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

    Course Director Christian Johnson has led courses on a range of subjects, including lending documentation and negotiation, and on swaps, for BNDES (Brazilian Development Bank), the EDC (Canadian Development Bank), Inter-American Development Bank, and the Islamic Development Bank. He has also had participants in his courses from such institutions as the Caribbean Development Bank and the African Development Bank among others.
    "Excellent, practical and very relevant information from an experienced expert"*  - Rabobank International

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
    • Professor Johnson currently serves on the Law Faculty at the University of Utah after serving 13 years at Loyola University Chicago Law School. He publishes extensively on lending, corporate finance and derivatives, having written numerous books and monographs (several co-authored with Paul Harding) and more than 36 articles on these topics.

      Professor Johnson testified before Congress in 2009 on the regulation of derivatives. He has been a frequent speaker on the financial crisis and corporate finance at institutions including the IMF, the American Bar Association, the Futures Industry Association, the Federal Reserve Bank of Chicago and a variety of academic institutions abroad such as the University of Hong Kong, the National University of Singapore, Osgoode Law School and the University of Johannesburg. He has been a senior lecturer at the University of Melbourne and an academic consultant for the Federal Reserve Bank of Chicago.
      "I really enjoyed Christian’s teaching style and everyone felt comfortable asking questions. This allowed us to make the most of the training"* - ING Bank
      Prior to joining the Loyola faculty, Professor Johnson was an associate for Milbank, Tweed, Hadley & McCloy in New York, and Mayer, Brown in Chicago. He was also a CPA for Price Waterhouse.

      *Testimonials from Christian’s Repo & Securities Lending course

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