Derivatives – Page 3 – Global Investment Law Watch

United States: CFTC Proposes to Broaden Scope of Eligible Collateral for Initial Margin

Jul 28 2023

By: Kenneth Holston, Cheryl Isaac, Matthew Rogers and Gustavo De La Cruz Reynozo

On July 26, 2023, the Commodity Futures Trading Commission (“CFTC”) proposed an amendment (“Proposal”) to, among other things, expand the universe of eligible collateral for the CFTC’s initial margin (“IM”) requirements for uncleared swaps. The Proposal would result in swap dealers that are not subject to prudential regulation being able to use a broader range of money market funds (“MMFs”) and similar funds as collateral to meet their uncleared swap IM requirements under CFTC Regulation 23.156(a)(1)(ix).

United States: CFTC Seeks to Refresh Swap Dealer and FCM Risk Management Program Requirements

Jul 18 2023

By: Clifford C. Histed, Cheryl L. Isaac and Christine Mikhael

On July 18, 2023, the Commodity Futures Trading Commission (“CFTC”) published in the Federal Register an advanced notice of proposed rulemaking (“ANPRM”) on Risk Management Program (“RMP”) requirements for swap dealers (“SDs”), major swap participants (“MSPs”) and futures commission merchants (“FCMs”). After initially adopting its RMP requirements for SDs and MSPs (CFTC Regulation 23.600) and FCMs (CFTC Regulation 1.11) in 2012, the CFTC now seeks to refresh certain aspects in light of feedback it has received on market participants’ confusion and lack of uniformity on their RMP obligations and filings. In particular, the CFTC identified the impetus for issuing the ANPRM as being:

People’s Republic of China: CSRC Intends to Expand Business Scope for Futures Companies

Apr 04 2023

By Chloe Duan and Grace Ye

On 24 March 2023, China Securities Regulatory Commission (CSRC) released the draft amended Regulatory Measures for Futures Companies (Amended Regulatory Measures) for consultation, aiming to, amongst others, expand the scope of business activities that future companies are allowed to conduct directly.

United States: CFTC Proposes New Rules for Derivatives Clearing Organizations

Aug 23 2022

By: Cheryl L. Isaac and Matthew F. Phillips

On July 27, 2022, the Commodity Futures Trading Commission (“CFTC”) proposed a series of amendments to the Commodity Exchange Act (the “Exchange Act”) designed to enhance its governance standards for Derivatives Clearing Organizations (“DCOs”).

United States: CFTC Extends Position Limits Aggregation Relief

Aug 23 2022

By: Cheryl L. Isaac and Michael G. Lee

On August 10, 2022, the Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (DMO) issued a no-action letter (NAL), CFTC Staff Letter No. 22-09 (NAL 22-09), temporarily extending relief regarding certain position aggregation requirements until the earlier of either August 12, 2025 or the effective date of any relevant rulemaking. This relief was first provided in CFTC Staff Letter No. 17-37 (NAL 17-37) on August 10, 2017, and subsequently extended in CFTC Staff Letter No. 19-19 (NAL 19-19) on July 31, 2019. The extended relief provided by NAL 19-19 was set to expire on August 12, 2022, two days before the issuance of NAL 22-09. The DMO stated that it would use the newly extended time to assess the impact of the relief, including whether it hinders the CFTC staff’s ability to conduct market surveillance, particularly in light of so many new contract markets and market participants becoming subject to the Position Limits for Derivatives Final Rule. The CFTC will also consider a rulemaking process to codify the relief set forth in NAL 22-09.

United States: CFTC Sues Crypto Exchange Gemini Trust Co.

Jun 09 2022

By: Clifford C. Histed, Cheryl L. Isaac, and Christine Mikhael

On 2 June 2022, the Commodity Futures Trading Commission (CFTC) filed a complaint against crypto exchange Gemini Trust Company, LLC (Gemini) in the U.S. District Court for the Southern District of New York for allegedly making false or misleading statements of material facts to the CFTC related to the bitcoin futures contract that Gemini launched on its exchange in 2017. If successful in this litigation, the CFTC would impose a derivatives trading and registration ban on Gemini and its employees, in addition to civil monetary penalties and profit disgorgement.

