(This story was originally published in IFR, a Thomson Reuters
* US Treasury authorises derivatives trading
* EU yet to provide explicit relief for swaps
By Christopher Whittall
LONDON, Aug 5 (IFR) - As financial lawyers scramble to
assess the impact on financial markets of the latest round of
international sanctions against Russia, two unlikely bedfellows
have been earmarked by the US Treasury as safe for the time
The Office of Foreign Assets Control, the Treasury division
responsible for meting out economic sanctions, provided
reprieves for both Kalashnikov-owners and derivatives users in
an FAQ published in mid-July relating specifically to the
While gun enthusiasts will be relieved that they can
continue toting their AK47s (that is, provided they haven't
bought them on credit from the Russian manufacturer), the FAQ
also clarified that secondary trading of legacy financial
instruments (including loans, bonds and equities generally) does
not fall foul of the law.
But arguably the greatest coup came for the derivatives
market, which was singled out by a general licence authorising
swap trades linked to bonds with maturities greater than 90 days
or equity issued by sanctioned firms after July 16 - the date
the licence was signed by OFAC acting director Barbara Hammerle.
"I can't recall another sanctions programme in which the US
government issued a general license with respect to derivatives,
but I'm not surprised as it is consistent with US policies under
other programmes," said Dale Turza, a Washington, DC-based
partner at Cadwalader Wickersham & Taft.
"Reading the text at face value, derivatives are authorised
provided they fall within the parameters set by the Treasury."
Industry professionals are cautiously optimistic that the
general licence will offer a reprieve for derivatives users with
Russian exposure and prevent a mass wind-down of swaps trades.
This was supported by further information in the FAQs, which
stated that counterparty credit risk to Russia is not considered
an extension of credit if the derivative is otherwise permitted
under the regulations.
However, the unprecedented nature of the economic sanctions
- which have never before been levied on this scale against a
G-20 nation - means that some uncertainty remains over the
interpretation of regulations on both sides of the Atlantic.
European policymakers, for their part, have yet to provide
explicit relief for derivatives markets, and lawyers say the
original legislation, published in March, looked like it could
create issues for closing out derivatives trades with sanctioned
"European regulations say that changing the character of the
asset, or exercising a right of set-off, would breach the
sanctions, which means there is a potential problem with the
close-out and netting of derivatives trades with sanctioned
firms," said Simon Firth, a partner at Linklaters, referring to
the March legislation.
Lawyers are still digesting the latest round of sanctions in
the wake of the MH17 air disaster, which targeted more Russian
financial institutions and cut those firms off from US dollar
and euro funding markets.
The new EU legislation, which was published on Thursday,
bans dealing in securities of sanctioned firms from August 1
onwards. This includes trading these securities in secondary
markets and trading derivatives referencing the firms in
question if the contracts are physically settled.
"Cash-settled derivatives are probably not prohibited, but
it will be impossible to hedge them by acquiring the securities
(or selling them short) and so, in practice, these transactions
are unlikely to be possible," said Firth.
(Reporting By Christopher Whittall, editing by Matthew Davies)