Swaps and Other Hedges

Derivative products have been developed in response to specific needs of issuers and bond purchasers.  Governing law or the issuer's objectives may not permit bonds to be issued in a form that would command the best price in the market.  Underwriters or other market participants, either in connection with the initial issuance of the bonds or in totally unrelated secondary market transactions, using custodial receipts, grantor trusts, swaps, puts or other devices, make a different instrument or instruments ("synthetic securities") out of the original bonds that they can market at an aggregate price higher than they paid for the original bonds. It is generally necessary to avoid creating a new debt obligation (that would not be tax-exempt) for tax purposes. For securities law purposes, either (i) no separate security that would be subject to registration with the SEC is created, (ii) a separate security is created and sold by private placement, or, (iii) taking advantage of recent changes in federal securities law, a separate security is created and registered with the SEC so that it can be publicly sold.

Derivative products are a mixture of municipal and corporate finance devices and concepts and require expertise in securities laws and related tax laws, including the Investment Company Act of 1940, and tax laws, such as the rules governing contingent payment debt instruments, notional principal contracts, regulated investment companies, partnerships and grantor trusts (including the so-called "Sears Regulations"), not normally encountered in tax-exempt bond practice. As one of the few major bond counsel firms with a substantial asset securitization practice (generally ranked number one or number two by The American Lawyer) and related tax expertise, Orrick is uniquely suited to provide the specialized legal services required by this area. As a result, the firm has played an important part in its development. We have had extensive experience with the IRS, the SEC, and other government agencies that regulate this area, trade groups such as the Investment Company Institute, and the major buyers of derivative products and their counsel.

Orrick is also one of the few firms with significant experience with municipal interest rate swaps, partly as a by-product of our work in derivative products and of our assistance to the Public Securities Association and the International Swaps and Derivatives Association, Inc. and also as a result of representing issuers and underwriters in nonderivative original bond issues that involve swaps: for example, swaps to a fixed rate used in combination with variable rate bonds to produce lower interest rates than those available for fixed rate bonds, swaps to variable rates during construction to maximize investment income, and forward swaps in combination with variable rate bonds to approximate the economic effect of advance refundings, as well as other hedge instruments such as interest rate caps, floors, collars, "swaptions" and currency swaps. We have also represented swap counterparties and other providers of swap and other hedge instruments. The legislation granting California public entities the power to enter into swaps and other similar devices (which was the basis for the ISDA model swaps legislation) was drafted and lobbied by our firm, and we have participated in such legislation in other states (e.g., New York and Washington).