Investment Management/Broker-Dealer

Authored by Andrew Cross

Equity derivatives are used by a wide range of buy-side firms.  For example, public companies use equity derivatives on their own shares for treasury management purposes (for example, share repurchase transactions and other stock buy-back programs).  Also, investment managers and their clients use equity derivatives in pursuit of investment objectives and related strategies.

Given the unprecedented levels of market volatility, counterparties to equity derivatives should consider analyzing their trade confirmations to determine whether market events could result in:

  • The termination of a particular transaction prior to its scheduled termination date; or
  • An additional payment by one of the counterparties.

In addition, it is a good idea to make sure that any payment or pricing provisions that reference a particular rate (like the Fed Funds Effective Rate) will function as intended in the current low interest rate environment.


Continue Reading Equity Derivatives and Market Volatility: Check Trade Confirmations to Determine Whether Early Termination or Additional Payments May Be Required

Authored by Andrew Cross

The Federal Deposit Insurance Corporation (FDIC) today issued an “FAQ” to financial institutions entitled, Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 (Referred to as COVID-19).

The FDIC has highlighted the following items in respect of this FAQ:

  • The FDIC encourages financial institutions to work with customers affected by COVID-19 in a prudent manner, especially borrowers from industry sectors particularly vulnerable to the volatility in the current economic environment and small businesses and independent contractors that are reliant on affected industries.
  • A financial institution’s prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism.


Continue Reading Payment Accommodations Under Commercial Loans by Banks to Borrowers: Remember the Related Interest Rate Hedge Documentation

Authored by Thomas Ahmadifar and Val Dahiya

On March 9, 2020, FINRA released Regulatory Notice 20-08 (the “Regulatory Notice”) providing guidance and limited relief to its member broker-dealers during the COVID-19 pandemic. In particular, the Regulatory Notice requests that broker-dealers evaluate their compliance with FINRA Rule 4370, which requires broker-dealers to create, maintain, and update upon any material change, BCPs (Business Continuity Plans) identifying procedures relating to emergency or significant business disruption.

Business Continuity Plans

  • FINRA is encouraging broker-dealers to review their BCPs for pandemic preparedness, including whether the BCPs are sufficiently flexible to address a wide range of possible effects of a pandemic.
  • Broker-dealers are encouraged to contact their assigned FINRA Risk Monitoring Analyst to discuss the activation and implementation of their BCPs.
  • Broker-dealers must ensure that they designate two emergency contact persons, both of whom must be associated persons, and at least one contact must be a member of senior management and a registered principal.


Continue Reading FINRA Issues Notice Regarding Business Continuity Planning During COVID-19 Outbreak

Authored by Andrew Cross and Kari Larsen

The U.S. Commodity Futures Trading Commission (CFTC) yesterday announced that its Division of Market Oversight (DMO) has granted temporary no-action relief to designated contract markets (DCMs) and swap execution facilities (SEFs).

In a related press release, CFTC Chairman Heath P. Tarbert stated that, “These prudent, targeted, and temporary actions will help facilitate orderly trading and liquidity in our derivatives markets. The CFTC remains squarely focused on promoting their integrity, resilience, and vibrancy through sound regulation.”

This post summarizes this no-action relief.

In addition, we have prepared the attached Overview of COVID-19 Relief Provided by the CFTC to SEFs and DCMs to supplement the information presented in this post.


Continue Reading CFTC Provides COVID-19 No-Action Relief to DCMs and SEFs

Authored by Andrew Cross, Kari Larsen, and Anna Smith-Sandy

On March 18, 2020, the U.S. Commodity Futures Trading Commission (“CFTC”) Office of Customer Education and Outreach (“OCEO”) published a Customer Advisory warning market participants away from potential fraudulent schemes that may arise to take advantage of market volatility related to COVID-19.

In a related Press Release, CFTC Chief Communications Officer and Director of Public Affairs Michael Short stated, “[d]uring this period of market volatility, we want to ensure the public has important information to help detect and stop fraud”.

The Advisory warns consumers to be aware of biases and emotions that may affect trading decisions. When influenced by bias and emotions, market participants may find it difficult to see when a situation is “too good to be true.”


Continue Reading CFTC Staff Publish Customer Advisory on Fraudulent Schemes in Wake of Coronavirus Pandemic

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On March 9, 2020, FINRA released Regulatory Notice 20-08 (the “Regulatory Notice”) providing guidance and limited relief to its member broker-dealers during the COVID-19 pandemic. In particular, the Regulatory Notice requests that broker-dealers evaluate their compliance with FINRA Rule 4370, which requires broker-dealers to create, maintain, and update upon any material change, BCPs (Business Continuity Plans) identifying procedures relating to emergency or significant business disruption.
Continue Reading FINRA Issues Notice Regarding Business Continuity Planning During COVID-19 Outbreak

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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

Authored by Andrew Cross and Kari Larsen

The U.S. Commodity Futures Trading Commission (CFTC) today announced that its Division of Swap Dealer and Intermediary Oversight (DSIO) has granted temporary no-action relief to futures commission merchants (FCMs), introducing brokers (IBs), swap dealers (SDs), retail foreign exchange dealers (RFEDs), floor brokers (FBs), and members of designated contract markets (DCMs) and swap execution facilities (SEFs) that are not registered with the CFTC in any capacity.

In a related press release, CFTC Chairman Heath P. Tarbert stated that, “These prudent, targeted, and temporary actions will help facilitate orderly trading and liquidity in our derivatives markets.  The CFTC remains squarely focused on promoting their integrity, resilience, and vibrancy through sound regulation.”

This post summarizes this no-action relief.

In addition, we have prepared the attached Overview of COVID-19 Relief Provided by the CFTC to supplement the information presented in this post.


Continue Reading CFTC Provides COVID-19 No-Action Relief to FCMs, IBs, SDs, RFEDs, FBs, and Members of DCMs and SEFs

In light of the recent novel coronavirus (COVID-19) outbreak and the challenges it presents for boards of directors to safely travel, the Securities and Exchange Commission issued an order on March 13, 2020, exempting all registered investment companies and business development companies, including their advisers and principal underwriters, from the in-person meeting requirements of certain