Regulatory Arbitrage, Extraterritorial Jurisdiction And Dodd-Frank: The Implications Of Us Global Otc Derivative Regulation, Christian Johnson
Dec 2013
Regulatory Arbitrage, Extraterritorial Jurisdiction And Dodd-Frank: The Implications Of Us Global Otc Derivative Regulation, Christian Johnson
Christian A. Johnson
A review of the Dodd-Frank rulemaking projects suggests that the U.S. has entered into a “race to the top” of over-the-counter derivative regulation. Many of the Dodd-Frank statutes and proposed rules go well beyond the relatively modest objectives agreed to by the G20 countries in 2009. These efforts in the U.S. create a legal environment ripe for regulatory arbitrage and the isolation of U.S. OTC derivative markets. Isolation results from participants simply abandoning U.S. markets because of overly aggressive U.S. regulation. Regulatory arbitrage occurs as both U.S. and non-U.S. persons attempt to structure their trading activities to avoid the extraterritorial …
Exigent And Unusual Circumstances: The Federal Reserve And The Financial Crisis, Christian Johnson
Dec 2010
Exigent And Unusual Circumstances: The Federal Reserve And The Financial Crisis, Christian Johnson
Christian A. Johnson
The U.S. Federal Reserve has committed hundreds of billions of dollars in unprecedented lending activities and purchases of mortgage-backed securities based upon its authority under the Federal Reserve Act, and particularly upon its interpretation of Section 13(3), a formerly untested and unused clause in the Federal Reserve Act. Such efforts effectively doubled the size of the Federal Reserve’s balance sheet. This expansion of authority exercised by the Federal Reserve not only has significance in today's financial crisis but also sets a precedent for future Federal Reserve actions. The Federal Reserve has relied on Section 13(3) to authorize its controversial lending …
The Enigma Of Clearing Buy Side Otc Derivatives, Christian Johnson
Nov 2009
The Enigma Of Clearing Buy Side Otc Derivatives, Christian Johnson
Christian A. Johnson
Congress is currently drafting bills and holding hearings on regulating the over-the-counter (“OTC”) derivatives market. One principal focus is on reducing credit and systemic risk by eventually requiring the majority of OTC derivatives to be cleared through registered clearing organizations or agencies (hereinafter “clearing-houses”).
The Central Bank’S Role In The Payment System: Legal And Policy Aspects, Christian Johnson, Robert Steigerwald
Dec 2007
The Central Bank’S Role In The Payment System: Legal And Policy Aspects, Christian Johnson, Robert Steigerwald
Christian A. Johnson
The paper starts with a brief overview of the payment system and the roles central banks have traditionally played as payment intermediaries. In particular, it discusses interbank settlement and the role of bank money as a settlement asset. The paper shows that the concept of settlement finality, which has both legal and risk management dimensions, is a key attribute of any form of payment and is not a unique attribute of payments made through a central bank.
Assessing A Decade Of Interstate Bank Branching, Christian Johnson, Tara Rice
Dec 2007
Assessing A Decade Of Interstate Bank Branching, Christian Johnson, Tara Rice
Christian A. Johnson
U.S. banking regulation has historically prohibited the ability of a bank to open or own a branch located outside of its home state, commonly referred to as interstate branching. Only since the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA) in 1994 have banks have been able to engage in interstate branching, though subject to state restrictions. Despite IBBEA's removal of branching barriers, it still allowed the states to impose restrictions on the entry of out-of-state branch offices. This article describes the changes in Federal and state interstate branching law since passage of IBBEA and reviews how …
A Bank By Any Other Name..., Christian Johnson, George Kaufman
Nov 2007
A Bank By Any Other Name..., Christian Johnson, George Kaufman
Christian A. Johnson
Banks come in a wide variety of forms. These include commercial banks, savings banks, savings and loans, and credit unions. But, all banks are not perceived as equally vital to the economy so as to require the same degree of government regulation to promote their safe and efficient operation. To regulate efficiently, it is necessary to carefully define the entity to be regulated.
