Derivatives and Swaps

Lax & Neville LLP represents investors and buy side “end users” in arbitrations and litigations against financial firms where the security or investment product at issue is an OTC derivative or swap. The term OTC stands for “over-the-counter” and applies to derivative contracts that are traded at “arm’s length” or not traded on a regulated exchange. However, sometimes these products are traded on what is known as a Designated Contract Market, or a Swap Execution Facility, a new platform established under Title VII of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Title VII of Dodd-Frank has dramatically changed the laws regarding some swaps and OTC derivatives. The most common examples of these products are credit default swaps and interest rate swaps; however, Title VII requires that other named swaps must comply with the new regulations arising from Dodd-Frank as well.

OTC derivatives are highly complex products. Traditionally, these products were designed and used to help businesses manage or hedge against risk inherent to their business. However, financial firms and some investors have increasingly begun to speculate using swaps and OTC derivatives. Indeed, some economists attribute the recent financial crisis to risky speculation in these products. Recently, financial firms have also begun to sell OTC derivatives to less sophisticated investors, including ultra-high net-worth individuals and family offices or other non-traditional institutional entities. Many times, these less sophisticated investors have some general investment experience, but have no experience with OTC derivatives. Losses can be extreme and are often devastating to the investor.

Almost all OTC derivatives are documented using an ISDA Master Agreement. If an OTC derivative utilizes the ISDA Master Agreement, that agreement may establish how disputes arising out of the agreement should be resolved. Often times, these disputes will be resolved through arbitration, rather than litigation in state or federal courts. However, sometimes the agreement will require mutual negotiation or mediation before a party may file a claim.

OTC derivatives and swaps carry a high risk for deceptive trading practices. Because of the complexity of these products, wealthy, yet unsophisticated investors may be misled regarding the product risks, its liquidity, potential tax implications, and how the products actually work. In fact, due to the complexity of these products, some experienced investors may still be entirely reliant on their broker or investment advisor to explain the risk and benefits of these highly complex products. FINRA released Notice to Members 12-03, which provides guidance to firms regarding the supervision of complex products, including OTC derivatives and swaps. However, financial firms may unfairly and inappropriately treat unsophisticated investors as if they were a financial institution.

Our attorneys have the experience and expertise to evaluate whether an investor has a potential case against a brokerage firm or other financial firm relating to its sale of an OTC derivative. We understand the law governing these complex products and can prosecute claims for deceptive sales practices on behalf of investors. If you believe you may have a victim of these deceptive sales practices regarding an OTC derivative or swap, please contact our attorneys for a free consultation.

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