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January 18, 2017

A Primer on Risk Participation Agreements

Risk Participation Agreements offer financial institutions opportunities to better align target risk/reward profiles

Risk Participation Agreements (RPAs) are off-balance sheet transactions in which one bank, the agent, sells part of its exposure to a contingent obligation to another bank, the participant, for a fee. The obligation is typically in the form of an interest rate swap or other derivative contract with a commercial client. The agent bank thus reduces its commercial client credit exposure, while the participant bank creates additional fee revenue in exchange for accepting some contingent credit risk.

This document is intended to provide bank officers and relationship managers at regional and community banks with a high-level description of the mechanics of RPAs, so that they can better understand how they work, and how they can be used to either mitigate contingent counterparty credit risk or to create non-interest fee income opportunities.

Throughout the paper, a concrete example of a typical, real-world set of transactions is utilized to illustrate the concepts presented, and to demonstrate how Derivative Path’s DerivativeEDGE platform can help banks drive and manage new business opportunities through the use of derivative products.

December 15, 2016

The Year Ahead: Will Deregulation Happen and What Could That Mean for Banks?

Now that the election is over and President-Elect Trump has started the nomination process, there has been substantial speculation on whether there will be a move toward a reversal of some or all of Dodd-Frank and other financial regulation.  While this would likely be a welcome change to the financial industry, the ambiguity is challenging, especially with the uncertainty surrounding scheduled regulations still due to take effect.
While the incoming administration clearly seems to favor deregulation, a complete repeal of Dodd Frank is neither practical nor likely. The large dealers have spent considerable amounts of money and time over the last five years establishing infrastructure to comply with the rules and there is a shared belief within the industry that while the regulation can be burdensome and overreaching, some elements protect the financial system and have led to safer markets. 

We have summarized considerations to be mindful of going forward into this period of uncertainty. 

October 14, 2016

Swap Dealers Gear Up for Non-Cleared U.S. Swap Margin Rules To Take Effect Next Year

One year ago, Derivative Path sent out a Regulatory Update (published October 27, 2015 - see below) regarding new margin rules finalized by the CFTC and Prudential Regulators.  In short, these rules set guidelines for the calculation and posting of Initial (IM) and Variation Margin (VM) between parties in non-cleared/over-the-counter swap transactions -- intended to reduce systemic risk.

June 27, 2016

Brexit offers banks an opportunity to restructure their balance sheets and improve funding profile

Just when we thought we were firmly on a path to another Fed tightening in June or July, the world got a sharp reminder Thursday night that it is full of volatility and things don't always go as planned.  This dramatic and historic Brexit event offers banks an opportunity to delever their balance sheet  by getting rid of high coupon term funding liabilities (e.g. Term FHLB Advances) and possibly re-lever at significantly lower coupons, thereby improving their funding profile.


January 8, 2016

Clearing Relief Extended to Small Bank Holding Companies

The CFTC issued welcome no-action relief today in response to ABA and other industry requests to include certain bank holding companies (BHCs) and savings and loan holding companies (SLHCs) within the “small bank” clearing relief available under CFTC Regulation 50.50(d).  The CFTC granted this request in No-Action Letter 16-01 under certain conditions.

November 6, 2015

Create Low-Cost Synthetic Term Funding As the Fed Prepares For Its First Rate Hike

As markets gets ready for the FOMC to begin the tightening cycle, banks are considering various options on the funding side of their balance sheet.  For banks looking to fund beyond their organic deposit-gathering capacity, there are a variety of funding sources available, and each one has its own benefits and risks.

We present an idea that allows banks to create term funding at considerably lower rates compared to other traditional fixed rate wholesale funding alternatives available.  We also present a market anomaly in 1s3s basis that allows a bank to reduce their cost of funds on existing 3 month LIBOR swaps by switching them to swaps tied to 1 month LIBOR.

October 27, 2015

U.S. Prudential Regulators Finalize Uncleared Derivative Margin Rules

FDIC and OCC Approve Long Awaited Final Rule

Earlier this year, Derivative Path sent out a Regulatory Update regarding a bill passed by Congress providing regulatory relief from anticipated uncleared swap margin rules for non-financial end users and other counterparties eligible for an end user exception.  The legislation amended Dodd-Frank, exempting certain transactions from future initial and variation margin requirements, while requiring regulators to promulgate a final rule on margin requirements.

On October 22, 2015, the FDIC and OCC released a joint final rule in conjunction with other U.S. prudential regulators on swap margin requirements, ending a long period of uncertainty and delivering what should be welcome relief to community and regional banks and their hedging clients.

We provide a detailed analysis of the rule, its applicability to regional and community banks, commercial end users, and what to look for in the next several months.  We also provide a simple grid of important dates for various counterparties.

September 24, 2015

Interest Rate Strategies for 2015 and Beyond

Pradeep Bhatia, Co-CEO, Derivative Path, Inc. presented at the Western Independent Bankers 2015 Education Summit and Expo in San Diego, CA on September 23, 2015.

Community banks have been challenged with organic growth headwinds and net interest margin compression. As the Fed begins to tighten, many community banks are considering various strategies to protect their margins and enhance their fee income. Is your balance sheet positioned well for the next interest rate cycle? This session introduced strategies that help protect margins and enhance fee income.

September 6, 2014

Compliance Update - Uncleared Margining Rules

U.S. Regulators choose not to impose new margining requirements on end-user hedging

May 29, 2014

Compliance Best Practices in the Post Dodd-Frank World

An overview of Dodd-Frank Additional Requirements for Registered Swap Dealers Requirements for Non-Swap Dealers


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