The guide enables side-by-side comparison of critical equity derivatives issues across key jurisdictions.

By Rafal Gawlowski

The past several years emphasized the growing importance of strategic equity solutions as part of corporate finance advisory services for both listed issuers and their controlling shareholders. Strategic equity solutions include a range of equity derivatives products, such as capital-raising, equity-linked products; structured share buy-back and share accumulation and disposal products; and hedging and monetization products.

Interestingly, the pandemic highlighted the continued demand for sophisticated methods of capital raising, balance sheet management, and hedging solutions, all of which utilize strategic equity solutions. That trend continued until the 2022 downturn in global equity markets. The eighth edition of the Equity Derivatives volume in the Lexology Getting the Deal Through series aims to survey the equity derivatives landscape in key jurisdictions around the world and highlight the critical issues that practitioners and market participants should be aware of.

A new rule removes the requirement to clear IBOR-based swaps and extends mandatory clearing to swaps on IBOR alternatives.

By Yvette D. Valdez and Adam Bruce Fovent

On August 12, 2022, the US Commodity Futures Trading Commission (CFTC) voted to amend its mandatory clearing requirements for interest rate swaps (the Rule). The vote furthers the CFTC’s  efforts in the global transition away from inter-bank offered rates (IBORs) towards alternative reference rates.

The agency will use the information to take further steps to address climate risks in the commodity derivatives markets.

By Jean-Philippe Brisson, Yvette Valdez, Douglas Yatter, Joshua Bledsoe, Michael Dreibelbis, Qingyi Pan, and Deric Behar

On June 2, 2022, the Commodity Futures Trading Commission (CFTC) issued a Request for Information (RFI) to inform its understanding and oversight of climate-related financial risk relevant to the derivatives markets and underlying commodities market. The CFTC is seeking public feedback on all aspects of climate-related financial risk that “may pertain to the derivatives markets, underlying commodities markets, registered entities, registrants, and other related market participants.”

According to the RFI, public response may be used to inform new or amended guidance, interpretations, policy statements, regulations, or other potential CFTC action. The information will also inform CFTC’s response to the recommendations of the Financial Stability Oversight Council 2021 Report on Climate Related Financial Risk (see Latham’s blog post on the FSOC Report) and inform the work of the CFTC’s Climate Risk Unit (CRU) (see Latham’s blog post on the CRU). Comments on the RFI were originally due by August 8, 2022. On July 18, 2022, the CFTC extended the deadline by an additional 60 days; comments are therefore due by October 7, 2022. 

The consultation response heralds innovation-friendly reform to the UK wholesale capital markets regime.

By Rob Moulton and Dianne Bell

On 1 March 2022, HM Treasury published its response to the July 2021 consultation on the Wholesale Markets Review after considering the feedback received. The consultation response sets out changes that are expected to “liberate businesses from unwieldy and stifling rules that hold back their ability to grow and innovate”, according to Economic Secretary to the Treasury John Glen.

As a major LIBOR transition milestone approaches, a Staff Statement provides key considerations for market participants regarding their obligations.

By Laura N. Ferrell, Marlon Q. Paz, Zach Lippman, and Deric Behar

On December 7, 2021, the Staff of the Securities and Exchange Commission (SEC) issued a statement (the Statement) on the transition away from the London Interbank Offered Rate (LIBOR). The transition away from LIBOR is reaching an inflection point as the publication of the USD LIBOR benchmark for the 1-week and 2-month USD LIBOR maturities and many non-USD LIBOR maturities cease immediately after December 31, 2021.[1] The SEC, like other regulators around the world, continues to emphasize its expectation that market participants understand the risks associated with LIBOR transition and take appropriate action to move to alternative rates in a manner that protects customers, counterparties, the firm itself, and the capital markets more broadly.

Proposals signal that the UK government is willing to diverge significantly from EU rules.

By Rob Moulton and Charlotte Collins

On 1 July 2021, HM Treasury published a consultation on its Wholesale Markets Review. The Review was established to determine how the UK’s approach to regulating secondary markets needs to adapt post-Brexit, and to ensure that the framework is flexible enough to adapt to future challenges and opportunities. HM Treasury is also consulting separately on changes to the UK prospectus regime.

While the government and the regulators have already made or consulted on a number of changes to the UK regulatory framework post-Brexit, these changes have targeted specific areas and have not signalled fundamental change. For example, the FCA’s recent consultation on changes to MiFID proposed amendments that are similar to those already agreed in the EU. However, the Review represents the UK’s most significant and far-reaching proposals to date, indicating that the UK government is not afraid to diverge substantially from EU standards where it feels this is best for UK markets. Indeed, no longer does there seem to be a concern about maintaining equivalence with EU standards.

