interest rate swaps presentation

3 VERULAM BUILDINGSGRAY’S INN, LONDON WC1R 5NTTEL: 020 7831 8441FAX: 020 7831 8479

Chambers@3vb.com www.3vb.com

Interest Rate Swaps

Richard Hanke & David Simpson3 Verulam Buildings

Interest rate hedging products• Swaps• Caps• Collars• Callable Swaps• Structured Collars

Documentation

• Treasury Master Agreement• Trade Call• Confirmation

Common characteristics

• pricing• break costs• portability

IHRPs as designated investments

• Regulated Activities Order 2001• Art 85: contracts for differences• Art 83: options

Regulatory duties

• COBS 2.2.1R – appropriate information • COBS 4.2.1R – clear, fair, not misleading• COBS 9.2.1R – suitability•COBS 14.3.2R – duty to warn

Rights of Action under FSMA

• s150 / 138D: “private person”• [almost] “any individual”• a legal person “unless he suffers the loss in question in the course of carrying on business of any kind”

Rights of Action under FSMA

• Titan Steel Wheels [2010] EWHC 211• wide meaning: almost any corporate entity• narrow meaning: “business-like speculation”

Claims under common law

• advisory duties• information duties• regulatory rules ↔ common law• effectiveness of ‘basis clauses’

Bailey v Barclays Bank

• Example of factually weak case arising from rare factual context: swap novated to company following tax advice

Alleged breaches of COBS•2.1.1R•9.2.1R•10.2.1R•11.2.1R

• Cause of action for breach of COBS: • FSMA s.150 – private person• FSMA s.150 – not private person• Incorporation into contract

• Indirect contractual application

• Breach of fiduciary duty• Declaration of unenforceability

under FSMA s.27

• Other issues considered:• Novation• Duress• Unjust enrichment

Crestsign v RBS

• effectiveness of basis clauses• common law advisory duty• common law information claim• misrepresentation• quantum

10 May, 2008 20 May, 2008 1 Jun, 2008

15 May, 2008

Internal approval for loan with hedging condition

21 May, 2008

Introductory phone re hedging

28 May, 2008

Meeting to discuss hedging

30 May, 2008

Risk Management Paper- 4 trade ideas- breakage costs "substantial"- "paying interest on debt you do not have"- no reliance / no advice clause

4 Jun, 2008

Terms of Business for Retail Clients- no reliance clause

Standalone Derivatives Terms- no reliance clause

4 Jun, 2008

phone call - "paying interest for money that you have paid back"

4 Jun, 2008

email re final structures

6 Jun, 2008

Trade Call

5 Jun, 2008

C signed Terms of Business

Crestsign v RBS

• The advice claim• (1) Did the facts give rise to an advisory relationship? Yes

Crestsign v RBS

• The advice claim“The disparity in knowledge and expertise and the respective roles of the two men was such that it was reasonably to be expected that Mr Parker would rely on Mr Gillard’s skill and judgment and, aside from the documents, it would be reasonable for him to do so.”

Crestsign v RBS

• The advice claim• (2) Did the Bank disclaim responsibility for any advice that might be given? Yes

Crestsign v RBS

• The advice claim“The Risk Management Paper and the two sets of terms of business were unequivocal; they defined the relationship as one in which advice was not being given. They were clearly drawn to Mr Parker’s attention before the swap contract was concluded.”

Crestsign v RBS

• The advice claim• (3) Had the Bank owed a duty, would it have been in breach? Yes

Crestsign v RBS

• The advice claim“It seems to me obvious that, viewed at the time and not with hindsight, any of those four variants carried with it the unacceptable risk of being de facto “locked in” to a 10 year transaction period with serious risk of very high quarterly payments resulting from low interest rates…”

Crestsign v RBS

• The information claim• (1) What duty did the Bank owe when giving information about the Swap?

Crestsign v RBS

• The information claim“I resist the fallacious reasoning that because common law duties and COBS duties are not coterminous, and because Crestsign is excluded from the class of persons able to sue for breach of COBS duties, the banks can owe no common law duty which happens to overlap with a COBS duty.”

Crestsign v RBS

• The information claim“a duty to explain fully and accurately the nature and effect of the products in respect of which he chose to volunteer an explanation, but I do not think he came under a duty to explain fully other products that Crestsign might have wanted to purchase but which he did not wish to sell”

Crestsign v RBS

• The information claim• (2) Did the Bank act in breach of that duty? No (just)

Crestsign v RBS

• The information claim“I have considered anxiously whether it was adequate merely to describe them as “substantial” in the Risk Management Paper, without any further explanation of what “substantial” might mean in a variety of unpredictable scenarios…”

Crestsign v RBS

• The information claim“… It is in this respect that the banks came closest to breaching the duty it owed in respect of the provision of information. But in the end I have reached the conclusion that the banks gave just enough information to avoid a breach. .”

Kays Hotels v Barclays Bank

Limitation of swaps claims:•Contract and breach of statutory duty claims statute barred.•Arguable that Limitation Act 1980 s.14A extended limitation for tortious claim.

Kays Hotels v Barclays Bank“27. … This is a case where the facts will be important. It is quite right to point out, as the defendant does, that one is not just concerned with actual knowledge; constructive knowledge is sufficient under Section 14A(10). However, that section requires one to enquire into the knowledge which a person:

"Might reasonably have been expected to acquire: (a) from facts observable or ascertainable by him; or (b) from facts

ascertainable by him with the help of appropriate expert advice which it is reasonable for him to seek,"28. That is an objective test but it is a test that has to be considered in the context of the circumstances applicable to the person in question. In the present case that involves looking into the degree of Mr Saeed's sophistication, what he had been told or not told, what his general state of knowledge was in 2008/2009 and what the more general state of knowledge was at that time, for example in relation to the anticipated future trend of interest rates. These are all matters that depend on a full factual picture and mean that the issue is not appropriate for summary determination.”

Questions

interest rate swaps presentation

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