This action might not be possible to undo. Are you sure you want to continue?
Dechert LLP 1095 Avenue of the Americas New York, New York 10036 +1 212 698 3500
This presentation is provided by Dechert LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. This presentation is considered attorney advertising in some jurisdictions. © 2008 All Rights Reserved
© 2008 Dechert LLP
Table of Contents
I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. XVII. XVIII. Public Policy Concerns Repurchase Agreements Forward Contracts Securities Contracts Swaps Commodity Contracts Distinction Between Forwards and Commodities Contracts Ipso Facto Provisions Enforceable Application of Automatic Stay to Termination Setoff/Netting Damages Avoidance Actions Exception Section 105 Recharacterization Issues Mandatory Subordination issues Preemption/Chapter 11 Plan Conflict Applicability to Chapter 9/Ancillary Proceedings Glossary of Commonly Used Terms 3 7 12 16 23 26 30 34 38 41 47 50 56 57 58 62 63 64
Derivatives in Bankruptcy
I. Public Policy Concerns
The legislative history to the Safe Harbor Provisions indicates strong Congressional policy to protect American financial markets and institutions from the ripple effects resulting from a bankruptcy filing by a major player in the financial markets. These provisions are designed to protect the financial markets from systemic risks.
± It is essential that stockbrokers and securities clearing agencies be protected from the issuance of a court or administrative agency order which would stay the prompt liquidation of an insolvent's positions, because market fluctuations in the securities markets create an inordinate risk that the insolvency of one party could trigger a chain reaction of insolvencies of the others who carry accounts for that party and undermine the integrity of those markets.
See Statement of Senator Dole, 128 Cong. Rec. S8,132-33 (daily ed. July 13, 1982).
± The legislative history to the Act to Amend Title 11 of the United States Code Regarding Swap Agreements and Forward Contracts, Pub. L. 101-311, 104 Stat. 268, is similarly a testament to the public policy behind the safe harbor provisions.
See Statement of Senator DeConcini, 135 Cong. Rec. S1414 (daily ed. Feb. 9, 1989).
Derivatives in Bankruptcy
As new financial instruments have been developed. forward contracts. 1982). 9. at S1415." 128 Cong. New York Clearinghouse Association." recognizing the "potential volatile nature of the markets. These protections should be extended to the swap and forward foreign exchange agreements for the same reasons. at S1416. International Swap Dealers Association. Securities Industry Association. Feb. The same rationale supported the 1984 amendments. Id. Public Securities Association.Public Policy Concerns (cont¶d) The legislation is supported by the Federal Reserve Board. The 1982 amendments were "intended to minimize the displacement caused in the commodities and securities markets in the event of a bankruptcy affecting these industries. H261 (daily ed. Congress has recognized the need to amend certain aspects of the Bankruptcy Code in order to continue to provide the necessary speed and certainty in complex financial transactions. 4 Derivatives in Bankruptcy . I am not aware of any opposition to the legislation. commodity contracts and repurchase agreements. In 1982 and again in 1984 Congress amended section 362 to exempt the termination and setoff of mutual debts and claims arising under securities contracts. Rec. Id. and others.
counterparties could be faced with substantial losses if forced to await bankruptcy court decision on assumption or rejection of financial transaction agreements. where the markets change gradually. Rep. certain protections are necessary to prevent the insolvency of one commodity or security firm from spreading to other firms and possibly threatening the collapse of the affected market. ± ³The commodities and securities markets operate through a complex system of accounts and guarantees. There is a clear need for Congress to assure counterparties that they will be able to terminate these agreements and exercise contractual liquidation and netting rights if a party to the agreement files for bankruptcy relief. Unlike ordinary leases or executory contracts. ± S. . at S1417. Because of the structure of the clearing systems in these industries and the sometimes volatile nature of the markets. at 1 (1982). 97-420.Public Policy Concerns (cont¶d) As Congress recognized at the time of the 1982 and 1984 amendments. Id. the financial markets can move significantly in a manner of minutes. 98-65. . No. No. The markets will not wait for a court decision . 5 Derivatives in Bankruptcy .´ H.R. Rep. . at 44-49 (1983) contains a description of importance of repo markets ³to the health of the country¶s financial system´ ± including importance to state and local governments ± and uncertainty as to coverage of securities contract provisions.
