Capital markets, derivatives, and the law : positivity and preparation

513 Pages·2019·23.465 MB·English

by  Alan N. Rechtschaffen

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Capital Markets, Derivatives, and the Law
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Capital Markets, Derivatives,
and the Law
POSITIVITY AND PREPARATION
Third Edition
Alan N. Rechtschaffen
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Capital Markets, Derivatives, and the Law. Alan N. Rechtschaffen.
© Alan N. Rechtschaffen 2019. Published 2019 by Oxford University Press.
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Oxford University Press is a department of the University of Oxford. It furthers the University’s
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Published in the United States of America by Oxford University Press
198 Madison Avenue, New York, NY 10016, United States of America.
© Alan N. Rechtschaffen 2019
First Edition published in 2009
Second Edition published in 2014
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system,
or transmitted, in any form or by any means, without the prior permission in writing of
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Library of Congress Cataloging- in- Publication Data
Names: Rechtschaffen, Alan N., author.
Title: Capital markets, derivatives, and the law : positivity and preparation / Alan N. Rechtschaffen.
Description: Third edition. | New York : Oxford University Press, [2019] | Includes
bibliographical references and index.
Identifiers: LCCN 2018048101 | ISBN 9780190879631 ((hardback) : alk. paper)
Subjects: LCSH: Financial instruments—United States. | Derivative securities—
Law and legislation—United States. | Capital market—Law and legislation—United States. |
Securities industry—Law and legislation—United States.
Classification: LCC KF1070 .R42 2019 | DDC 346.73/096—dc23
LC record available at https://lccn.loc.gov/2018048101
9 8 7 6 5 4 3 2 1
Printed by Sheridan Books, Inc., United States of America
Note to Readers
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B’H
Thank you for Miera, Ronit, Evie, Sarah, Emunah, my mother, my father,
and my teachers. Thank you to Miera for more things than I could ever say.
Thank you Josh, Tevi, Jason, and R. Green for your friendship.
And thank you to my students who are an unstoppable source
of inspiration and positivity.
Alan Rechtschaffen
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Contents
Acknowledgments xix
Preface xxiii
Introduction xxv
1. The Financial Crisis: The Seeds of New Regulation 1
I. Origins of the Great Recession 5
II. Subprime Lending 6
III. Government- Sponsored Entities 6
IV. Legislative Reforms 9
A. Multiple Guarantor Model 10
B. Multiple Insurer Model 11
2. The Liquidity Crisis and Government Reaction 13
I. Buildup to Crisis 13
II. Providing Liquidity and Stabilizing the Financial Markets 18
III. Regulatory Reaction at the Height of the Crisis 19
A. The Emergency Economic Stabilization Act 19
B. American Recovery and Reinvestment Act 21
IV. Dodd- Frank 23
3. Dodd- Frank and the Regulation of Depository Institutions Capital Requirements 25
I. The Volcker Rule and “Too Big to Fail” 26
II. Bank Holding Companies and Systemically Significant Nonbanks 29
III. Living Wills, Credit Exposure Reports, and Concentration Limits 32
IV. Other Prudential Standards 35
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4. Using Financial Instruments 37
I. Goal- Oriented Investing 37
A. Using Financial Instruments to Hedge Risk 39
B. Using Financial Instruments to Enhance Yield 39
C. The Economy’s Impact on Financial Instruments 40
II. Achieving Investment Goals 41
A. The Investor’s Perspective 41
B. Financial Instrument Objectives 43
III. Managing Risk 45
5. Financial Instruments and the Capital Markets 47
I. The Capital Markets 48
A. Primary versus Secondary Markets 49
B. Long- Term versus Short- Term Marketplaces 50
C. Case Study: The Auction Rate Securities (ARS) Market 50
II. Financial Instruments 51
A. Types of Financial Instruments 51
1. Equity- Based Financial Instruments 51
2. Debt- Based Financial Instruments 52
3. Derivatives 53
4. Cryptocurrency and Digital Assets 54
B. Distinction between Debt and Equity 54
C. Federal Regulation 57
III. The Role of the Attorney 61
A. Competent Representation 61
B. Duty to Advise Client 61
C. Drafting Financial Instruments 62
D. Regulatory Compliance 62
E. Opinion Letters 63
6. Bureau of Consumer Financial Protection 65
I. Structure 66
II. Roles and Function of the BCFP 68
A. The Bureau’s Regulatory Authority 68
B. The Bureau’s Supervisory Authority 69
C. The Bureau’s Enforcement Authority 70
III. Significant Changes in Financial Consumer Protection by the BCFP 70
A. The Judicial Review of BCFP’s Power 71
IV. BCFP under President Trump’s Administration 73
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Contents ix
V. The Judicial BCFP Structures under President Trump’s Administration 77
A. Constitutionality of the Bureau 77
B. Single Directorship 77
VI. Ongoing Enforcement Action Status 78
A. Wells Fargo Case 78
7. Understanding Interest Rates and the Economy 81
I. Background 82
A. The Federal Reserve 82
B. The Federal Reserve Banking System 83
1. Composition 84
2. Purpose 84
3. Responsibilities 85
II. Economic Indicators and Interest Rates 86
A. Key Economic Statistics 86
1. Statistics 88
B. Monetary Policy Objectives 92
C. Inflation Targeting 95
III. Monetary Policy: The Financial Crisis and Beyond 96
IV. Quantitative Easing 97
A. Balance Sheet Normalization 104
B. Fiscal Considerations 106
V. FOMC Minutes 107
8. Asset Valuation 111
I. The Use of Interest Rates in Asset Valuation 111
II. Interest Rate Yield Curve 112
A. Types of Yield Curves 113
B. Why the Yield Curve May Be Flat or Inverted 117
1. Increase in Market Demand for Long- Term Securities 117
2. Long- Term Yield Affected by Federal Reserve Monetary Policy 118
9. United States Treasury Securities 121
I. Purpose and Goals 122
A. Risk- Free Nature 123
B. Primary Dealers 124
II. Description of U.S. Treasury Securities 125
A. Types of Treasury Securities 125
1. Treasury Bills 125