As the markets continue to react to the COVID-19 pandemic, the trading prices of many corporate loans and bonds have fallen dramatically. As a result, many companies (or their private equity sponsors) are looking at repurchasing their debt at a discount. In addition, many companies are concerned that the impact of the COVID-19 pandemic will result in covenant breaches or other defaults and are engaging in discussions with their lenders and investors to obtain needed modifications to their debt agreements.
The Alternative Reference Rates Committee (ARRC) recently unveiled its 2020 objectives for facilitating the industry's transition away from the US dollar London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate. These goals and projected timelines build on the ARRC's previous transitioning work and aim to account for both the impact of COVID-19 on financial markets and the expectation that LIBOR will still be discontinued at the end of 2021.
The outbreak of the novel coronavirus (COVID-19) has implications for derivatives contracts. For example, some companies are asserting that the reported disruptions in the global supply chain and travel restrictions constitute a force majeure, which is a legal basis for excusing non-performance and a right to terminate under contracts. This article examines certain issues that market participants may wish to consider when evaluating the potential impact of the COVID-19 outbreak on their outstanding derivatives contracts.
The Commodity Futures Trading Commission (CFTC) recently issued three no-action letters providing relief for swap transactions (and amendments to swap transactions) in connection with the expected market transition from using the London Interbank Offered Rate and other interbank offered rates. The approach is consistent with an increasing focus at the CFTC and other regulators on facilitating an orderly transition to alternative rates.
The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation recently announced that they will stop accepting London Interbank Offered Rate-indexed adjustable-rate mortgages by the end of 2020. Additionally, the two government sponsored agencies announced that they will soon accept mortgages tied to the Secured Overnight Financing Rate later in 2020.
As a further step towards the implementation of its security-based swap regime, the Securities and Exchange Commission (SEC) has adopted a number of long-awaited capital, margin and segregation requirements for security-based swap dealers and major security-based swap participants. The SEC's final rules address one of the key remaining questions required to implement the security-based swap regime: which capital and margin requirements will apply to non-bank dealers?
The Securities and Exchange Commission (SEC) continues to take steps towards the implementation of its security-based swap (SBS) dealer registration framework. In a recent proposal, the SEC has sought to address certain questions as to the cross-border implementation of its SBS regime and, in some cases, to further harmonise its regulations with the Commodity Futures Trading Commission's swaps regulatory framework.
The Commodity Futures Trading Commission has proposed a series of changes to its general regulations governing derivatives clearing organisations (DCOs). While the proposed amendments intend to (among other things) enhance certain risk management and reporting obligations, many of them would require significant changes to current practice and impose new obligations on DCOs and their clearing members.
The Commodity Futures Trading Commission (CFTC) has proposed the first instalment of a series of amendments to its rules relating to swap data repositories and the reporting of swap data. The proposed amendments, which would affect Parts 23, 43, 45 and 49 of the CFTC's regulations, implement the CFTC's Roadmap to Achieve High Quality Swaps Data and are intended to improve the quality and accuracy of data available to the CFTC and the public and to streamline data reporting.
The International Swaps and Derivatives Association recently published proposed amendments to its 2014 Credit Derivatives Definitions relating to narrowly tailored credit events. The proposal comes in the wake of concerns raised by market participants over certain failure to pay credit events, or claimed failure to pay credit events – in particular, the 2017 agreement by Hovnanian Enterprises to default on an interest payment to an affiliate in order to obtain favourable refinancing terms from GSO Partners.
The Commodity Futures Trading Commission (CFTC) recently published the 2019 examination priorities for its three divisions. This marks the first time that the agency has published its divisions' examination priorities, which serves as part of the CFTC's efforts to advance its Project KISS (which stands for 'Keep It Simple, Stupid') initiative and demonstrates areas that the divisions view as particularly important to self-regulation in US derivatives markets for the coming year.
Towards the end of 2018, the Commodity Futures Trading Commission (CFTC) proposed significant revisions to the framework governing swap trading through swap execution facilities and designated contract markets. Many of these amendments are in line with recommendations contained in CFTC Chair J Christopher Giancarlo's white paper on swaps regulation reform. The proposed changes are intended to reflect developments in the swaps markets since the CFTC's implementation of its current regulations.
Commodity Futures Trading Commission Chair J Christopher Giancarlo recently released a white paper recommending potential reforms to the agency's approach to the extra-territorial, or cross-border, application of its swaps trading rules. According to Giancarlo, the reforms are intended to create a territorial, risk-based approach that relies on greater deference to regulators in jurisdictions with comparable regulatory frameworks (comparable jurisdictions), where appropriate.
The National Futures Association (NFA) recently adopted an interpretive notice that requires futures commission merchants, introducing brokers, commodity pool operators and commodity trading advisers to disclose to customers certain potential risks involved when dealing with virtual currencies and virtual currency derivatives. The notice reflects the NFA's concern that, among other things, customers may not fully understand the nature of these products or the losses that could be sustained.
The Commodity Futures Trading Commission (CFTC) recently proposed amendments to certain requirements for swap dealers and major swap participants to notify counterparties of their right to segregate initial margin for uncleared swaps. The proposal addresses several concerns previously raised by market participants about the existing rules, including through the CFTC's Project KISS initiative, which was intended to lift unnecessary regulatory burdens and reduce costs for market participants.
Commodity Futures Trading Commission (CFTC) Chair J Christopher Giancarlo and Chief Economist Bruce Tuckman recently published a white paper on potential reforms to the CFTC's swaps trading rules. The white paper proposes a series of changes to rules relating to transactions on swap execution facilities. Accompanying statements note that commission staff is expected to propose a formal rulemaking in this area in Summer 2018.
Virtual currency exchange Gemini recently released a proposal to create the first self-regulatory organisation for US virtual currency exchanges. The so-called 'Virtual Commodity Association' (VCA), as envisioned, would be a non-profit, independent regulatory organisation that would operate to foster responsible virtual commodity markets. The VCA would also encourage greater cooperation with relevant regulators in an effort to assist with the maturation of the virtual commodity industry.
The US District Court for the Eastern District of New York recently confirmed that virtual currencies are a commodity within the anti-fraud jurisdiction of the Commodity Futures Trading Commission (CFTC). The ruling marks the first time that a federal court has affirmed the CFTC's 2015 determination that virtual currencies are 'commodities' as defined by the act. This provides the CFTC with further standing to police fraud in virtual currency spot markets.
The Securities Exchange Commission (SEC) recently issued a statement warning investors of potential risks involving digital asset exchanges. The statement aims to protect investors trading digital assets through online platforms and serves as a warning shot to exchanges dealing in digital assets that may be securities. This is the first time that the SEC has directly targeted exchanges and trading platforms in the context of virtual currencies and initial coin offerings.
Although changes in the regulatory landscape were limited in 2017, several steps, including the Capital Markets Report and Project KISS, may lay the groundwork for more significant developments to come, particularly now that regulatory agencies have new leadership and senior staff and have had an opportunity to review market participant feedback. There also remain a number of outstanding issues and emerging issues that are likely to demand regulatory attention in the coming year.