The Financial Services Lawyer's Bookshelf: A Selected Bibliography Of Payment, Clearing And Settlement Resources, Christian Johnson, Robert Steigerwald
Sep 2006
The Financial Services Lawyer's Bookshelf: A Selected Bibliography Of Payment, Clearing And Settlement Resources, Christian Johnson, Robert Steigerwald
Christian A. Johnson
To understand today's payment, clearing and settlement systems, we must be aware that these arrangements rely to some extent upon financial and operational technologies that were developed in other times and circumstances.
Distinguishing Swaps From Futures: A Regulatory History, Christian Johnson
Apr 2005
Distinguishing Swaps From Futures: A Regulatory History, Christian Johnson
Christian A. Johnson
Over 20 years since the first official over-the-counter derivative trade went public between IBM and the World Bank, the divide between the OTC and exchange-traded derivatives industries is as wide as ever. Although many firms trade both types, the individual participants in those shops still tend to think of themselves as either a swaps or a futures person. Such division can best be understood by appreciating the regulatory battle in the U.S. over swap regulation. Although much of that battle ended in 2000 with the passage of the Commodity Futures Modernization Act, defining differences continue to distinguish the two industries.
Justice And The Administrative State: The Fdic And The Superior Bank Failure, Christian Johnson
Dec 2004
Justice And The Administrative State: The Fdic And The Superior Bank Failure, Christian Johnson
Christian A. Johnson
This essay demonstrates through the Superior Bank failure how an administrative agency, the FDIC, can act without taking into account what is fair and just for all involved parties, instead maximizing its power or its economic recovery. The author argues that the FDIC lost sight of how it should have responded and not how it could have by giving preferential treatment to Superior's shareholders and attempting to sue the auditor Ernst & Young in contravention of Superior's contractual obligations. The FDIC's actions sublimated the fairness of the insolvency resolution process for the creditors of Superior and exposed Ernst & Young …
Teaching Research Assistants, Christian Johnson
Dec 2003
Teaching Research Assistants, Christian Johnson
Christian A. Johnson
Research assistants, are, to borrow from Winston Churchill, "a riddle wrapped in a mystery inside an enigma."
Demystifying Fas 133 - Part 2, Christian Johnson, Mary Grossman
Nov 2003
Demystifying Fas 133 - Part 2, Christian Johnson, Mary Grossman
Christian A. Johnson
This is the second in a two-part series examining the U.S. accounting change. Last week's article gave a general overview, this week the authors focus on hedge accounting.
Demystifying Fas 133--Part 1, Christian Johnson, Mary Grossman
Nov 2003
Demystifying Fas 133--Part 1, Christian Johnson, Mary Grossman
Christian A. Johnson
FAS 133 has generated substantial confusion and expense, especially for end-users acquiring derivatives as hedges. This article will give a general overview, whilst next week's will focus on hedge accounting.
Close-Out Netting & Set-Off Under U.S. Banking Insolvency Law, Christian Johnson
Aug 2003
Close-Out Netting & Set-Off Under U.S. Banking Insolvency Law, Christian Johnson
Christian A. Johnson
The huge role of U.S. banks in the derivatives industry means counterparties must understand the treatment of close-out netting and set-off for an insolvent bank by the Federal Deposit Insurance Corporation (FDIC). Close-out netting and set-off, both of which are typically provided under the ISDA Master Agreement, provide the most effective and efficient way to minimize credit risk with respect to the insolvency of a counterparty.
The 2002 Isda Master Agreement Made Simple, Christian Johnson
Jan 2003
The 2002 Isda Master Agreement Made Simple, Christian Johnson
Christian A. Johnson
The International Swaps and Derivatives Association published a new Master Agreement in December to replace the 1992 agreement. The new agreement represents the work of ISDA's Documentation Committee, with over 100 different members reviewing earlier drafts and providing comments. The trade association has already arranged for netting opinions on the new agreement in 36 different jurisdictions.
Netting, Financial Contracts, And Banks: The Economic Implications, William Bergman, Christian Johnson, Robert Bliss, George Kaufman
Dec 2002
Netting, Financial Contracts, And Banks: The Economic Implications, William Bergman, Christian Johnson, Robert Bliss, George Kaufman
Christian A. Johnson
Derivatives and certain other off-balance sheet contracts enjoy special legal protection on insolvent counterparties through a process referred to as close-out netting. This paper explores the legal status and economic implications of this protection. While this protection benefits major derivatives dealers and derivatives markets, it is less clear that other market participants or markets in general are better or worse off. While we are not able to conclude whether or not these protections are socially optimal, we outline the wide range of issues that a general consideration of the pros and cons of netting protection should take into cognizance, and …
Random Walks Down The Aisle And Class Participation, Christian Johnson, Linnie Wheeless
Dec 2002
Random Walks Down The Aisle And Class Participation, Christian Johnson, Linnie Wheeless
Christian A. Johnson
After attending a mock class discussion at the AALS Workshop for New Teachers, I developed a strong dislike for randomly calling on students.
