It has been an extraordinary few weeks as businesses face challenges presented by the COVID-19 outbreak. Companies are grappling with a multitude of issues — from the health and safety of employees to increased cyber security risks to financial and operational stability. Understandably, assessments of significant contractual and market exposures have been prioritized. Potential exposures under over-the-counter derivatives contracts should be included in those reviews. Many companies maintain active OTC derivatives portfolios to hedge commercial risk, whether interest rate, foreign exchange, commodity or other hedges. The OTC market has experienced large movements in reaction to COVID-19 and the related containment measures. Below we highlight key OTC considerations for companies in relation to COVID-19:
Derivatives: Regulators Address No-Deal Brexit Cross-Border Issues
On March 29, the UK House of Commons rejected, for the third time in three months, a draft withdrawal agreement for a negotiated exit of the UK from the European Union. The UK now has until April 12 to present the EU with a new exit proposal. The lack of a negotiated transition for the UK (a “no-deal Brexit”) could present uncertainty for participants in the global derivatives markets. In response to concerns over such potential uncertainty, regulators on both sides of the Atlantic are taking measures to reassure the markets that U.S.-UK derivatives activity will continue with minimal interruption.
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Derivatives: Non-Cleared Swaps Variation Margin Update – Limited Relaxed Enforcement by the CFTC, Prudential Regulators and European Supervisory Authorities
Recently, the U.S. Commodity Futures Trading Commission (“CFTC”), the U.S. Prudential Regulators[1] and the European Supervisory Authorities (“ESAs”)[2] have offered limited relief from or guidance for relaxed enforcement of variation margin requirements for non-cleared swaps that take effect March 1, 2017. This news follows reports that, despite all efforts, market participants are facing continued legal and operational challenges in implementing the requisite steps for timely compliance with the new margin regimes. Still international regulators remain committed to moving non-cleared OTC derivatives to a collateralised model.
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Derivatives: ISDA Announces 2016 New York Law Variation Margin Credit Support Annex
On April 14, 2016, the International Swaps and Derivatives Association, Inc. (ISDA) announced the 2016 ISDA Credit Support Annex for Variation Margin for use with New York law transactions (the 2016 CSA).
ISDA is in the process of updating certain of its documents to account for recent regulatory reforms. The 2016 CSA