Tag: Sovereign debt

Revisiting the Regulatory Framework of the US Treasury Market

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Yesterday [July 13, 2015], staff members of the federal agencies that comprise the Interagency Working Group for Treasury Market Surveillance (“Working Group”) issued a joint report concerning the so-called “flash crash” that occurred in the U.S. Treasury market on October 15, 2014 (the “Report”). I commend the staff of all the agencies for their hard work in putting together the Report, which examined the events of that day and the broader forces that have changed the Treasury market in recent years. This was a difficult undertaking, but the report does an excellent job of discussing the known factors, while acknowledging that more work needs to be done.

The remarkable events of that day, which cannot yet be fully explained, have dispelled any lingering notion that the Treasury market is the staid marketplace it was once thought to be. The transformative changes that swept through the equities and options markets in the past decade have vastly reshaped the landscape of the Treasury market, as well. As a result, the structure, participants, and technological underpinnings of today’s Treasury market are far different than they were just a few years ago.


Towards a “Rule of Law” Approach to Restructuring Sovereign Debt

Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law.

In a landmark vote, the United Nations General Assembly overwhelmingly decided on September 9 to begin work on a multilateral legal framework—effectively a treaty or convention—for sovereign debt restructuring, in order to improve the global financial system. The resolution was introduced by Bolivia on behalf of the “Group of 77” developing nations and China. In part, it was sparked by recent litigation in which the U.S. Supreme Court held that, to comply with a pari passu clause (imposing an equal-and-ratable repayment obligation), Argentina could not pay holders of exchanged bonds without also paying holdouts who retained the original bonds. That decision was all the more dramatic because the holdouts included hedge funds—sometimes characterized as “vulture funds”—that purchased the original bonds at a deep discount, yet sued for full payment.


Banks, Government Bonds, and Default

The following post comes to us from Nicola Gennaioli, Professor of Finance at Bocconi University; Alberto Martin, Research Fellow at the International Monetary Fund; and Stefano Rossi of the Finance Area at Purdue University.

Recent events in Europe have illustrated how government defaults can jeopardize domestic bank stability. Growing concerns of public insolvency since 2010 caused great stress in the European banking sector, which was loaded with Euro-area debt (Andritzky (2012)). Problems were particularly severe for banks in troubled countries, which entered the crisis holding a sizable share of their assets in their governments’ bonds: roughly 5% in Portugal and Spain, 7% in Italy and 16% in Greece (2010 EU Stress Test). As sovereign spreads rose, moreover, these banks greatly increased their exposure to the bonds of their financially distressed governments (2011 EU Stress Test), leading to even greater fragility. As The Economist put it, “Europe’s troubled banks and broke governments are in a dangerous embrace.” These events are not unique to Europe: a similar relationship between sovereign defaults and the banking system has been at play also in earlier sovereign crises (IMF (2002)).


Republic of Argentina v. NML Capital

The following post comes to us from Irwin H. Warren, senior partner in the Securities Litigation practice at Weil, Gotshal & Manges LLP, and is based on a Weil alert authored by Mr. Warren, Ted Posner, and Adam Banks.

The Supreme Court issued its decision yesterday [June 16, 2014] in Republic of Argentina v. NML Capital, No. 12-842, holding that the Foreign Sovereign Immunities Act (FSIA) does not limit the scope of discovery available to a judgment creditor in post-judgment execution proceedings against a foreign sovereign.

As part of NML’s efforts to collect on various litigation judgments entered against Argentina following its default on bond obligations, NML sought discovery of Argentina’s assets around the world in an attempt to locate Argentine property that might be subject to attachment and execution. Those efforts included subpoenas served on Bank of America and Banco de la Nacion Argentina, both of which had offices in New York. The subpoenas generally sought information about Argentina’s accounts, balances, transaction histories and funds transfers. Argentina and the banks sought to quash the subpoenas, contending that they violated the FSIA by seeking discovery of Argentina’s extraterritorial assets that were beyond the reach of U.S. courts. The district court denied the motion to quash, and the Second Circuit affirmed. Only Argentina sought review in the Supreme Court.


Argentina and Exchange Bondholders File Certiorari Petitions

The following post comes to us from Antonia E. Stolper, partner in the Capital Markets-Americas group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication by Ms. Stolper, Henry Weisburg, and Patrick Clancy.

On February 18, both Argentina and the Exchange Bondholders Group filed petitions for writs of certiorari with the Supreme Court, seeking review of the Second Circuit’s rulings in the pari passu litigation. We discuss below the certiorari procedure, followed by comments on substantive arguments raised by Argentina and the Exchange Bondholders.

Our many prior comments on Argentina’s pari passu litigation, as well as all of the material pleadings and decisions (including the two February 18 certiorari petitions), can be found on our Argentine Sovereign Debt webpage, at http://www.shearman.com/argentine-sovereign-debt.


The Volcker Rule: A First Look at Key Changes

The following post comes to us from Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden memorandum.

