Exploring the Role of a Derivatives Lawyer in Financial Markets

Modern capital and financial markets rely on a diverse range of complex instruments. Yet, these instruments still need to be widely understood.

Derivatives are often used for speculative purposes and are linked to various economic ills. This makes them highly regulated, and the law is complex.

Regulatory Issues

Whether they trade on exchanges, over-the-counter, or in the commodities, securities, and financial markets, derivatives lawyers must comply with complex rules, regulations, and legislation. A derivatives lawyer can help clients meet regulatory requirements, create compliance plans, and prepare for enforcement actions.

As the name suggests, derivatives are contracts that derive value from underlying assets. These include everything from agricultural goods to corporate bonds and stock options. Derivatives are used for various purposes, including hedging, investing, and trading, but most users seek to lower their exposure to market volatility and uncertainty.

The riskiness of derivatives has led to intense public anger and calls for new, stricter regulation. Unfortunately, most legal systems are not keeping pace with financial innovation. For example, most countries still need to develop an effective, simple way to separate applicable hedging contracts from speculative wagers. This lack of legal tools has resulted in a complex and confusing regulatory framework that focuses on regulating derivatives as unique products rather than promoting accurate disclosure by all participants.

Regulatory matters are the most frequent issues that confront derivatives attorneys. Often, they are involved in complex, multifaceted investigations by several federal and state regulators, such as the SEC, CFTC, DOJ, and FERC. They can also be called upon to defend clients against SEC and CFTC civil and criminal enforcement actions.

Dispute Resolution

Derivatives are complex financial instruments that can have significant market impact. As such, they are highly regulated. In addition to their work with CFTC and SEC rules and regulations, futures and derivatives lawyers are often called upon to counsel clients on risk management and dispute resolution issues that arise in trading or using derivatives.

Dispute resolution can take many forms, from the very formal – civil litigation – to less formal methods intended to keep parties out of court. Often, the first step is negotiation, where parties seek common ground and try to see each other’s perspectives to reach an agreement. However, other dispute-resolution methods may be necessary if the differences are too broad.

Gibson Dunn’s attorneys regularly advise clients on complex disputes in exchange-traded and OTC derivatives and physical commodity products. Our team includes attorneys who have structured and documented OTC derivatives before current industry documentation was standardized and those who have handled controversies arising from every significant market spike and distressed credit event over the past 25 years.

We have a wealth of experience counseling industry associations about regulatory issues that affect both the OTC and exchange-traded derivatives markets, including preparing comment letters on proposed CFTC rules and ESMA regulations and assisting with lobbying efforts in Congress and before the CFTC. In addition, we have extensive experience defending companies under investigation by the CFTC and other government agencies such as the Department of Justice, SEC, and FERC.

Transactional Issues

The use of derivatives and trading strategies is critical for businesses across industries and around the world. However, the complex legal issues with this form of investment can take time due to regulations, margin requirements, and other factors. Our team helps you create opportunities and mitigate risk through the intelligent use of these tools.

Our attorneys are experienced in representing swap dealers, asset managers, financial intermediaries, and hedge funds in the negotiated purchase and sale of exchange-traded and over-the-counter (OTC) derivatives. Our clients include energy companies, telecommunications providers, banks and other financial institutions, not-for-profit corporations, and pension plans.

When a client is interested in a particular derivative structure, our lawyers will communicate back and forth with them to discuss possible arrangements. Once the structure is agreed upon, the lawyer will prepare documentation for the transaction. This often includes ISDA Master Agreements standard contracts set by the International Swaps and Derivatives Association.

Our clients rely on us for our knowledge of the complex issues in this area of law. In addition, our attorneys have experience handling domestic and foreign regulatory investigations, enforcement actions, and other litigation arising from the sale of derivatives. As such, our clients can rest assured that they will receive the highest quality representation.

Risk Management

The ability to measure, understand, and manage risk has become an essential business function. This risk management process requires a comprehensive understanding of assessing and quantifying risks and the various methods to modify those exposures (whether through prevention or avoidance, transfer by insurance or derivatives, or internal mitigation). Moreover, many types of risk are not easily quantified and must be addressed qualitatively, with a clear understanding of the inherent limitations and sensitivity of such assessments.

Gibson Dunn has extensive experience advising clients on all aspects of risk management. This group includes attorneys who structured and documented OTC derivatives before industry documentation was standardized and who have handled controversies stemming from every market spike and significant bankruptcy or distressed credit event in the past 25 years. They also work closely with the firm’s securities and commodities lawyers and the energy practice in physical derivative product transactions. Clients include banks, broker-dealers, commodity trading advisers and investment funds, financial institutions, clearing corporations, swap dealers, introducing brokers, and any commercial entity that is the “end-user” of these products. This team also has considerable experience addressing issues under the Commodity Futures Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. This involves advising on compliance matters, negotiating business transactions, and defending against enforcement actions.