be based on the LEAP agreement’s terms, will allow, for the first time, market participants to capture transactions in physical crude oil and refined oil products delivered via U.S. pipelines under the ISDA Master Agreement.

The ban on P-Notes based on futures contracts was particularly troublesome for U.S. investors seeking to invest in Indian equity futures contracts because these instruments represented one of the few ways that U.S. investors could invest in such contracts.

Excerpt: In this environment some hedge funds have found they are more exposed to the risk of bank failure because they agreed to trading terms that did not require banks to post collateral against certain derivatives trades, according to Lauren Teigland-Hunt, managing partner at law firm Teigland-Hunt LLP.

Excerpt: The ISDA Coal Annex allows market participants to combine physical coal trades and coal derivatives under a single trading agreement. Lauren Teigland-Hunt says this developement should improve liquidity in the global coal market.

Excerpt: The private sector initiatives that have been launched in response to issues raised by regulators over the last year are changing the way the credit derivatives markets operate and are giving these markets a vital and timely face lift. Specifically, these undertakings have led to the development of standard procedures for transferring (or “novating”) credit derivative trades in reliance on a “Novation Protocol” published by the International Swaps and Derivatives Association, Inc. (ISDA)

Excerpt: The growth of the over-the-counter energy markets can be attributed in no small part to the development of standardized documentation for physical energy trading. These documents not only provide market participants with sophisticated tools for documenting and tailoring transactions to their needs but also have led to greater market liquidity by ensuring that products are traded on consistent terms, thereby enhancing fungibility.

Excerpt: Kenneth Raisler and Lauren Teigland-Hunt examine ISDA’s Novation Protocol and its impact on the credit derivatives market… “The Novation Protocol amendments were developed to address the challenges in the processing of novations that were contributing to confirmation backlogs with respect to both credit and interest rate derivative transactions.”

Excerpt: Allowing traders to cross-product net is also an important part of the proposed law since it has become a common practice in the growing hedge fund industry, says Lauren Teigland-Hunt, managing partner of Teigland-Hunt & Associates in New York and a representative of the Managed Funds Association. “I deal with many people who hedge their forward contracts with a swaps contract, but can’t easily net the entire trade [because of current bankruptcy law],” she says. “A lot of lawyers have spent a lot of hours trying to get around this.”

Excerpt: “There are certain complexities in the business that have to be recognized, and I think Treasury and the other regulators active in this area have tried to craft rules for hedge funds that make sense,” said Lauren Teigland-Hunt, the external counsel for the Managed Fund Association… “Could a hedge fund be used for money laundering? Possibly. But there are impediments associated with that investment vehicle that don’t lend themselves to money laundering, such as lockup periods, which prevent investors from redeeming their interests for an extended period following investment, and limited redemption windows, which mean investors can redeem only once a quarter, for example…”

Televised interview with Lauren Teigland-Hunt, external counsel to Managed Funds Association, regarding SEC proposal to hire additional examiners to inspect hedge funds