Preview Of The 2002 Isda Master Agreement, Christian Johnson
Aug 2002
Preview Of The 2002 Isda Master Agreement, Christian Johnson
Christian A. Johnson
The International Swaps and Derivatives Association is working on a revised version of the 1992 Master Agreement. Parties should carefully consider the proposed changes because these agreements have become the market standard for documenting over-the-counter derivatives. The 2002 ISDA Master Agreement is the result of several years of work by various ISDA documentation committees and reflects some of the best thinking in the area. The following column is based upon the July 2002 draft circulated by ISDA. There will only be one or two more drafts to be circulated prior to its anticipated publication in December. Although there will probably …
Seven Deadly Sins Of Isda Negotiations, Christian Johnson
Mar 2002
Seven Deadly Sins Of Isda Negotiations, Christian Johnson
Christian A. Johnson
ISDA master agreement negotiations are often never-ending, expensive and tedious. Negotiations can take months as parties battle over legal, business and credit terms. Although much has been done to standardize the documentation process, there are still numerous issues that parties must negotiate prior to executing the ISDA master agreement. In addition, parties often insist on making additional amendments to the ISDA master agreement that they believe are necessary to minimize legal and credit risks. Although negotiations can still deadlock over important terms, much can still be done to speed up negotiations. In particular, there are seven deadly sins that can …
Holding Credit Hostage For Underwriting Ransom: Rethinking Bank Antitying Rules, Christian Johnson
Dec 2001
Holding Credit Hostage For Underwriting Ransom: Rethinking Bank Antitying Rules, Christian Johnson
Christian A. Johnson
This article considers the importance of Congress's and the courts' consideration regarding the role antitying provisions have in light of the battle that exists between commercial banks and investment banks in the underwriting arena. Part I of this article discusses the history of commercial banks' powers to both lend and underwrite securities, focusing particularly on the enactment of the Glass-Steagall restrictions and their repeal by the Gramm-Leach-Bliley Act of 1999. Part I also focuses on the recent rise of commercial banks (or their affiliates) as securities underwriters. Part II examines the growing convergence of commercial banks and investment banks both …
Payee Tax Representations & The Isda Master Agreement, Christian Johnson
Jul 2001
Payee Tax Representations & The Isda Master Agreement, Christian Johnson
Christian A. Johnson
Negotiations over the payee tax representations to be made in an ISDA Master Agreement are often confusing, acrimonious and slow. U.S. negotiators, at the urging of expensive tax counsel, often insist that their foreign counterparties make comprehensive tax representations for U.S. tax purposes and deliver certain IRS tax forms to them. Typically, foreign counterparties resist making these representations because they don't understand the purposes behind them. However, these payee tax representations, and the related delivery of tax forms, serve important purposes.
Liquidity & The Isda Master Agreement, Christian Johnson
Apr 2001
Liquidity & The Isda Master Agreement, Christian Johnson
Christian A. Johnson
Ensuring liquidity should be the primary goal in negotiating an ISDA Master Agreement (the "Agreement") for smaller, non-rated customers, such as a hedge fund or a middle-market corporation. Often highly leveraged and with little room for error, these customers should focus their efforts when negotiating the Agreement with a dealer on limiting the dealer's opportunity to terminate the Agreement. Unfortunately, however, customers (typically through expensive outside counsel), often instead use up valuable negotiating capital on esoteric legal issues that may only remotely affect a customer's situation.
Rehypothecation Risk, Christian Johnson
Apr 2001
Rehypothecation Risk, Christian Johnson
Christian A. Johnson
Granting rehypothecation or "use rights" with respect to pledged collateral is common in the over-the-counter derivative market. In fact, subject to the pledgor's consent, the credit support annex to the International Swaps and Derivatives Association master agreement provides the secured party with the right to rehypothecate, or use for its own purposes, collateral pledged to it---subject only to the obligation to return the collateral once the pledgor has satisfied its obligations. Customers, however, are often alarmed to learn that the dealer requires such an unrestricted right to use and sell the pledged collateral.
