Derivatives Regulation Case Study: Clearing Selection Our Client: A regional bank that uses derivatives for asset-liability management and offers hedges to its customers in connection with variable-rate loans. Situation: The client, who will be required to centrally clear certain derivatives transactions, hired Chatham to evaluate and help in the selection of futures commission merchants (FCMs), with whom the client will need to establish a relationship in order to be able to access clearing houses for the central clearing of derivatives trades. Outcome: Chatham conducted an independent RFP (request-for-proposal) process for the client involving eight FCMs. The RFP assessed fee schedules, creditworthiness, initial margin estimates and complementary services available to customers. The client received a full analysis and evaluation of the FCM proposals customized to align with the client’s specific needs. The RFP evaluation was presented to the client’s senior management…

Read More...

It’s amazing how time flies. Can this really be our first newsletter in June 2013? Why, that means our favorite holiday is one short week away! Of course, we’re talking about World Derivatives Day! To answer your first question: no, this is not a joke! If you’ve been reading our newsletters for a while, you may recall that in 1997, we at Chatham decided to dedicate one day a year to celebrating the mighty derivative and its use in financial risk management: more predictable than a LIBOR-Fed Funds dislocation; more foreseeable than a black swan event; and able to fix the largest of variable interest rate exposures with a single “done”! But this year, World Derivatives Day coincides with an important milestone in the now four-year-old realm of financial regulatory reform, and it is an inauspicious day for some. Beginning…

Read More...

Dodd-Frank End-User Clearing Exception: Practical Considerations for Preparing Your Board March 12, 2013, DerivSource By Matthew E. Hoffman and Christina Norland The initial election of the end-user clearing exception represents a unique opportunity for boards to comply with Dodd-Frank and meet their fiduciary duties. Matthew E. Hoffman and Christina Norland, both of Chatham Financial explain how boards can establish a proper foundation of robust policies, processes, and procedures that will position their companies to hedge efficiently while evolving with the rapidly changing post-regulatory regime. Download Complete Article 

Read More...

End-User Exception Election For swaps subject to mandatory clearing, end users will be exempt if they qualify for the end user exception and provide justification. The end user exception must be elected on a per trade basis. If an end user is facing a swap dealer, the exempt end user would provide the information to its swap dealer counterparty, or its financial entity counterparty. The dealer or financial entity would report this information to a “swap data repository” along with the specific trade details. If two end users face each other, one of the end users would have to notify the CFTC, through reporting to the SDR, that the election to use the end-user exception to mandatory clearing. The CFTC’s final rule would require any end user that wishes to be exempt from clearing to report additional information on an…

Read More...

The clearinghouse CME has announced that it is now accepting corporate bonds as initial margin for cleared trades, which would benefit asset managers and insurance companies with bond portfolios. Whether the Fed and other prudential regulators will do the same with respect to margin for uncleared trades is not certain. If not, the discrepancy could provide an incentive for certain end user to do a cleared trade over a uncleared trade.

Read More...

Overview of Central Clearing Requirements for End-User Exception: 1. Must not be a financial entity (small bank exemption can be used for banks with less than $10bn in assets) 2. Must be hedging commercial risk 3. If public, must have board approval to not clear trades 4. Must complete CFTC end-user exception questionnaire and submit to a swap data repository Clearing Timeline 1. Proposed mandatory clearing determination published by CFTC in the Federal Register on August 7th, 2012. 2. 30 day comment period ends September 6th, 2012. 3. Final mandatory clearing determination released as early as September 7th, 2012 (not expected to slip more than a month or two if it does slip) 4. Swap dealers, major swap participants, and active funds (private funds executing an average of 20 trades or more a month) required to clear as early as…

Read More...