ISDA Negotiations: Sweat the Small Stuff
December 10, 2012, DerivSource
By Matt Hoffman and Mike Ashby
Chatham Financial’s Matt Hoffman and Michael Ashby assert that end users should explore some of the smaller terms of ISDA agreements when negotiating these agreements. The authors explore three terms included in ISDA agreements worthy of review to help all parties reach fair agreements. Read Now
Swaps – Function and Dysfunction
September 2012, Project Finance International European Report
By Rob Dornton-Duff
Rob Dornton-Duff, Head of the Global Infrastructure and Project Finance Derivatives Advisory Team at Chatham Financial, looks at how the project sector’s use of derivatives has fared through the cycle so far, and asks whether LIBOR is likely to be the optimal model for bank debt and derivatives going forward. Download Now
European Derivatives Regulatory Update – Impact on End Users
August 15, 2012
Following passage of the European Market Infrastructure Regulation (“EMIR”) in March, derivatives market participants have been anticipating guidance from regulatory authorities on how they will implement key aspects of Europe’s derivatives regulatory regime.
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Chatham Comment Letter on ESMA Consultation Paper
August 03, 2012
Chatham Comment Letter on ESMA Consultation Paper “Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories” (EMIR)
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The Economics and Accounting Implications of Swapping Fixed Rate Debt to Floating
Corporate Finance Review
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.
EU Property Sector Commissioned Study Estimates EUR 64.9 Billion Of Impact From Proposed EU Derivatives Regulation
November 23, 2010
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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AIFMD’s Passage and Its Implications On Derivatives Regulation
November 15, 2010
After more than a year of political and legislative wrangling over the Alternative Investment Fund Managers Directive (â€œAIFMDâ€), 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.
Chatham Financial Comments on FASB’s Proposal on Financial Instruments and Hedge Accounting
September 29, 2010
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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Summary of Key Issues from EU Derivatives Published Proposal
September 21, 2010
After more than a year of incubation, the European Commission finally released a draft proposal of its derivatives legislation on September 15th, 2010. By and large, the proposal harmonizes with the U.S. Dodd-Frank bill with several notable exceptions including classification of companies into regulated and exempt entities.
The EU derivative regulation works in conjunction with several other pieces of EU legislation including the AIFM, CRD, and MiFID to form a comprehensive regulatory framework. The AIFM and the derivative regulation proposed today are still subject to final approval in the EU. While the CRD and MiFID are subject to review and potential revisions to bring them in line with the G20 spirit of more regulation for the derivatives market.
Although, the final shape and form of European derivative regulation will not be known until the end of 2012, the broad principals and outlines are in place and clients would benefit from understanding and preparing for the coming regulatory changes that could have significant impact on their business.
Overview of OTC Derivatives Legislation
July 21, 2010
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, an historic piece of legislation that will enact the most sweeping set of rules for the financial services industry since the 1930s. Following is a summary of one of the sections of the legislation that specifically deals with regulation of over-the-counter (OTC) derivatives. The summary is intended to be used to understand the key elements of the derivatives title and can be used as a quick reference guide for market participants.
Preliminary Analysis of House-Senate Conference on OTC Derivatives Title
June 25, 2010
Early Friday morning, negotiators for House and Senate reached a compromise on the OTC derivatives bill. The â€œconference reportâ€ which reflects this compromise will be sent next week to the House and Senate to be voted upon. It is expected to pass and be signed into law by the President not later than July 4th. The differences between the bills were negotiated through the night. Though it was televised on C-SPAN, many of the amendments were not made available to the public, including the final House â€œofferâ€ that contained last minute changes. As such, many of the items below are subject to confirmation upon review of the actual language. Download Now
Make Hedging Your Common Currency
Jason Hoffnagle, Managing Director at Chatham Financial for the Asian Office is featured in an article in the June 2010 issue of AsiaProperty. He addresses the misconception that hedging is a complex and risky business that prevents many property investors from using it as a tool to protect themselves against possible losses resulting from currency fluctuations in cross-border deals. Download Now
Beware of the Mongoose
June 17, 2010
This Op-Ed by Chatham’s Luke Zubrod on FT.com evaluates the unintended consequences of the controversial swaps desk spin-off provision by analogy to Hawaii’s 19th century introduction of the mongoose as a solution for rat infestations that threatened its sugar crop. Download Now
What Does Europe Know About Derivatives Reform That the White House Doesn’t?
April 26, 2010
European policy makers have joined those in the UK in asserting that manufacturers, energy
producers and hospitals should not be subject to the same derivatives regulatory regime as large financial institutions. At the same time, the Obama administration has said that it would â€œfight hard to opposeâ€ provisions that clearly differentiate such companies – known as â€œend usersâ€ – from the likes of AIG and Goldman Sachs. So it begs the question: â€œWhat does Europe know about derivatives reform that the White House doesn’t?â€ The answer: European policy makers have been listening to hundreds of
corporate treasurers from companies like Lufthansa and Caterpillar and to the European Association of Corporate Treasurers, who have told them of the great harm that would result from indiscriminate application of derivatives regulations.
Evaluating SEFs as a Transparency Mechanism in the OTC Derivatives Market
February 2, 2010
In addition to the market transparency that would be provided by central trade repositories, CFTC
Chairman Gensler is proposing that the vast majority of OTC derivatives be required to trade on regulated â€œswap execution facilitiesâ€ (â€œSEFsâ€). Examples of SEFs include electronic trading platforms such as FXall and Tradeweb.
Market Practices for Settling Derivatives in Bankruptcy: Part II
Second part of a two part series describing the economic settlement of derivative contracts after a bankruptcy event. Download Now
Market Practices for Settling Derivatives in Bankruptcy: Part I
First part of a two part series describing the treatment of derivative contracts during bankruptcy. Download Now
FAS 157 and Non-performance Risk for Derivative Financial Instruments: More Than Meets the Eye
Arguably no other accounting standard has received so much attention in recent times as Statement of Financial Accounting Standards No. 157 Ã¢â‚¬ËœFair Value Measurements’ (ASC 820, and formerly FAS 157). This article explores the application of ASC 820 on derivatives financial instruments, and showcases the importance of consider the nature of such financial instruments when calculating adjustments for credit risk. Download Now
Don’t bet on a quick fix for CMBS swap problem
An introduction to Swap breakage concerns within the struggling CMBS industry.
Find out why defeasing a loan in today’s market can make sense.
Interest Rate Hedging in a Low Rate Environment
Today’s hedging strategy can include standard derivative instruments such as interest rate swaps, caps, or collars. However, navigating the hedging decision is no simple matter and depends not just on company or business specific factors, but also on conditions in the market at the time the strategy is implemented. This article explores important factors to consider when navigating the interest rate hedging decision.
Refinancing CMBS Loans and the Hidden Hedge
A brief discussion on hedging options for new financing and how the analysis can be impacted by a defeasance requirement.
An indepth look at the difference between Yield Maintenance and Defeasance provisions and how different market conditions impact the cost of each.