Dechert Webinar Highlights Key Deal Points and Tactics in Negotiations between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements

April 18, 2013
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) eliminated bilateral trading for most over-the-counter (OTC) derivatives and will require most derivatives to be cleared through a clearinghouse, or central counterparty (CCP), which will hold collateral (i.e., margin) from both counterparties. The principal goal of central clearing is to reduce counterparty risk associated with swaps and other derivatives transactions. Hedge funds that trade swaps, futures and options on futures will likely need to clear those derivative transactions through a registered “futures commission merchant” (FCM) which will, in turn, face the CCP as counterparty with respect to such transactions. As a result of these regulatory changes, hedge fund managers must understand cleared derivatives agreements entered into with FCMs and the key points to negotiate with respect to such agreements. A recent webinar hosted by Dechert LLP, entitled “From the Buy-Side: The ABC’s of Negotiating Cleared Derivatives Agreements,” provided an overview of the new rules governing margin held by FCMs on behalf of their customers and a roadmap for negotiating cleared derivative agreements with FCMs. The speaker was Matthew Kerfoot, a partner in Dechert’s New York office, whose practice includes advising investment funds, ETFs and other clients on commodities and derivatives matters. This article summarizes the key takeaways from the webinar.