A comprehensive guide to the new rule, which largely supersedes prior CFTC guidance that had informed market practice for over seven years.

By Yvette D. Valdez, Adam Bruce Fovent, and J. Ashley Weeks

On November 13, 2020, the US Commodity Futures Trading Commission’s (CFTC’s) final rule on the cross-border application of aspects of the swaps regulatory regime under the Commodity Exchange Act (CEA) (the Cross-Border Rule) became effective.

The Cross-Border Rule addresses (i) the cross-border application of the registration thresholds for swap dealers (SDs) and major swap participants (MSPs) and (ii) the categorization and cross-border application of certain regulatory requirements applicable to those entities and previously addressed in CFTC guidance. The Cross-Border Rule also addresses key definitions, such as the terms “US person” and “guarantee,” and replaces the previous “conduit affiliate” category with a new “significant risk subsidiary” concept. Additionally, the Cross-Border Rule formalizes a process and standard of review for the CFTC’s grant of comparability determinations regarding a foreign jurisdiction’s regulation of SDs/MSPs for substituted compliance purposes.

The CFTC continues to demonstrate a commitment to using its regulatory mandate to combat climate change risks to the US financial system.

By Yvette D. Valdez, Douglas K. Yatter, Jean-Philippe Brisson, Paul Davies, Nicola Higgs, and Deric Behar

On March 17, 2021, the Commodity Futures Trading Commission (CFTC) announced the establishment of an interdivisional Climate Risk Unit (CRU) to assess the risks to US financial stability posed by climate change. The CRU aims to be a catalyst for change by highlighting the derivatives markets’ role in understanding, pricing, and addressing climate-related risks, as well as its role in the transition to a low-carbon economy.

The announcement was made by Acting Chairman Rostin Behnam, whose efforts to steer the CFTC’s focus toward climate-related impacts on the financial system led to the publication of a landmark report by the CFTC’s Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee in September 2020. The report, titled “Managing Climate Risk in the U.S. Financial System” (the Report), makes 53 recommendations to help mitigate climate risk to financial markets. See Latham’s discussion of the report here.

The launch of the Protocol and the Supplement represents a key landmark in the transition away from IBORs but is not a one-stop solution.

By Yvette D. Valdez, Becky Critchley, Adam Bruce Fovent, J. Ashley Weeks, Deric Behar, and Anna Lewis-Martinez

On October 23, 2020, the International Swaps and Derivatives Association, Inc. (ISDA) published its IBOR Fallbacks Protocol (Protocol) and Supplement to the 2006 ISDA Definitions (Supplement) in anticipation of the expected discontinuation of the London Interbank Offered Rate (LIBOR) at the end of 2021. ISDA has also published a related set of Frequently Asked Questions, as well as a User Guide to IBOR Fallbacks and RFRs, to assist market participants in navigating the Protocol and the Supplement.

The Protocol and the Supplement, which take effect on January 25, 2021, provide robust fallback provisions to be applied upon the permanent cessation of a relevant IBOR or a pre-cessation announcement made with respect to LIBOR. The Protocol provides an efficient amendment mechanism for mutually adhering counterparties to incorporate these fallback provisions into legacy contracts. However, the Protocol and the Supplement do not themselves modify the terms of underlying floating rate exposures or ensure such exposures transition in the same manner as any interest rate derivatives entered into to hedge those exposures.

Regulators and industry groups strongly encourage market participants to adopt ISDA’s much-anticipated IBOR Fallbacks Protocol and Definitions Supplement.

By Yvette D. Valdez, Becky Critchley, Deric Behar, and Anna Lewis-Martinez

The International Swaps and Derivatives Association (ISDA) has published a statement from its Board of Directors confirming that on October 23, 2020 it will launch its IBOR (interbank offered rates) Fallbacks Protocol (the Protocol) and IBOR Fallbacks Supplement to the 2006 ISDA Definitions (the Supplement). The Supplement and the Protocol’s amendments will take effect on January 25, 2021.

According to ISDA’s October 9 announcement, all new derivatives contracts that incorporate the 2006 ISDA Definitions and reference one of the covered IBORs will contain the new fallbacks as of January 25, 2021. Derivatives contracts existing as of this date will also incorporate the new fallbacks if both counterparties have adhered to the Protocol or otherwise bilaterally agreed to include the new fallbacks in their contracts.