Spanish derivative markets

Londres, 1 de diciembre de 2010


The turmoil in the global financial markets during the last three years has accelerated the development of Spanish over-the-counter (OTC) derivatives markets. Significant litigation is taking place in this jurisdiction, while new sectorial legislation is appearing in the form of an EU regulation on the derivatives markets.

Regulation in OTC derivatives, central counterparties and trade repositories

This EU regulation will affect the Spanish derivatives markets, not only for financial counterparties, but particularly for non-financial counterparties that have significant exposure to OTC derivatives. On October 15, the Spanish government made its first move to protect the Spanish central clearing counterparties and trade repositories by approving a royal decree to further regulate the derivatives markets.

Pension funds and investment funds

Recent changes in pension funds and the upcoming derivatives circular for investment funds will clarify the derivatives transactions these entities can enter into, and their eligibility to receive and post collateral.

New documentation paradigms

The Spanish master derivatives framework agreement (CMOF) was upgraded in 2009, when judges in civil and insolvency proceedings were becoming familiar with derivatives transactions under the old version of this agreement. Spanish banks and counterparties prefer the CMOF instead of ISDA documentation when a levelplaying- field documentation standard is required (i.e., in structured-finance-linked swaps). The 2009 CMOF is a rising value that Iberian banks must be familiar with.

Suitability and misrepresentation litigation

The significant exposure of Spanish and foreign banks to real-estate loans and other types of Spanish indebtedness in the past five years finds its counterpart in the thriving commercialization of OTC derivatives transactions with all kinds of non-financial counterparties, including small companies and consumers. Those transactions, usually credit contingent and leveraged derivatives such as swaps, eventually turned against consumers and companies in a critical economic context. Suitability, misrepresentation, and claims of fiduciary duty are commonly discussed in Spanish courts.

Insolvency proceedings and close-out netting

As derivatives transactions have been the focus of litigation in insolvency proceedings in recent years, the core netting provisions of Royal Decree Law 5/2005, of 11 March, have been subject to testing, with initial puzzling results that led to further legal changes at the end of 2009.

The legal nature of the amounts owed by the early termination amount payer of a netting agreement with an insolvent counterparty is still subject to discussion and interpretation. However, the worries in the Spanish derivatives industry now focus on the risk of re-characterizing interest-rate swaps into a mere novation of the agreed interest rate of the hedging loan. The drafting techniques used for schedules and confirmations have changed in the last year to reduce this risk.

In this seminar, we will put these events into context, explaining the status of the Spanish derivatives markets. We will also address the characteristics of the new regulations, which may be of interest to financial entities and the investment industry.