Often in connection with commercial loans, borrowers will enter into hedging transactions (“swaps”) for the purpose of mitigating interest rate, commodity or currency risk. Such swaps will frequently be entered into directly with the borrower’s lender or an affiliate of the lender or, in a syndicated or club loan transaction, one of the syndicate lenders (or an affiliate of such syndicate lender). In such circumstances, lenders will typically require that guarantors of the loan (including borrower subsidiaries and/or affiliates), and the collateral securing the loan, also provide support for the borrower’s obligations under swaps entered into with the lender and/or an affiliate of such lender. Recent interpretative rules related to the implementation of Dodd-Frank have significant implications with respect to the documents governing such loan transactions.
Certain provisions of Dodd-Frank amended Section 2(e) of the Commodity Exchange Act (the “CEA”) and recent final rules interpreting these statutory reforms, published jointly by the U.S. Commodity Futures Trading Commission (the “CFTC”) and the U. S. Securities and Exchange Commission (the “SEC”), have significant implications on loan documents, including guarantees and, potentially, security documents, where a related swap is (or in the future may be) involved. As a result of these new interpretations, Lenders should carefully review current loan document forms, including guaranties, pledges and other security documents to ensure that they are in compliance with Dodd-Frank and CEA restrictions and requirements for entities providing credit support for swap transactions. In particular, in light of these new interpretations, borrowers and their counsel should also be cognizant of the need to potentially modify enforceability representations and warranties contained in loan documents that they enter into, as well as qualifications and assumptions in forms of legal opinions, given in connection with commercial loan transactions.
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