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Austria

The Stock Exchange Act has recently been amended to extend significantly disclosure obligations for shareholdings in listed companies. The main objective is to capture arrangements, in particular derivatives, which previously escaped major shareholding disclosure rules, even though they could be (and were) used for stake-building purposes in Austrian listed companies.

Under the Stock Exchange Act, persons that directly or indirectly acquire or sell shares of an issuer whose shares are admitted to trading on a regulated European Economic Area market must declare when the proportion of voting rights changes in accordance with stipulated thresholds. Failure to comply with the share disclosure regime is an administrative offence and may result in a fine of up to €30,000.

British Virgin Islands

The judge responsible for the Lehman bankruptcy proceedings recently held that Metavante Corporation could not rely on Section 2(a)(iii) of the International Swaps and Derivatives Association Master Agreement to suspend payments. Historically, a BVI court would uphold the contractual provisions of Sections 2(a)(iii) and 6(a) on the occurrence of a Section 5(a)(vii) bankruptcy event in respect of a BVI counterparty.

Cyprus

According to a new regulation, foreign exchange trading transactions now fall within the ambit of the Law on Provision of Investment Services. In practice, the regulation means that the reception, transmission and execution of orders relating to certain financial instruments are considered to be an investment service which can be provided only by an authorized Cypriot investment firm.

Czech Republic

Following the signing of contracts with various clearing banks concerning the financial settlement of trades - the last essential requirement for the commencement of trading - the Prague Energy Exchange has begun trading. The new market offers trading in electricity in the form of fixed-term derivatives.

France

At the 2008 annual public meeting of the Autorité des marchés financiers (AMF), market professionals approved the European Commission's proposals demanding the introduction of a centralized clearing house for credit default swaps. The AMF put in place a working group to draft its own proposals by the end of 2009.

Germany

The XI Civil Senate of the Federal Court of Justice recently held that a defendant bank was liable to the plaintiff, a medium-sized company, for compensation because it had breached its duty when advising on the conclusion of a constant maturity swap spread ladder swap agreement which it had designed.

A bank which arranged a 10-year currency swap for a small utility company owned by a municipality has been found liable for damages because of insufficient risk advice. While the bank had advised the company of the risk in general terms, it should not have proceeded before discussing with the managing director whether and to what extent the swap would also be in the best interest of the shareholding municipality.

Hungary

The Hungarian Financial Supervisory Authority has fined Deutsche Bank London Ft90 million (approximately €325,500) for manipulating the exchange rate of the Hungarian forint in a series of transactions undertaken in October 2008. The regulator concluded that Deutsche Bank London had sold huge quantities of Hungarian forints on the
over-the-counter market, causing a significant weakening in the forint rate.

International

Closing down one credit default swap (CDS) following a credit event may be relatively straightforward, but closing down many CDS transactions at once is more problematic; if they are not handled efficiently, losses may occur. The bankruptcy credit event is the most likely credit event to be triggered under the 2003 Credit Derivatives Definitions.

Recent events have left many investors analyzing their derivatives and structured products exposure to financial institution bankruptcy. This update sets out some of the practical steps to take and matters to consider under the International Swaps and Derivatives Association 1992 and 2002 master agreements.

Ireland

The Irish Stock Exchange is aware of the practical difficulties current requirements pose for funds listing on the exchange and has undertaken significant industry consultation with a view to developing an alternative regime for listing funds which invest in derivative positions. Having taken legal advice, the exchange has decided to amend its rules and to introduce new rules on the custody of derivatives.

Jersey

As financing transactions have become more sophisticated over the last decade, it has been common for parties to agree in advance matters relating to netting, contractual subordination and non-petition provisions. The Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005 ensures certainty to parties entering into such agreements. This update summarises its provisions.

Kazakhstan

Amendments to the terminology for financial instruments in the Civil Code could have unforeseen consequences. Previously, the term 'derivative financial instrument' could be held to include derivative securities or derivative contracts, but its definition has been narrowed to cover only contracts. Among other things, this theoretically limits the capacity of Kazakh banks to enter into derivatives transactions.

A decree issued by the Agency of the Republic of Kazakhstan for the Regulation and Supervision of Financial Markets and Financial Organizations significantly expands the scope of derivatives transactions that commercial banks may perform and clarifies the treatment of swaps and foreign exchange transactions.

New legislation enacted by the financial markets regulator limits the types of derivative transaction that may be entered into by Kazakhstan's commercial banks. The legislation is vague and contradictory, but it appears that the regulator wishes to limit transactions which involve assets that are difficult to evaluate or that are intended to circumvent the existing limitations.

Investment companies managing pension assets are the main beneficiaries of a recent regulatory amendment which authorizes them to undertake certain derivative transactions, namely futures, options and swaps for the purposes of hedging. Previously, pension funds could be used only for reverse repo operations with a term of less than 30 days.

Nigeria

The Central Bank of Nigeria (CBN) is responsible for developing the Nigerian financial markets and assuring the stability of the financial system. In pursuance of these objectives, the CBN has issued the Guidelines for FX Derivatives in the Nigerian Market. The guidelines regulate the activities of authorised dealers of foreign exchange in Nigeria (ie, banks, bureaux de change and discount houses) in regard to derivatives transactions.

Panama

The National Securities Commission recently issued Opinion 13-2008, offering its administrative position on whether contracts for difference (CFDs) may be the object of a public offering in Panama. The commission has decided to re-evaluate its prior position to make it consistent with criteria that maintain that CFDs are not a 'security' under the definition in the Securities Law.

By means of Opinion 5-2008 of June 20 2008, the National Securities Commission has issued its administrative position on intermediation activities undertaken by Panamanian companies in the international foreign exchange markets. The commission has reiterated its prior position that foreign exchange investments are not considered to be ‘securities’ for the purposes of Panamanian law.

