Recently regulators gave a first glimpse into the timeline for when market participants will have to comply with new rules that promise to transform the over-the-counter derivatives market. On September 8, 2011, the Commodity Futures Trading Commission (CFTC) held an open meeting where they proposed a tentative schedule for implementation of key rules that will be finalized in the coming months. The rules relate to the implementation and compliance schedule for (1) the central clearing and trading requirements for swaps and (2) the trading documentation for swaps and margining requirements for non-cleared swaps executed with non-bank swap dealers.

This article by Chatham’s Mike Ashby reviews the first glimpse of compliance deadlines for the new derivatives regulations.
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The last two years have seen unparalleled volatility in all aspects of financials markets. The price of oil has ranged from $32 to $145 per barrel, the EUR-USD exchange rate has traded between 1.19 and 1.63, and the 10 year US Treasury yields have gone from 2 percent in late 2008 to 4 percent in early 2010 to back below 3 percent recently. These extreme swings and the prevalence of “underwater” hedges have often left boards and senior management questioning their risk management strategies.

In response to these concerns, this article by Chatham’s Amol Dhargalkar will create a framework of questions for firms with multiple financial risks (interest rate, currency and commodity risk) to help define the objectives of a hedging program.
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In its third year, the survey yielded responses from 39 public real estate companies, representing almost 40% of the entire public real estate market, as measured through assets. As an advisor to over 90 US public real estate companies, including 70% of REITs by total asset size, Chatham has a unique perspective on how REITS are funding themselves and managing resulting risk exposures. This survey is intended to leverage that perspective by offering insight on how REITs are approaching key areas such as capital sources, debt, budgets, forecasts, hedging activity, and investment plans.
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Chatham’s Luke Zubrod and Sam Peterson author an article about how Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act constitutes a massive reconfiguration for OTC derivatives.
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Covering topics from market and product basics, to end users and Title VII of the Dodd-Frank and rulemaking, this frequently asked questions guide is an easy to understand document on derivatives and how they are used by businesses today.
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This year will stand as a landmark year in the history of finance. 2010 saw the passage of the Dodd-Frank Act, legislation that constitutes the most comprehensive reworking of our financial system since the ‘30s. As 2010 comes to a close, regulators charged with writing and implementing the derivatives regulations under Title VII of the Dodd-Frank Act (“Title VII”) are nearing the half-way point. Chatham remains actively involved in the process, meeting with the primary financial regulatory agencies frequently and commenting on key rules.
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Chatham’s Clark Maxwell, Steve Castleton, and Razvan Ionescu analyze shortcut and long-haul methods as they relate swapping fixed-rate debt to floating. In spite of the accounting complexities involved, the authors show that such allocations of debt can be beneficial and in line with a company’s economic objectives.
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Proposed EU rules on derivatives could take an estimated EUR 64.9 billion of working capital away from Europe’s real economy as property businesses risk being required to collateralize their interest rate hedges with cash. This is the main conclusion of a Chatham Financial study commissioned by the European property sector to assess the impact of the European Commission’s proposed European Market Infrastructure Regulation (EMIR) released on September 15, 2010.

One of EMIR’s core requirements is that businesses deemed to be ‘financial’ entities must centrally clear their hedges and post cash collateral to a central clearing party. ‘Non-financial’ businesses, which use derivatives for hedging commercial risks are rightly excluded from these requirements. Absent legislative clarification, property businesses (which use interest rate hedges to protect against fluctuating interest rates), risk being misclassified as ‘financial’ entities and thus subject to onerous clearing requirements which would undermine the stability of the property and banking sector as well as diverting precious capital from the real economy.
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After more than a year of political and legislative wrangling over the Alternative Investment Fund Managers Directive (“AIFMD”), the EU Parliament finally adopted the Directive in its plenary session last week by a vote of 513 to 92 with 3 abstentions. This brings the regulation of a broad range of funds (hedge funds, private equity, real estate, microfinance) one step closer to implementation. There remains a degree of uncertainty as ESMA – the new EU financial super-regulator, the EU Commission, and EU member states will need to work through important implementation guidelines from now until the effective date of 2013.
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We recently provided our views to the FASB on its controversial proposal to modify the accounting for financial instruments, including revisions to the accounting for derivatives and hedging activities. With respect to financial instruments in general, we continue to believe that both fair value and amortized cost have merit, and we share the concerns of most constituents that the FASB proposal goes too far with fair value as the primary measurement attribute for nearly all financial instruments.

As for derivatives and hedging, we agree with certain provisions of the proposal, including reducing the standard for hedge qualification from “highly effective” to “reasonably effective.” However, we have serious concerns about the FASB’s proposed prohibition against removing the designation of an effective hedge (no more de-designations) and the substantial transaction costs that would be incurred by companies to “fully offset” such positions in the marketplace to achieve an “effective termination” under the new rules.

We also think the FASB is missing a golden opportunity to significantly simplify/improve the hedge accounting model and further converge with IFRS. In particular, we would like to see the FASB permit companies to hedge any “separately identifiable and reliably measurable” portion or component of a financial instrument’s cash flow or fair value (for example, permit non-benchmark-rate indices like Prime and Fed Funds to be treated similarly to a benchmark rate like LIBOR). Without going into detail, this provision also would significantly simplify the accounting for fair value hedges of fixed-rate assets and liabilities–and even provide a reasonable approach for hedges of callable debt. We also would like to see the FASB permit bifurcation-by-risk for identifiable and measurable components of nonfinancial items.
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