Derivatives markets: House of Lords enquire

The House of Lords is conducting an inquiry into the European Commission’s “communications on ensuring efficient, safe and sound derivatives markets”. The Lords are inviting written evidence by 1 February 2010.  The EC communications outline proposals to reform the regulation and supervision of derivatives markets in the European Union.  The Committee hope to receive evidence on the economic benefits and risks associated with derivatives markets and the activities of central counterparties including how clearing might be regulated. The Committee will also be looking at trade repositories and who should be responsible for operating them. 

On a related topic, ISDA published a report this month on the impact of the legislation proposed in the US for over-the-counter derivatives on the Foreign Exchange Market.  ISDA aren’t convinced that this legislation is helpful: they think it would discourage customisation of foreign exchange transactions, increase the cost and difficulty of hedging foreign exchange positions and, as a result, lead to greater credit, settlement and market risk for companies and investors.

The Vienna Sales Convention

To the casual observer, it might not be obvious why the Vienna Sales Convention is relevant to banking law but I see the Financial Markets and Law Committee have said the Convention will apply to derivative contracts where there is provision for physical delivery. It could extend to cover other financial instruments falling within the category of choses in action. The Convention provides a “uniform law governing the formation of cross-border sale of goods contracts, and delimiting certain substantive rights and obligations arising”. The Convention was adopted in 1980 and came into force on 1 January 1988 but the UK is not a party. Most EU countries, the US, China, Canada, and Australia have adopted the Convention and Japan is about to ratify it. In October 2007, the FMLC set up a Working Group to investigate potential legal uncertainties for the financial markets that would arise from UK implementation of the Convention. The paper sets out the problems of legal uncertainty for financial instruments and makes a plea for express consideration to be given in legislation that implements the Vienna Convention.

Some ISDA news

New and revised credit derivative documentation

Also available on ISDA’s site are:

1) iTraxx® LevX® standard terms supplement and confirmation for credit derivative transactions on leveraged loans. These documents are designed for credit default swap transactions where the reference entity is a European syndicated loan which is listed on the iTraxx® LevX® index and are primarily intended for use in the European market.  12 March 2008

2) A revised version of the “single name standard terms supplement and confirmation” for use with credit derivative transactions on leveraged loans. These documents, which are designed for credit default swap transactions referencing a syndicated secured loan, have been updated.

2008 Americas Master Designated/Exchange-Traded Contract Option Confirmation Agreement

ISDA have published the 2008 Americas Master Designated/Exchange-Traded Contract Option Confirmation Agreement on their website, at www.isda.org . 28 March 2008

Improving processing of credit derivatives

In response to concerns about backlogs of unconfirmed trades in the over-the-counter (OTC) derivatives market, a group of dealer banks have written to the New York Federal Reserve committing to improving the trade processing of credit derivatives.

In recent years, the volume of trades has increased and many banks are struggling to process them.  Many OTC trades are still confirmed by email or fax rather than on electronic trading platforms.

Market Disruption Event

All the hard work that ISDA puts in to drafting provisions in the master agreements to deal with the unthinkable has come in handy. On 7 November, the LSE suffered a “technical problem” and as a result, we have a real, live Market Disruption Event. ISDA has confirmed that for share and index variance swaps documented under the ISDA 2007 European Variance Swap Master Confirmation Agreement, a Market Disruption Event occurred. Closing price data from the LSE’s Tuesday 6 November fixing will be used in calculations for all affected FTSE indices and shares.

Guidance for bond markets and retail cascades

A statement of good practice on bond market transparency for retail investors has been published by ICMA, the International Capital Market Association.  The standard, which will help retail investors to get better information about price and liquidity in the bond markets, does not impose new reporting requirements on the industry. 

And ICMA has also published a guidance note on debt securities “retail cascades” which will help issuers comply with the disclosure requirements of the Prospectus Directive Regulation.  When preparing a retail cascade prospectus, often much of the necessary information is not known and this note helps negotiate those tricky waters.

Securities-lending code of best practice

The International Corporate Governance Network have published a new version of the Securities Lending Code of Best Practice. The Code (first out in 2005) sets out three principles which apply to all areas of investment practice and clarifies the responsibilities of all parties engaged in stock lending.

Is the Prospectus Directive working?

The European Securities Market Expert Group (prettily named: ESME) has published a report on whether the Prospectus Directive has achieved what it set out to do.  This was to achieve market efficiency in detailing the publishing of prospectuses when securities are offered to the public or admitted to trading.  ESME is a body of practitioners that advise the EC on EU securities directives.  The report details ambiguities and deficiencies in the wording of the Directive (e.g., definition of transferable securities, liability for prospectuses, advertisements and marketing materials) and notes the average length of a prospectus has increased since the Directive came into effect.  It is safe to assume there will be some amending legislation in due course.

New Retail Structured Products Guidance

Five leading trade associations have jointly released a draft set of non-binding principles relating to retail structured products (the ‘RSP Principles’). They focus particularly on the management of the relationship between providers and distributors. Structured products include a variety of financial instruments that combine various cash assets and/or derivatives to provide a particular risk-reward profile that would not otherwise be available in the market. These Principles are issued in the form of an exposure draft, for comment by any interested party by close of business on Wednesday 30 May 2007. The associations who have facilitated the publication of the RSP Principles are: the European Securitisation Forum (ESF), the International Capital Market Association (ICMA), the International Swaps and Derivatives Association (ISDA), the London Investment Bankers Association (LIBA) and the Securities Industry and Financial Markets Association (SIFMA).

SEC provides relief to non-US issuers

Thacher Proffitt have published a clear and helpful bulletin on the US Securities and Exchange Commission’s unanimous vote (21 March 2007) to approve new exit rules for “foreign private issuer” deregistration. The new, more lenient rules take effect on 4 June 2007 and make the process much easier for a non-US company qualifying as a foreign private issuer to terminate its SEC registration and reporting obligations.Thacher’s observe the new rules should be welcome news for non-US issuers and market participants.