Orrick's Derivatives in Review - March 2014


Publication of 2014 ISDA Credit Derivatives Definitions

On February 21, the International Swaps and Derivatives Association, Inc. announced the publication of the 2014 ISDA Credit Derivatives Definitions, which revised the 2003 version of the definitions.  The definitions, which are expected to come into use in September 2014, amend several existing terms and introduce several new terms based on "lessons learned," including from various events affecting financial and sovereign entities.
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Bitcoin: The Virtual Currency Market Emerges

"Virtual currencies" such as bitcoin, which was developed in 2008, have gained increased acceptance as a form of payment and as a recognized asset in currency exchange markets.  Investments in bitcoin may be made in several ways, and funds, ETFs and derivatives based on bitcoin are beginning to develop.  Bitcoin remains independent of any national or trading block central bank or system, but global financial regulators have begun implementing measures that are intended to curb the use of virtual currency for money laundering and other criminal activities and, to some extent, regulate the virtual currency market. 
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Dodd-Frank Trade Execution Developments

In February 2014, certain categories of interest rate swaps and index credit default swaps became subject to the trade execution requirement under Dodd-Frank.  As a result, those product types may no longer be traded bilaterally over-the-counter but, rather, must be executed on a swap execution facility or designated contract market, unless an exemption or exception applies.  In addition, the CFTC announced various measures intended "to promote trading on swap execution facilities and support an orderly transition to mandatory trading."
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Lehman Court Finds Safe Harbors Protect Damage Calculation Provisions in Swap

An important opinion involving swaps was issued recently in the Lehman litigation.  Specifically, this opinion protects a non-debtor counterparty's right to rely on a contractually agreed methodology for damages calculations upon the liquidation of a safe harbored swap agreement, even if the debtor's bankruptcy triggers the provision. 
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No-Action Relief Relating to the Inter-Affiliate Exemption Under Dodd-Frank

On March 6, 2014, the CFTC issued two no-action letters relating to the April 2013 inter-affiliate exemption from the clearing requirement under Dodd-Frank.  Pursuant to this exemption, the clearing requirement generally will not apply to any swap under which either the counterparties have a common majority-owning parent or one counterparty is a majority owner of the other, provided that certain additional requirements are met.  The recent no-action letters (i) extend the date for eligible affiliate counterparties to clear their "outward-facing" swaps and (ii) provide temporarily relief from the Dodd-Frank trade execution requirement to eligible affiliate counterparties, even if they do not elect the inter-affiliate exemption.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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