Derivatives Regulation and Legal Risk: managing uncertainty in derivatives transactions
Euromoney Trading Ltd, January 2004, Pages: 179
An invaluable guide to understanding how financial derivatives are regulated in the UK, US and Australia, Derivatives Regulation and Legal Risk: Managing Uncertainty in Derivatives Transactions provides a detailed account of the rules, principles and regulation that govern derivatives contracts. Recent litigation has shown that legal risk and legal uncertainty continue to be of both operational and practical significance in contracting, transacting and documenting financial derivatives.
This book examines in detail the key market practices and standard documentation that can be used by practitioners to minimise their legal risk. In particular, the book examines the following:
- What are the implications for market participants of the threat of their transaction being characterised as against gaming and bucket shop laws?
- What happens if a transaction is declared void? How do you protect payments and recover compound interest?
- How to enforce your transaction, including choice of jurisdiction and applicable bankruptcy laws
- How to structure a credit derivatives transaction and avoid insurance laws
- How to negotiate uncertain rules and regulation
- How to avoid customer litigation
The book includes practical tips and checklists to avoid legal traps and minimise legal uncertainties, and a glossary of key legal terms.
Essential reading for anyone entering into or arranging derivatives transactions with sovereigns, municipalities and regional authorities, insurance companies, pension funds, or unit trusts, mutual funds and fund managers.
About the author
Dr Tony Ciro is a Lecturer in Law at La Trobe University, Melbourne, Australia. He is a graduate of Oxford University and has recently completed his doctorate at Monash University, which examined the legal risks that confront the markets for financial derivatives in the United Kingdom, the United States and Australia.
Tony has practised in a commercial law firm, and has taught and researched widely in the areas of accounting and finance, commercial law, intellectual property law, and business law. He has also taught in Malaysia as part of the joint venture arrangements between La Trobe University and Nilai College. He has also taken up an appointment as a visiting academic scholar at Hertford College, Oxford University.
Tony has published a number of scholarly papers examining the legal and regulatory issues affecting financial markets, in particular financial derivatives. He is a well-respected legal scholar for his contribution to financial derivatives research. His works have appeared in leading Australian and international refereed journals, including Company and Securities Law Journal, Journal of International Commercial Law, Current Commercial Law, Journal
of Banking, Finance Law and Practice, Australian Business Law Review, Bond Law Review and the Journal of International Financial Markets.
Tony’s other research interests include intellectual property, business law, contract law and e-commerce. He is currently engaged in a number of research projects on intellectual property and e-commerce, and will publish the findings of his empirical research in leading academic journals.
Tony is a member of the Victorian Bar, where he practises as a barrister in the fields of financial derivatives, securities regulation, corporate crime, information technology and intellectual property law.
Tony holds a Bachelor of Economics (Hons) and Bachelor of Laws (Hons) from Monash University, a Bachelor of Civil Law from Oxford University, and a Doctor of Philosophy in law from Monash University.
Chapter 1: Introduction Overview What is legal risk? The consequences of legal risk The legal risks defined and examined by the book Null and void contracts Protecting payments and interest Netting and bankruptcy Derivatives at risk Review of regulation New derivatives regulation Legal risk and legal uncertainty persist What can be done?
Chapter 2: Understanding financial derivatives Introduction Derivatives: what are they? The main types of derivatives: over-the-counter versus exchange-traded Financial derivatives in context Market microstructure Conclusion
Chapter 3: Costing legal risk and legal uncertainty Introduction Implications for practitioners Direct costs Indirect costs On-going review of the law Suggestions: what to do? Conclusion
Chapter 4: Managing legal risk Introduction Practices and procedures for managing legal risk Master Agreements Counsel opinions Netting arrangements Background cross-checking of counterparties Compliance issues: knowing your client Market solutions Conclusion
Chapter 5: Removing gaming risk Introduction Background: the how and why of gaming risk The current position Implications for market practitioners Practical suggestions: what to do? Conclusion
Chapter 6: Structuring credit derivatives Introduction What are credit derivatives? What is credit risk? Background: the how and why to insurance risk The current position Implications for market practitioners Suggestions: what to do? Conclusion
Chapter 7: Contracting with legal capacity Introduction What is ultra vires? Background: the how and why to ultra vires risk? Criticism of the Hazell decision Current position Implications for market practitioners The effect on contract enforceability Additional problems with trusts Suggestions: what to do? Conclusion
Chapter 8: Protecting payments and recovering interest Introduction Background: the how and why of payments and interest risk Case study Current position Implications for practitioners Suggestions: what to do? Conclusion
Chapter 9: Avoiding customer litigation Introduction Background: the how and why of litigation risk The current position Implications for market practitioners Suggestions: what to do? Conclusion
Chapter 10: Enforcing netting arrangements Introduction Background: the how and why to netting risk Current position 1International initiatives: UNCITRAL model law on crossborder insolvency Application of UNCITRAL Model Law in the United Kingdom, the United States and Australia EU: EC Regulation No 44/2001 on Crossborder Jurisdiction Choice of law and jurisdiction clauses Implications for market practitioners Suggestions: what to do? Conclusion
Chapter 11: Negotiating uncertain rules and regulation Introduction The background: the how and why of uncertain rules and regulation Current position Suggestions: what to do? Conclusion
The book consists of 12 chapters. Following the introduction, Chapter 2 examines the economic functions and purposes of financial derivatives markets and products. Chapter 3 assesses the costs of legal risk and legal uncertainty, and examines the implications for regulatory design arising from such concerns. Chapter 4 suggests that a number of practices and procedures can be adopted and implemented by market practitioners to reduce the incidence of legal risk for the markets for financial derivatives.
Chapter 5 examines the gaming, wagering and bucket shop laws affecting financial derivatives in the United Kingdom, United States and Australia. Chapter 6 examines the relationship and risk posed by insurance laws to credit derivatives. Chapter 7 examines the application of the ultra vires doctrine to financial derivatives transactions. The restitutionary response and the right to claim compound interest for losses incurred are examined in Chapter 8.
Chapter 9 examines the issue of customer-based litigation, and assesses the risks posed by customers and end-users of financial derivatives products. Chapter 10 provides a detailed examination of netting enforceability and bankruptcy laws in each of the three jurisdictions.
Chapter 11 examines the content of new derivatives and financial markets regulation enacted in each of the three jurisdictions under review. Chapter 12 outlines additional areas for future review and reform, with the overall aim of minimising legal risk in derivatives markets in the United Kingdom, United States and Australia.
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