According to the CFTC’s complaint, Gemini intended to self-certify its bitcoin futures contract, and it engaged with CFTC staff between July and December 2017 in connection with the self-certification. The bitcoin futures contract was to be cash-settled by reference to the underlying bitcoin price, determined by the daily bitcoin auction that took place on the Gemini Exchange. In its complaint, the CFTC alleges that the Gemini bitcoin futures contract and related spot auction were readily susceptible to manipulation.

Specifically, the CFTC alleges that:

Gemini represented to the CFTC that Gemini required all transactions to be fully “prefunded”, despite the fact that Gemini was lending digital assets to traders on an unsecured basis at low rates;
Gemini made false or misleading statements relating to self-trading and did not effectively prohibit self-trading from occurring in the Gemini bitcoin auctions (with about 70% of the total auction trading volume resulted from one market participant trading with itself in December 2016);
Gemini entered into bespoke fee arrangements with certain market makers that were not available to all Gemini market participants and were not disclosed to the public; and
Gemini provided false or misleading statements to the CFTC regarding trading volume and liquidity on the Gemini Exchange.

The CFTC emphasized in its complaint that the bitcoin futures contract was particularly significant because it was to be among the first digital asset futures contracts listed on a U.S. derivatives exchange. This action makes clear regulators’ intense focus of crypto assets, and the stakes are high: If the CFTC is successful, Gemini and its employees and agents would effectively be banned from U.S. derivatives markets, in addition to being subject to civil monetary penalties and profit disgorgement. CFTC Chairman Rostin Behnam has previously warned that the agency’s recent crypto-related enforcement actions were just the “tip of the iceberg,” and the Gemini lawsuit is evidence that there are more enforcement actions to come.

United States: All Square: Amended CFTC “Block Trade” Definition Officially Effective

May 31 2022

By: Cheryl L. Isaac and Michael G. Lee

On 25 May 2022, the U.S. Commodity Futures Trading Commission’s (CFTC) block trade no-action relief, provided in CFTC No-Action Letter (NAL) 20-35, expired. As of that day, all swap execution facilities (SEFs) are required to comply with the amended definition of “block trade” provided under CFTC Regulation 43.2.

“Block trades” are large, privately negotiated (either directly or through a broker) swap transactions that meet certain quantity thresholds. Block trades must qualify for execution apart from the SEF’s order book or trading platform in accordance with the relevant SEF’s rules, pursuant to CFTC Regulations.

United States: What’s in a Name? SEC Proposes Amendments to Fund Names Rule & ESG Disclosure Requirements

May 26 2022

By: Clair Pagnano

In a significant departure from the SEC’s long-standing position on the use of fund names, the SEC is proposing amendments to Rule 35d-1 that would expand the Names Rule to include terms denoting strategies, thereby subjecting funds that use the terms “Growth,” “Value,” and funds that use ESG-related terms in the fund’s name to the rule. It would also prohibit funds from using ESG-related terms in their names if ESG factors are considered to the same extent as other screening factors in the management of the fund (so-called “integration” funds). These and other key aspects of the proposed rule include:

Europe: From Russia With FUD: Settlement of Credit Derivatives Transactions Referencing Entities Under Western Sanctions and Kremlin Capital Controls

Mar 29 2022

By: Anthony R.G. Nolan and Kenneth Holston

Russia’s war against Ukraine has led in record time to the implementation of extensive anti-Russian sanctions by the United States, the European Union, and the United Kingdom, among others. Those initiatives in turn have led to the imposition of extensive capital controls within Russia. The combined effect of Western sanctions and Russian countermeasures threaten the liquidity and creditworthiness of Russian debt obligations. Although the Russian Federation avoided defaulting on a coupon payment on its dollar bonds on March 16, it subsequently announced that it will satisfy its obligations under rubles a dollar bond coming due on April 4 by making payment of principal and interest in rubles.

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