Derivatives Download

Kirkland’s Derivatives Download covers regulatory developments and transactional trends affecting the derivatives, repo and prime finance markets. Bookmark this page and check back often for updates on the ever-evolving Dodd-Frank rules, accessible digests of front-page trading news and our attorneys’ perspectives on this dynamic sector.

Inquiries may be directed to editor Jaime A. Madell, or the authors as noted.

Closing the Loop(holes) — The SEC’s New SBS Proposals

by Jaime A. Madell

Just as the market was catching its breath from go-live of the SEC’s Title VII framework regulating security-based swaps, the SEC has rolled out another set of proposals aimed at the security-based swap ("SBS") marketplace. The proposals come at a time when the derivatives market, having settled into the post-Dodd-Frank normal, is grappling with a number of issues, and moving the regulatory goalposts again may well cause new growing pains. Market participants will likely want to read the proposals carefully and share their views with the SEC before anything gets fully baked. (Continue reading)

Equity Derivatives Enter the Ring

by Jaime A. Madell

On November 15, 2021, a Dealer filed suit against a Market Participant in the U.S. District Court for the Southern District of New York for breach of contract under certain equity derivatives contracts.

The complaint is straightforward — essentially the Dealer alleges the Market Participant failed to pay what the Dealer says it should have when the Dealer says it should have. What is slightly more complicated is the dispute giving rise to the claim. (Continue reading)

LIBOR Cessation and Hedging in the U.S. — Cutting to the Chase

by Jaime A. Madell

There’s no shortage of digital ink being spilled on LIBOR cessation — and probably justifiably so. It’s fairly evident to most that USD LIBOR will likely be predominantly replaced with the secured overnight financing rate (“SOFR”). It’s also fairly clear that financing arrangements — bonds, loans, securitizations, etc. — and corresponding hedges should either directly incorporate alternative benchmarks like SOFR or (particularly in the case of financing documents that are more difficult to amend) have “fallback” language to ensure an orderly transition from LIBOR to a replacement rate when LIBOR fully sunsets. But it’s a bit less obvious how to ensure that these moving pieces come together neatly when LIBOR is in the rearview mirror. (Continue reading)

Derivatives Resource Roundup

by Jaime A. Madell

Thank you for taking a moment to check in. We wanted to share some of our recent events and thought leadership here at Kirkland derivatives.

Please click here for links to the full materials, and don't hesitate to reach out with any questions. We'll be following up on all these topics and more.

• Derivatives and Investment Funds: Topics included fund-level hedging, synthetic leverage strategies and the evolving derivatives regulatory landscape.
• European Credit Derivatives Outlook: The presentation explores the evolution of the “Bankruptcy” Credit Event and several key considerations in handling CDS in the restructuring process.
• Equity Derivatives: A Walk Through for Public Companies: Topics included accelerated share repurchases, reverse ASR disposition strategies, call spreads and trust mandatories.
• Leaving LIBOR: Strategies for a Successful Transition: Topics included key LIBOR transition challenges, juggling alternative credit sensitive rates and hedging/basis risk considerations.

A Cross-Border AANA Inconsistency

by Jaime A. Madell

Following on the margin theme of our previous post, we thought we might point out one of the stranger inconsistencies between U.S. and non-U.S. uncleared margin rules. In the U.S., options on single securities and single security indices are generally not considered swaps or security-based swaps and are therefore not subject to the various mandatory margin rules. This means that they don’t count towards the average aggregate notional amount (“AANA”) calculations that determine whether parties are subject to mandatory initial margin rules. However, under EMIR (EU derivatives regulations), these transactions are generally considered in-scope for AANA calculations, even though they’re not subject to mandatory margin rules until at least 2024. (Continue reading)

Spring Forward, Fall Into New Margin Rules

by Jaime A. Madell

Welcome to the inaugural post of the Kirkland Derivatives Download! Thank you for reading.

Today we touch on margin requirements for uncleared derivatives. This topic generates frequent questions — which makes sense given how often the landscape has changed since various regulators worldwide started finalizing uncleared margin regulations. We’ve all been living with the margin rules promulgated by the CFTC and the various prudential regulators (OCC, FDIC, etc.) for some time. With new SEC rules and an updated FINRA proposal, however, the status quo will change. (Continue reading)