The National Securities Commission recently issued an opinion offering its administrative position on the issue of whether foreign economic agents that operate in Panama or abroad and exclusively engage in investing in contracts for difference in the market are subject to regulation.

The National Securities Commission has issued its administrative position on the activities of a company engaged exclusively in the purchase and sale of currency in the international markets, with or without financing schemes, and clarified whether such a company requires a licence under the Securities Law and its regulations.

Russia

An amendment to the Civil Code has greatly enhanced the confidence of the financial markets when dealing with derivatives, but the wording of the provision still leaves room for doubt. Various derivatives transactions now in use are not covered by the amended article because either the participants or the characteristics of the transaction fall outside its scope.

Singapore

Singapore’s futures market has recently seen regulatory amendments aimed at broadening the suite of asset classes that may be traded on Singapore’s securities platform. The Singapore Stock Exchange has announced amended rules that will facilitate the trading of listed structured products based on futures prices.

Singapore Exchange Limited (SGX) issued a consultation paper on proposed amendments to its business rules for the introduction of single stock derivatives in the first quarter of 2008. Single stock derivatives will be a new product class and the first margin-based, exchange-traded product on the SGX securities trading market.

Singapore Exchange Limited (SGX) has announced a proposal to dissolve the SGX Derivatives Trading Compensation Fund. Among the reasons for the proposal is the existence under the Securities and Futures Act of the Fidelity Fund, which is intended solely for the compensation of non-accredited investors in the event of a default by a member of Singapore Exchange Derivatives Clearing Ltd.

As the market moves towards a fully electronic trading environment, Singapore Exchange Limited has completed a timely major revision of its existing derivatives trading rulebook. The new version of the rulebook better caters for the industry's key regulatory and market developments and introduces deliverable commodity futures contracts on the newly launched Joint Asian Derivatives Exchange.

After a long restructuring exercise involving the ill-timed oil derivative trading that nearly brought down China Aviation Oil (Singapore) Corporation Ltd, the company has restructured its debt and its shares have been relisted. However, its former chief executive officer has been jailed for offences relating to breaches of a director's duties, non-disclosure of price-sensitive information and insider trading.

Spain

A new royal decree aims to improve competitiveness and bring the Spanish secondary market regulations into line with other international markets. It offers an increase in the number of products that can be traded and registered in these markets, and hopes to reduce systemic risk associated with contract settlement by allowing the governing company to offer central counterparty services.

The debate on the regulation of derivative products has always existed and remains unresolved. However, without underestimating the importance of regulation and the usefulness of adequate external control, strict internal control is essential to prevent new financial scandals as experts warn of a lack of understanding of financial instruments and a tendancy to focus on the product, not the customer.

The EU Directive on Eligible Assets for Undertakings for Collective Investment in Transferable Securities has been transposed into Spanish law. Among other things, the order clarifies in detail the types of financial derivative instrument that are considered eligible for financial collective investment schemes and addresses the classes of assets capable of underlying financial derivative instruments.

Switzerland

Except for some regulated entities, market participants are in general free to assume unlimited counterparty risk at their discretion, whether under over-the-counter derivative transactions or otherwise. Collateralisation is a useful means of significantly reducing counterparty risk, although it cannot fully eliminate any remaining credit risks relating to the counterparty.

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United Kingdom

Following its July 2008 announcement proposing the adoption of a general disclosure regime for contracts for difference, the Financial Services Authority has published a further consultation paper. Once finalized, the new rules will require disclosure of long contract for difference positions under the Disclosure and Transparency Rules at an initial threshold of 3% of total voting rights and every 1% thereafter.

Financial institutions are taking advantage of the growth in emissions trading and other environmental projects by launching multiple environmentally friendly products and climate change thematic indices. The new market faces challenges, such as a lack of empirical data supporting the indices, but standardized access to information and the international harmonization of energy laws should boost its growth.

Credit derivative product companies have been described as highly rated, capital-efficient and successful managers of diverse and complicated risk, but why have so few made it to market? This update considers their structure and history, the importance of a AAA rating and the prospects for the market in the fallout of structured credit product downgrades.

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USA

The credit default swap (CDS) market is the most significant component of the credit derivatives market and has grown considerably in recent years. However, the market has been identified by some commentators as contributing to the financial crisis. This update summarizes the situation regarding the CDS market and the calls for its tighter regulation.

In light of serious disruptions suffered by the capital markets, there is a growing sentiment that the credit default swap market must be regulated. The fundamental question is whether the market should be segmented from a regulatory point of view, with a portion subject to one or more state insurance regulators and the remainder subject to federal or industry regulation, or subject to a single regulator.

The defendants in CSX Corporation v The Children’s Investment Fund Management (UK) LLP had acquired a significant portion of their interest in CSX through the purchase of cash-settled total return equity swaps. As a result, the court considered whether the defendants acquired “beneficial ownership” of the reference CSX stock through their swap positions.

The two questions in determining the tax characterization of a structured note are whether the note is principal protected and whether the note bears a current periodic coupon. Characterizing Type 1 and Type 2 notes is relatively straightforward, but for Type 3 notes issuers and investors have developed a de facto rule to apply in the face of uncertainty.

The Federal Reserve has approved a new variation on the Wachovia Income Trust Securities structure for Tier 1 bank holding company capital. It previously required that the maturity of the forward purchase agreement be at least five years, but has now approved a transaction with a forward three-year stock purchase date.

The Internal Revenue Service (IRS) and the Treasury Department have published a ruling and notice which serve as a warning that the IRS is inclined to require current accrual of income on instruments such as exchange-traded notes (ETNs). The ruling is expected to have an immediate impact only on a narrow class of single currency-linked ETNs.

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