Presenting a live 90 ‐ minute webinar with interactive Q&A Collateral Protection for Collateral Protection for Financial Assets: Current Legal Trends Best Practices for Protecting Collateral in a Post ‐ Lehman and MF Global World TUES DAY, DECEMBER 4, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: T d ’ f l f Craig S . Unterberg, Partner, Haynes & Boone , New Y ork Michele Navazio, Partner, Sidley Austin , New Y ork Daren R. Domina, Partner, Haynes and Boone , New Y Daren R. Domina, Partner, Haynes and Boone , New Y ork ork The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
Tips for Optimal Quality S S ound Quality d Q lit If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial 1-888-450-9970 and enter your PIN when prompted Otherwise please send us a chat or e mail when prompted. Otherwise, please send us a chat or e-mail sound@ straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Qualit y To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again press the F11 key again.
Continuing Education Credits FOR LIVE EVENT ONLY For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps: • In the chat box, type (1) your company name and (2) the number of attendees at your location attendees at your location • Click the S END button beside the box
Program Materials If you have not printed the conference materials for this program, please complete the following steps: • Click on the + sign next to “ Conference Materials” in the middle of the left- hand column on your screen hand column on your screen. • Click on the tab labeled “ Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. Double click on the PDF and a separate page will open. • Print the slides by clicking on the printer icon.
Collateral Protection P Post-Lehman & MF Global t L h & MF Gl b l December 4, 2012 Craig Unterberg, Haynes and Boone, LLP craig.unterberg@haynesboone.com | 212.659.4987 Miki Navazio, Sidley Austin LLP Miki Navazio, Sidley Austin LLP mnavazio@sidley.com | 212.839.5310 Daren R. Domina, Haynes and Boone, LLP d daren.domina@haynesboone.com | 212.659.4963 d i @h b | 212 6 9 4963 5
OVERVIEW 1. Legal Framework of Collateral Protection 2. Financial Institution Insolvency 3. Applicability to Swap Dealers 4. Case Studies: Lehman & MF Global 5 Collateral Protection Trends 5. Collateral Protection Trends 6. Dodd-Frank 6
Legal Framework: Article 8 • Our focus will be on the indirect holding system • Applicable to securities intermediaries Applicable to securities intermediaries • A person that maintains securities accounts for others is a “securities intermediary” others is a securities intermediary • Obligations on securities intermediaries are set forth in Article 8 forth in Article 8 7
Legal Framework: Article 8 • §8-504 requires securities intermediaries to maintain a quantity of financial assets equal to maintain a quantity of financial assets equal to all securities entitlements it has established • Compliance with §8-504 contains exceptions to Compliance with §8 504 contains exceptions to the “perfect match” rule • Example: a temporary shortfall due to failure to Example: a temporary shortfall due to failure to deliver by a counterparty in trade settlement 8
Legal Framework: Regulation & Legal Framework: Regulation & Oversight g • Broker-dealers / FCMs – Article 8 Article 8 – Federal statutes – SEC and SRO oversight SEC and SRO oversight • Banks (Custodians) – Article 8 – Federal and State statutes – FDIC oversight 9
Legal Framework: Broker-Dealers • Rule 15c3-3 limits broker-dealer’s use of customer’s securities customer s securities • Cap on a broker-dealer’s rehypothecation • Terms of the account agreement can T f th t t impact applicability of the customer protection rules t ti l – Rehypothecation – Cross-collateralization 10
Legal Framework: FCMs • FCMs must segregate customer funds pursuant to CEA § 4d(a)(2) – FCM may not grant any lien on customer collateral (other than to DCOs) • FCMs may invest customer collateral in “permitted investments” under CFTC rule 1.25 and retain gains – Since MF Global, CFTC has revised rule 1.25 to limit list of permitted investments investments • LSOC (for cleared swaps) – collateral legally segregated, but commingled in one account – mitigates “fellow customer” risk mitigates fellow customer risk • FCM not permitted to use one customer’s collateral to satisfy another customer’s obligations or the FCMs obligations – balances benefits and costs in protecting market participants and the public 11
Legal Framework: B/D and FCM Regulatory Compliance Regulatory Compliance • The regulatory oversight for customer assets and protections is handled through t d t ti i h dl d th h a combination of: – audits (internal and external); – regulatory examinations; and – reporting requirements. 12
Legal Framework: Bank Legal Framework: Bank Regulatory Compliance g y p • Periodic FDIC regulatory examinations of trust departments trust departments • Examine policies and account administration to prevent liabilities or loss to the bank’s capital 13
Insolvency of Financial Insolvency of Financial Institutions • Broker-Dealers – Customer Protection Rule C t P t ti R l – SIPC and SIPA • Custodians/Banks – FDIC – Trust/fiduciary accounts – Assets inside/outside the estate 14
Insolvency: Broker Dealers & Insolvency: Broker-Dealers & SIPA • Federal court appoints a SIPA trustee • Trustee tasked to return customer assets (in whole or pro rata based on net equity) • Net equity fixed as of SIPC filing date • SIPC Protections S C otect o s – $500,000 insurance cap – $250 000 insurance cap on cash (inclusive) $250,000 insurance cap on cash (inclusive) 15
Insolvency Risks: Broker-Dealer • Net equity claim in excess of pro rata share of customer assets and SIPA share of customer assets and SIPA insured amounts • Assets moved to offshore affiliates ff ff • Failure of broker-dealer to abide by customer protection rule 16
Insolvency: Bank/Custodian and Insolvency: Bank/Custodian and FDIC • Assets held in trust, fiduciary or custodial accounts should not be assets of the bank accounts should not be assets of the bank • FDIC will attempt to transfer accounts to a successor institution • Cash is typically held in deposit accounts subject to certain levels of FDIC insurance 17
Insolvency Risks: Insolvency Risks: Bank/Custodian and FDIC • Assets intended to be held in trust, fiduciary or custodial accounts are open to certain risks custodial accounts are open to certain risks – Determination that assets are not held in appropriate account – Inability to trace the assets • If assets are not held in appropriate account or non-traceable, then upon failure the customer is subject to FDIC receivership / conservatorship 18
Applicability to Swap Dealers • Swap collateral is posted under the CSA • Need to determine applicability of laws to swap dealer • Self-help remedies may be limited • Collateral subject to regulatory/bankruptcy Co ate a subject to egu ato y/ba uptcy regime that overlays the counterparty 19
Case Study: Lehman Brothers • In the insolvency of Lehman Brothers Inc. (“LBI”), SIPA and the SEC moved customer ( ) assets out of the failed brokerage • Pre-insolvency, LBI followed the segregation and reserve requirements • Customers were made whole and no advances from the SIPC Fund have been made from the SIPC Fund have been made 20
C Case Study: Lehman Brothers St d L h B th (UK) (U ) • Results for clients of Lehman Brothers International (Europe) ( LBIE ) were vastly International (Europe) (“LBIE”) were vastly different • Customers of LBIE became general unsecured creditors and their assets were frozen in the insolvency proceeding. insolvency proceeding. • Untangling customers’ assets from those of LBIE LBIE 21
C Case Study: Lehman Brothers St d L h B th (swap affiliates) (s ap a a es) • Counterparties of LBSF and similar US affiliates – general unsecured creditors general unsecured creditors – assets subject to insolvency proceeding (albeit under US bankruptcy law). • Competing claims over customer assets had to be resolved (LBIE and other Lehman affiliates, be resolved (LBIE and other Lehman affiliates, bondholder claims, etc.) • V l Valuation disputes ti di t 22
Recommend
More recommend