The Financial Netting Improvements Act of 2006.R. Pub. amends the Bankruptcy Code effective October 17. Rep. No. and contains provisions expanding the protections for derivative and financial contract transactions. 109-390. 109-8. 2005. L. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. ± 6 Derivatives in Bankruptcy . 2005. signed into law on December 12. at 1-4 (1990) contains description of importance and vulnerability of swap and forward contract markets.Public Policy Concerns (cont¶d) ± ± H. 2006. makes certain technical amendments and clarifications to the various provisions dealing with derivative and financial contract transactions. Pub. L. 101-484. signed into law on April 20.
agency. ± ± ± any combination of agreements or transactions described in (i) and (iii). or are fully guaranteed by the U. eligible bankers¶ acceptances. except that such master agreement shall be considered to be a repurchase agreement under this paragraph only with respect to each agreement or transaction under the master agreement that is referred to above. of certificates of deposit. including related terms provides for a transfer.II. or 7 Derivatives in Bankruptcy . together with all supplements to any such master agreement. securities that are direct obligations of. with simultaneous agreement by transferee to transfer the instruments back.S. mortgage related securities (as defined in Section 3 of the Securities Exchange Act of 1934). or that is fully guaranteed by. qualified foreign government securities (representing a direct obligation of.S. without regard to whether such master agreement provides for an agreement or transaction that is not a repurchase agreement under this paragraph. mortgage loans. against transfer of funds by the transferee. an option to enter into an agreement or transaction described in (i) or (ii). or on demand. interests in mortgage related securities or mortgage loans. or U. at a date certain not later than one year after the transfer. Repurchase Agreements Defined in §101(47): ± an agreement. a master agreement that provides for an agreement or transaction referred to above. the central government of a member of the organization for Economic Cooperation and Development). against transfer of fund.
but not to exceed the damages in connection with any such agreement or transaction. Does not include a repurchase obligation under a participation in a commercial mortgage loan. 2008) (notes secured by mortgages rated BBB by S&P and Baa2 by Moody¶s. 69 (Bankr. 8 Derivatives in Bankruptcy . Mortgage related securities: A security that is rated in one of the two highest rating categories by at least one nationally recognized statistical rating agency. Del.Repurchase Agreements (cont¶d) ± any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in clause (i). measured in accordance with section 562. 388 B. Applies to reverse repos: A Repo in which the broker-dealer rather than being the initial seller. do not meet the definition).R. American Home Mortgage v. including any guarantee or reimbursement obligation by or to a repo participant or financial participant in connection with any agreement or transaction referred to in any such clause. D. Lehman Brothers. or (iv). is the initial buyer. (iii). (ii).
R.S. pursuant to resolutions of the Board of Governors of the Federal Reserve System. Eligible bankers¶ acceptances: Probably refers to bankers¶ acceptances authorized under § 13(7) of the Federal Reserve Act. lists 20 principal type obligations that qualify. Agency? ± Legislative History: Intended to cover entities whose obligations are eligible for purchase by federal reserve banks. Board of Governors¶ interpretation FRRS 2-040. Lehman. supra. Bankers¶ acceptances are essentially thirdparty obligations which the bank committed to honor.F. What is a U. § 201. The legislative history to the 2005 amendments states that the intent is to cover obligations issued or guaranteed by Fannie Mae and Freddie Mac as well as all obligations eligible for purchase by Federal Reserve banks under the similar language of § 14(b) of the Federal Reserve Act.108 (2005). ± 9 Derivatives in Bankruptcy . codified at 12 C. American Home Mortgage v.Repurchase Agreements (cont¶d) Interest in mortgage loans: Notes secured by mortgage loans qualify.
10 Derivatives in Bankruptcy .Repurchase Agreements (cont¶d) ± Protected Party ± repo participant (§ 101(46)): any entity at any time before bankruptcy has outstanding repo with the debtor ± Financial Participant (§ 101(22A)) an entity that. at the time it enters into a securities contract. swap agreement. swaps or master netting agreements with the debtor or any other entity (other than an affiliate) of a total gross dollar value of not less than $1. or a clearing organization (as defined in section 402 of the Federal Deposit Insurance Corporation Improvement Act of 1991). repos.000. or forward contract. A repo is essentially a current sale and a forward contract. commodities contracts.000. forward contracts. or has gross mark-to-market positions of not less than $100.000 in notional or actual principal amount outstanding on any day during the15month period prior to the petition date. repurchase agreement.000. has one or more securities contracts. commodity contract. or at the time of the date of the filing of the petition.000 (aggregated across counterparties) in one or more such agreements or transactions with the debtor or any other entity (other than an affiliate) on any day during the 15-month period prior to the petition date.
