After months of negotiations and conferences among key legislators, President Obama signed into law a final version of regulatory reform legislation on July 21, 2010. More than 2,000 pages long, the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Act) provides new legal guidelines for both “financial companies” and non-financial companies and instructs federal agencies to develop a myriad of regulations to enforce the concepts provided in the Act.
In the wake of the recent financial crisis, the legal system continues to sort out rights and obligations of financial market participants. This is especially true for participants in the over-the-counter derivatives markets.
The tremendous growth of that largely unregulated market has been accompanied by the development of sophisticated contractual frameworks and specific bankruptcy legislation expressly intended to reduce uncertainty around the amount and type of claims that could ultimately be asserted by market participants following bankruptcy of a derivative counterparty.
On November 10th, the International Swaps and Derivatives Association announced that its Americas Credit Derivatives Determinations Committee resolved that a bankruptcy credit event has occurred in respect of Ambac Financial Group, Inc. An auction will be held for Ambac Financial Group for which ISDA will publish the auction terms. ISDA Press Release.
The treatment of derivatives, or “qualified financial contracts”, under state insurance insolvency laws has received increased attention since the financial crisis. Four states passed laws in 2010 that allow for the exercise of certain netting collateral and termination provisions in an insurance insolvency without regard to the automatic stay mechanism and similar laws are anticipated in other states in 2011. Federal laws provide a level of certainty with respect to the treatment of certain swap agreement provisions in a general corporate bankruptcy. The U.S.
We are seeing more and more challenges by borrowers to swaps. No big surprise since, with falling interest rates over the past few years, the borrowers are on the wrong end of the transactions. Although swaps are considered independent of the loans, they are often secured by the same collateral and are usually crossdefaulted with the loans, so the obligations that arise from early termination (which can be significant) become part of the collection process and are being fought vigorously by borrowers.
On December 3rd, the CFTC published for public comment proposed requirements for swap dealers and major swap participants with respect to the treatment of collateral posted by their counterparties to margin, guarantee, or secure uncleared swaps. The proposal also would ensure that, for purposes of subchapter IV of chapter 7 of the Bankruptcy Code, securities held in a portfolio margining account that is a futures account constitute "customer property" and owners of such account constitute "customers." Comments should be submitted on or before February 1, 2011.
In the current economic environment, many banks have lost significant capital and are under immense pressure, regulatory and otherwise, to recapitalize. Failure to recapitalize within time frames set by bank regulators can result in a bank’s seizure by its chartering authority and an FDIC receivership.
On February 8th, the CFTC published for comment proposed regulations that would set forth parameters for the inclusion of an orderly liquidation termination provision in the swap trading relationship documentation for swap dealers and major swap participants. Comments should be submitted on or before April 11, 2011. 76 FR 6708.
On April 25, 2011, as widely expected, a group of Lehman creditors holding claims arising from terminated derivatives transactions filed a competing plan of reorganization and related disclosure statement in the Debtors' chapter 11 cases. As a result of the new filing, there are now three competing plans – (1) the Debtors’ Plan, (2) the Ad Hoc Group’s Plan (filed by a group of bondholder creditors) and (3) the Non-Consolidation Plan (filed by the derivative claimants) - in the Lehman bankruptcy proceedings.
The International Swaps and Derivatives Association, Inc. (“ISDA”) is preparing forms of amendment to its boilerplate master agreements in connection with market practice relating to the suspension of payments by a non-defaulting party. ISDA is also considering a protocol to implement the amendments into existing agreements on a multilateral basis.