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As part of the Dodd-Frank financial reforms, the U.S. Commodity Futures Trading Commission (“CFTC”) increased its oversight of “swaps”.  One change stemming from Dodd-Frank is that a “swap”, as defined in the Commodity Exchange Act and CFTC regulations, is now a “commodity interest”.  The CFTC regulates collective investment vehicles that invest in commodity interests, which it calls “commodity pools”.  This can include SPVs which are not incorporated in the U.S..

The CFTC regulates the person with managerial or operational control over the commodity pool which is referred to as the commodity pool operator (“CPO”).  Determining precisely which person should serve as the CPO in any given structure requires an analysis beyond the scope of this blog post but where there is a commodity pool, there must be a CPO.  CPOs can be subject to onerous regulatory requirements.  Determining whether or not an entity is a commodity pool and then whether its operator needs to register as a CPO requires some careful analysis and, to make the issue more interesting, the rules have undergone significant changes recently.
Continue Reading CFTC Rules – When is a European SPV a commodity pool?

It’s been another one of those grey weeks. A swap counterparty in a securitisation is supposed to post collateral but there’s no CSA in place. Neither are there collateral accounts for that matter as the account bank agreement did not provide for any collateral accounts. Attempting to post would therefore only lead to a bigger mess. A bank holding several roles in a CMBS transaction was downgraded months ago, but parties still cannot decide which party will pay the Rating Agencies for the RAC. Or even which roles that RAC will cover. A bond issue has been dragging on for weeks now. You’ve been chasing people for comments to no avail. Is it ever going to close? And if all that wasn’t enough, a transaction you’ve been working on for months was supposed to close today but the signatories are unavailable. Angry emails are flying around…
Continue Reading Clouds and Silver Linings

In times when banks are facing balance sheet pressure and rating downgrades, it seems sensible for their clients to review the Credit Support Annex (“CSA”) terms under which they have entered into (or are looking to enter into) interest rate swaps with such bank counterparties. This is the main protection for a swap counterparty against counterparty credit risk so it is important that the terms actually address the current state of play.

In the past, when the banks were seen as almost indestructible, it was not unusual for the CSA to be completely absent or one-sided, relieving the banks of the need to post collateral, eliminating their funding risk or shifting it entirely onto the other swap party in the case of a one-sided CSA.

Having witnessed the difficulties that highly rated banks can run into – in some cases without any warning – and the impact it can have on their swap positions, clients should again consider the credit risks that they face in terms of what they can, and should, do to protect themselves when negotiating the swap terms.
Continue Reading CSAs: when and why to negotiate?