On December 10, 2013, five U.S. financial regulators (the Agencies) adopted a final rule implementing the Volcker Rule. [1] The text of the final rule and its accompanying preamble are available here. [2] The Volcker Rule was created by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and prohibits banking entities from engaging in “proprietary trading” and making investments and conducting certain other activities with “private equity funds and hedge funds.”

In October 2011, the Agencies released a proposed rule to implement the Volcker Rule. Our analysis of the proposed rule is available here. [3] The proposal generated extensive and diverse feedback from industry participants, policymakers and the public. After more than two years of deliberation, the final rule reflects the efforts of the Agencies to incorporate this feedback to the extent consistent with statutory requirements and policy objectives.


Ready for the Volcker Rule? What to Look For

The following post comes to us from Donald N. Lamson, partner in the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication.

Over two years after publication of a proposed regulation, a final regulation implementing the so-called “Volcker Rule” is expected to be adopted tomorrow by the five US Federal financial regulatory agencies. [1] Two of them—the Federal Reserve and the Commodity Futures Trading Commission—are expected to adopt the regulation at public meetings. According to reports, the explanation and regulatory language may be over a thousand pages long.

Assuming that the agencies go forward as announced, the most important points to look for in a final regulation are:


Don’t Cry for Me Argentine Bondholders: Avoiding Supreme (Court) Confusion

The following post comes to us from Antonia E. Stolper, partner in the Capital Markets-Americas group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication by Ms. Stolper, Henry Weisburg, Stephen J. Marzen, and Patrick Clancy.

Argentina is in hot pursuit of multiple audiences before the Supreme Court: two petitions for writs of certiorari filed by Argentina are pending in the NML v. Argentina cases, and another is almost certainly on the way. In addition, a writ of certiorari has already been issued in another case against Argentina. With so much action involving Argentina in the high court, there is the potential for confusion between these multiple proceedings, which we clarify in this post.

NML Capital, Ltd. v. Argentina (Supreme Court Docket No. 12-1494): Review of the Second Circuit’s October 26, 2012 Decision (Pari Passu)

On June 24, 2013, Argentina filed a certiorari petition with respect to the Second Circuit’s October 26, 2012 decision, in which the Second Court affirmed Judge Griesa’s interpretation of the pari passu clause, his determination that the plaintiffs were entitled to a “Ratable Payment,” and his conclusion that the Injunction did not violate the Foreign Sovereign Immunities Act (“FSIA”). However, the Court remanded the case to Judge Griesa to address certain issues relating to the operation of its Injunction.


Rollover Risk: Ideating a U.S. Debt Default

The following post comes to us from Steven L. Schwarcz, Stanley A. Star Professor of Law & Business at Duke University School of Law.

In Rollover Risk: Ideating a U.S. Debt Default, forthcoming in the Boston College Law Review, I systematically examine how a U.S. debt default might occur, how it could be avoided, its potential consequences if not avoided, and how those consequences could be mitigated. The impending debt-ceiling showdown between Congress and the President makes these questions especially topical. The Republican majority in Congress is conditioning any raise in the federal debt ceiling on spending cuts and reforms. Yet without raising the debt ceiling, the government may end up defaulting, perhaps as early as mid-October.

Even without that showdown, however, these questions are important. As the article explains, certain types of U.S. debt defaults, due to rollover risk, are actually quite realistic. This is the risk that the government will be temporarily unable to borrow sufficient funds to repay—sometimes termed, to refinance—its maturing debt.

Because rollover risk is such a concern, one might ask why governments, including the United States, routinely depend on borrowing new money to repay their maturing debt. The answer is cost: using short-term debt to fund long-term projects is attractive because, if managed to avoid a default, it tends to lower the cost of borrowing. The interest rate on short-term debt is usually lower than that on long-term debt because, other things being equal, it is easier to assess a borrower’s ability to repay in the short term than in the long term, and long-term debt carries greater interest-rate risk. But this cost-saving does not come free of charge: it increases the threat of default.


Sovereign Debt, Government Myopia, and the Financial Sector

The following post comes to us from Viral Acharya, Professor of Finance at New York University, and Raghuram Rajan, Professor of Finance at the University of Chicago.

Why do governments repay external sovereign borrowing? This is a question that has been central to discussions of sovereign debt capacity, yet the answer is still being debated. Models where countries service their external debt for fear of being excluded from capital markets for a sustained period (or some other form of harsh punishment such as trade sanctions or invasion) seem very persuasive, yet are at odds with the fact that defaulters seem to be able to return to borrowing in international capital markets after a short while. With sovereign debt around the world at extremely high levels, understanding why sovereigns repay foreign creditors, and what their debt capacity might be, is an important concern for policy makers and investors. In our paper, Sovereign Debt, Government Myopia, and the Financial Sector, forthcoming in the Review of Financial Studies, we attempt to address these issues.


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