Legal Risk Management of OTC Derivatives

This course focuses on controlling credit, business, and the legal risk of OTC derivatives through market standard documentation.

  • Course Instructor

    An experienced practitioner on capital market transactions such as TBA and repo and securities lending, he is also a law professor, professional instructor and author on the subjects, teaching regularly both for Euromoney and for law schools.

Euromoney Training and this course are neither endorsed by nor affiliated with ISDA®

Course overview

As the derivative market suffers record defaults by both dealers and their customers alike, understanding how market standard documentation helps protect a participant from such losses is more critical than at any other time in the market’s history. 'Legal Risk Management of OTC Derivatives'focuses in controlling credit, business, and the legal risk of OTC derivatives through market standard documentation. This course provides an overview of the risks confronted by participants and the development of standard documentation and market practices.

The course also reviews the use of credit support such as the ISDA® Credit Support Annex, guarantees and letters of credit to secure a party’s exposure to its counterparties.

Finally, this course will focus on the legal and documentation issues involved in “clearing” OTC derivatives. The course will discuss how “cleared” OTC derivatives differ from the current bilateral trading that is currently done. It will also explore the key documentation that needs to be put into place and negotiated. It will also discuss the different approaches toward clearing OTC derivatives in Asia, the US and Europe.

This course will help you to:

  • Understand crucial legal risk management techniques and principles
  • Understand the key risk areas when trading OTC derivatives
  • Review the Lehman failure and its effects on outstanding derivative transactions
  • Examine the principal legal, business and credit risk issues negotiated in industry standard documentation
  • Understand the risks (and how to mitigate the risks) involved in guarantees and collateral documentation
  • Minimise errors and risks in trade capture and confirming the transactions
  • Prepare for increasing use of “cleared” OTC derivatives
  • Understand the documentation needed to clear OTC derivatives
  • Summary of course content

    • Overview of the OTC derivatives market and an understanding of its risks
    • Risk management and documenting the trade
    • Close-out netting and risk mitigation
    • Events of default and early termination payments under the ISDA® Master Agreement
    • Key legal, business and credit terms in the ISDA® Master Agreement
    • Reducing risk through collateral, guarantees and master agreements
    • Understanding the new Collateral Disputes Resolution Procedures
    • Review of anticipated US and European Union legislative and regulatory changes


    As with all Euromoney Training courses, case-studies and practical examples will be used throughout this course so you can apply your learning as soon as you return to your office.

    Who should attend this training course?

    • Lawyers in banks, financial institutions, funds and corporations
    • Documentation staff that deal with derivative transactions
    • External lawyers who advise clients dealing with derivatives
    • Bankers involved in derivative transactions
    • Negotiators, within the documentation unit
    • Central Banks
    • Regulators
    • Hedge funds / Asset managers
    • Financial institutions: Credit analysts, relationship managers, auidtors

    ISDA® is a registered trademark of the International Swaps and Derivatives Association




    Supporting publication

    Day 1

    Legal risk management of OTC derivatives

    • Overview of the OTC derivatives market
      • OTC vs. exchange traded derivatives
      • Brief history of the OTC market
      • Dealers, endusers, and ISDA®
      • Products and OTC derivative examples
      • Standard documentation
    • Understanding the risks of OTC derivatives
      • Market risk
      • Credit risk
      • Legal risk
      • Systemic risk
      • Operational risk and rogue traders
      • Collateral risk
      • Country risk

    Case studies in derivative failures

    • Hammersmith & Fulham
    • Soc Gen
    • Allied Irish
    • Long-Term Capital Management
    • Amaranth
    • Bear Stearns
    • Lehman

    Understanding officer and director risk management responsibilities for derivative operations

    • Risk management and documenting the trade
      • Potential risks
      • Trade capture
      • STP vs. manual processing
      • Risk and errors in confirmation process
      • Master confirmations
    • Close-out netting and risk mitigation
      • Ability to terminate
      • Cherry picking
      • Preference payments

    Day 2

    Events of default and early termination payments under the ISDA® Master Agreement

    • Payment netting vs. close out netting
    • Role of close-out netting
    • Events of default and early termination
    • Market quotation, loss and the close-out amount
    • Set-off
    • Automatic early termination
    • 1992 vs. 2002 ISDA® Master Agreements (key differences)

    Case study: terminating derivatives during Lehman bankruptcy

    Key legal, business and credit terms in the ISDA® Master Agreement

    • Agreement structure
    • Representations and covenants
    • Calculation agent
    • Boilerplate
    • Service of process

    Reducing risk through collateral

    • Key legal, business and credit terms in ISDA® Credit Support Annex
      • New York vs. English CSA
      • Thresholds
      • Eligible collateral
      • Transfer timing
      • Understanding the new Collateral Disputes Resolution Procedures

    Reducing risks through guarantees

    • Understanding guaranties
    • Waivers, consents
    • Enforceability concerns

    Reducing risk through Master Agreements

    • Purpose
    • Bridge
    • Cross-product master netting agreement
    • Mechanics

    Understanding the Novation Protocol

    Day 3

    Minimising risks through use of legal opinions

    • Purpose
    • Protections
    • Key issues

    Special concerns in negotiating with hedge funds

    • Background
    • Termination events and other credit sensitive issues
    • Authorisations

    Understanding prime broker documentation

    • Purpose
    • Mechanics
    • Standard forms

    Tax risks

    • Role of representations and forms
    • Gross up

    Dealing with the risks of illegality and force majeure

    • Background
    • Mechanics

    Problems with contractual currency

    • Special concerns in negotiating with supranationals and sovereigns
      • Sovereign immunity
      • Hammersmith & Fulham and Ultra Vires
      • Insolvency concerns
      • Government sponsored enterprises (special U.S. issues)
    • Bankruptcy and insolvency issues

    Legislative and regulatory changes

    • Overview of U.S. and European anticipated regulatory and legislative changes
    • Clearing OTC derivatives
    • The course instructor has taught law courses on finance, derivatives and tax at Loyola Law School and the University of Utah College of Law for thirteen years. He has published 4 books and over 36 articles on these topics.

      His four books on OTC derivatives and repo documentation (Co-authored with Paul Harding) have become standard texts in the area. The instructor has spoken on finance and derivatives at such institutions as the International Monetary Fund, Osgoode Law School, the National University of Singapore, the Federal Reserve Bank of Chicago, the Federal Home Loan Bank System, the American Bar Association and the Futures Industry Association. He has also worked as a consultant on finance documentation for  large financial institutions, insurance companies and other capital market participants.

      Prior to teaching at law school, the course instructor was an associate for Milbank, Tweed, Hadley & McCloy in New York and Mayer, Brown, Rowe & Maw in Chicago. Professor Johnson attended Columbia Law School and was the executive editor of the Columbia Law Review and a Harlan Fiske Stone Scholar. Prior to the law school, he received his BA and Masters in Accounting from the University of Utah and was a C.P.A. with Pricewaterhouse. He is the author of A Guide to Using and Negotiating OTC Derivatives Documentation and the co-author of Mastering Collateral Management: a Practical Guide to the ISDA® Credit Support Documents.

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