A Review and Analysis of the Changing Financial Environment and the Need for Regulatory Realignment
Alan Schick, 44(1): 43–64 (Nov. 1988)
The October 1987 market crash has led to a re-evaluation of the role played by derivative financial instruments on equity markets. These instruments have profoundly influenced trading activities affecting the equity markets and increased the trading power of large institutional investors. This Article discusses the growth of derivative financial instruments, trading strategies capitalizing on these instruments, and the need to reassess the current regulatory scheme.
Certain Legal Aspects of Secondary Market Municipal Derivative Products
George G. Wolf, Gary A. Hermann, and Adam W. Glass, 49(4): 1629–89 (Aug. 1994)
Secondary market synthetic securities, which tailor the cash flows on an existing security to meet the needs of a particular market or even a particular investor, are an emerging force in the financial markets. Efforts to create synthetic tax-exempt municipal securities must retain this feature. Although certain types of municipal derivatives may be structured to retain the municipal obligation's exemption from registration under federal securities laws, other synthetic tax-exempt securities will require an independent basis for exemption from the Securities Act and the Investment Company Act. Synthetic securities targeted for sale to money market and other mutual funds must meet additional requirements. This Article explores the essential federal tax and securities aspects of synthetic municipal securities.
Enforceability of Over-the-Counter Financial Derivatives
David M. Lynn, 50(1): 291–337 (Nov. 1994)
Concern about financial derivatives has increased recently, following substantial losses by market participants. This Comment discusses legal risks associated with enforcing the agreements that create derivatives in the context of recommendations developed by the Group of Thirty. The author surveys and comments on recent developments related to statute of frauds, capacity, suitability, legality, and bankruptcy/insolvency issues, concluding that recent public and private initiatives promoting enforceability must continue.
Taking OTC Derivative Contracts as Collateral
Mark A. Guinn and William L. Harvey , 57(3): 1127 (May 2002)
Derivative contracts entered into by corporate end-users may provide valuable collateral to lenders. Maximizing the value and utility of such collateral, however, requires an understanding of both the financial and contractual attributes of such contracts. This Article provides background information and guidance to secured lenders who contemplate taking derivatives as collateral.
Derivatives in Bankruptcy
Shmuel Vasser, 60(4): 1507—1546 (August 2005)
The Bankruptcy Code provides for special and favored treatment to securities, forward and commodities contracts, swaps, and repurchase agreements. This special treatment includes the ability of the non—debtor counter—party to exercise rights free of the automatic stay, the enforceability of ipso facto clauses and protection from avoidance actions, including fraudulent transfers and preferences, except for actual fraud. In light of the explosive growth in the volume of the various derivative contracts, it is imperative for bankruptcy lawyers, whether they represent the debtor or its creditors, as well as for financial engineers, who develop cutting edge financial instruments, to be fully familiar with the benefits that the Bankruptcy Code provides as well as with the pitfalls associated with the application and interpretation of the relevant Code provisions. This is even more so in light of the significant expansion of the protections enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which will become effective for bankruptcy cases filed on or after April 17, 2005. This article analyzes the building blocks required for each derivative contract to qualify for the special treatment provided for in the Bankruptcy Code, and presents a comprehensive analysis as to the various issues that arise as to their interpretation and application.
The Uncertain Efficacy of Executive Sessions Under the NYSE's Revised Listing Standards
Robert V. Hale II, 61(4):1413-1426 (August 2006)
This article briefly explores key issues relating to the use of non-management executive sessions under Section 303A.03 of the NYSE's revised listing standards, including the authority of the SEC to enforce such a requirement, the status of board actions taken at such meetings, and whether such sessions may result in altering the principal roles of the board and management. In this respect, the Disney derivative litigation affords an opportunity to consider the use of executive sessions in relation to these issues, as well as the business judgment rule. Moreover, Disney raises the question whether mandatory non-management executive sessions might have created a different outcome under the circumstances in the case. The article concludes with a discussion of some practical considerations for attorneys and corporate secretaries in complying with the requirement.
Summary of Mendes Hershman Student Writing Contest Prize Essay: Conflicts of Interest in Derivative Litigation Involving Closely Held Corporations: An All or Nothing Approach to the Requirement of "Independent" Corporate Counsel
Bobby Riccio, 63(2): 383–384 (February 2008)
Rolling Back the Repo Safe Harbors
Edward R. Morrison, Mark J. Roe, and Christopher S. Sontchi, 69(4): 1015-1048 (August 2014)
Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code’s normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could prove illiquid or unable to fetch their expected long-run value in a panic. The exemptions from baseline bankruptcy rules facilitate this kind of panic selling and, according to many expert observers, characterized and exacerbated the financial crisis of 2007–2009. The exemptions from normal bankruptcy rules should be limited to United States Treasury and similar liquid securities, as they once were. The more recent expansion of these exemptions to mortgage-backed securities should be reversed.
Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
70(2): 319-320 (Spring 2015)
Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.
As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.
As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.
As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.
In Defense of the Bankruptcy Code's Safe Harbors
Mark D. Sherrill, 70(4): 1007-1038 (Fall 2015)
Since its enactment in 1978, the U.S. Bankruptcy Code has seen gradual but dramatic enlargement of rights for non-debtor counterparties to derivatives contracts. That enlargement of rights has generally tracked the rapid expansion of the use of derivatives in the United States. In light of the recent financial crisis, many have criticized the scope of the Bankruptcy Code's safe-harbor provisions and called for them to be narrowed or eliminated. This article rejects several proposals to narrow the safe harbors and argues that the provisions reflect Congress's effort to balance competing national policies. In contrast to many recent pieces, this article contends that the Bankruptcy Code's safe harbors provide a net benefit to the United States and its financial stability.