Banking, Antitrust And Derivatives: Untying The Antitying Restrictions, Christian Johnson
Dec 2000
Banking, Antitrust And Derivatives: Untying The Antitying Restrictions, Christian Johnson
Christian A. Johnson
This article argues that expressly requiring a borrower to enter into an OTC derivative with a bank as a condition for receiving credit does not violate the antitying restrictions of the Bank Holding Company Act ("BHCA"). Part I of this article discusses the nature of OTC derivatives and demonstrates through examples how OTC derivatives can enable a borrower to minimize various business risks. Part II examines how banks are encouraging their borrowers to utilize various risk management techniques such as OTC derivatives and discusses the impact of BHCA on such efforts. Finally, Part III analyzes the elements of tying a …
Risky Business: Acting As A Lender And Otc Derivative Dealer With The Same Customer, Christian Johnson
Sep 1999
Risky Business: Acting As A Lender And Otc Derivative Dealer With The Same Customer, Christian Johnson
Christian A. Johnson
Here the Author looks at some of the potential legal risk factors for a lender in taking a dual role with the same customer with respect to loans and over the counter derivative transactions. The principal risk, says the author, is the rejection of a bank's claim for damages in bankruptcy upon the termination of over the counter derivative transactions entered into with the now bankrupt borrower. This is because the damages with respect to the derivative transactions may be characterized as unmatured interest which may be rejected by bankruptcy court. Although such a characterization was rejected by the courts …
At The Intersection Of Bank Finance And Derivatives: Who Has The Right Of Way?, Christian Johnson
Dec 1997
At The Intersection Of Bank Finance And Derivatives: Who Has The Right Of Way?, Christian Johnson
Christian A. Johnson
The over-the-counter (“OTC”) derivatives industry has developed into one of the world's fastest growing financial markets.1Businesses of almost any description, size, and sophistication now engage in derivative transactions.
Minimizing The Risks Of Otc Derivatives Through Loan Documentation, Christian Johnson
Dec 1997
Minimizing The Risks Of Otc Derivatives Through Loan Documentation, Christian Johnson
Christian A. Johnson
Following an introduction to the two types of derivatives instruments (exchange and over-the-counter ("OTC")) this article focuses primarily on minimizing risk from OTC derivatives used to hedge variable interest rate risk. The author uses best practices observed in a loan documentation review of 200 institutions' transactions to demonstrate that the path to risk mitigation lies prudent loan documentation that includes definitions and controls. Controls may include restricting the amount of indebtedness, controlling the quality of the transaction, restricting the purposes for a transaction, pledging collateral, default provisions, application of proceeds, and the incorporation of loan covenants.
Derivatives And Rehypothecation Failure: It's 3:00 P.M., Do You Know Where Your Collateral Is?, Christian Johnson
Dec 1996
Derivatives And Rehypothecation Failure: It's 3:00 P.M., Do You Know Where Your Collateral Is?, Christian Johnson
Christian A. Johnson
A borrower would probably be alarmed to learn that its lender had an unrestricted right to use and sell the collateral that the borrower had pledged to secure its borrowings. Borrowers typically believe that a lender should safeguard and protect collateral pledged to it, not use the collateral for its own gain. Yet in the derivatives market, it has become increasingly common for secured parties to insist upon such unrestricted use of pledged collateral.
Wild Card Statutes, Parity And National Banks - The Renascence Of State Banking Powers, Christian Johnson
Dec 1994
Wild Card Statutes, Parity And National Banks - The Renascence Of State Banking Powers, Christian Johnson
Christian A. Johnson
The United States has a dual banking system in which banks can be charted either as a National Bank under the National Bank Act or a State Bank under any one of fifty different state banking laws. State Banks have often led the way in banking innovations and developing new approaches for regulating and examining financial institutions. However, in the past decade, State Banks have experienced difficulties in remaining competitive with National Banks, primarily because of the increasingly broad powers granted to National Banks by the Office of the Comptroller of the Currency. Some states have responded by enacting "wild …
