(This story was originally published in IFR, a Thomson Reuters publication)
* 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 being.
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 Russian measures.
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 Russian firms.
"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)