1986). 596-98 (D. S. 11 Derivatives in Bankruptcy . 25 F.S.4 (Bankr. 802-05 (Bankr.R. Lombard-Wall. 47 (B. 806.D.2d 38. Servicing Rights: Not protected and not subject to the safe harbor provisions even if included in the repo agreement. 1991). 2d 275.Y. 251 B. ± ± Courts are split on whether non-qualified repos are sales or loans. 557. 124 B. Aetna.. 123. ± Sales: Granite Partners v. 513 U. 1986). Md. 1998).P.R.R.N. D. 379 B. Bevill. 145 B. American Home Mortgage Corp. 785 F. 809 n. 1982). 23 B. Cal. 165 (Bankr. 578-80 (7th Cir. D. Comark.R.J. ± ± Undecided: CRIIMI MAE. Bear Stearns. 2008). Drysdale Securities. SEC v.Y. but under the plain meaning cannon of interpretation a contract that meets the statutory definition will be treated is such. 2000) (whether a repo is a sale or a loan is a factual question. 1994) (loans for insurance law purposes). 67 B. D. 41 (2d Cir. Bressler. Del. 379 B. 9th Cir. Del.. C. Nebraska Dep¶t of Revenue v.. 1992). Caylon NY Branch v.N. Loans: RTC v. finding the standard repo form to be ambiguous on this point).R. 796.R. 503 (Bankr. American Home Mortgage Corp. 17 F. 503 (Bankr.A. 300-04 (S.D.3d 570.R. 2008).N. Lowenstein. 134 (1994) (loans for state tax law purposes). aff¶d.Repurchase Agreements (cont¶d) Economically it is hard to distinguish a repo from a secured loan (underlying securities serve as collateral) since the repurchase price includes interest on the imputed loan created by the repo. Supp.D. Caylon NY Branch v.
option. with damages subject to § 562. deposit. consignment.D. of a commodity. any option to enter into these agreements or transactions. 2006). lease. Tex. hedge. 548. N. including. article. or any other similar agreement. loan. but not limited to: repos. 565 n. monthly nomination of quantities to be delivered six days before delivery date satisfies this requirement)). ± ± ± 12 Derivatives in Bankruptcy . maturity date of more than 2 days after the contract is entered into (Mirant. swap. D. 336 B. Del. or product or by product thereof. service or interest which is presently or in the future becomes the subject of dealing with in the forward contract trade. 310 B. reverse repos. for purchase. maturity means the due date for commencement of performance. 219 (Bankr. sale or transfer. allocated or unallocated transaction.R. 214. including any combination of agreements or transactions. including any similar good. Forward Contracts Defined in §101(25): ± ± ± a contract (not a commodity contract). 2004).R. master agreements. and security and credit enhancement agreements.III.26 (Bankr. Similar to the repo definition. Borden Chemicals.
in commodities or other similar good. Financial participant (§ 101 (22A)). N.R. Which presently or in the future becomes part of the forward contract trade ± Appears to overrule Mirant. 326-27 (Bankr. service or interests.Forward Contracts (cont¶d) Protected Party ± forward contract merchant (§ 101(26)): ± ± Federal Reserve Bank. Entity whose business consists in whole or in part of entering into forward contracts.D. 2003) (holding that governmental entities are not protected. ± Note: ± ± ³swap´ is mentioned as included. The 2006 amendments made clear that these terms do not refer to the defined term ³repurchase agreement´ The 2006 amendments made clear that the commodity contract carve-out specifically refer to commodity contract as defined in § 761(4). Tex. as a merchant or with merchants. 319. not a ³swap agreement´ ³repurchase transaction´ and ³reverse repurchase transaction´ are included. 303 B. old definition used ³person´ which excludes governmental entities). not ³repurchase agreement´. ± 13 Derivatives in Bankruptcy .
a forward contract merchant engaging in collection activities for gas it sold may not qualify as a forward contract merchant for settlement payment protections.´) ± ± 14 Derivatives in Bankruptcy .R. 336 B. processes it and sells the processed product to Party B ± is it a forward or a service contract? What is a forward contract merchant? ± ± Definition is descriptive Mirant.Forward Contracts (cont¶d) Query: What about a ³mixed´ contract ± Party A purchase gas from Party B. Aurora Natural Gas. Rec. Legislative history suggests that it is a commercial trading firm that offers producers. it buys. Merchant is not one acting as the end-user or producer. sell or trades in the market. 316 B. 2004): a person that. in order to profit. users of commodities and other traders opportunity to buy and sell commodities on a forward basis.R. 214.D. engages in forward contract trade as a. 310 B.D. or with. Borden Chemicals. Sept. N. 568 (Bankr. 1978) (comment of Senator Mathias) (³Forward contract merchants are commercial trading firms which offer to commercial customers the ability to buy or sell commodities in the physical market on a forward basis.R. merchants. 14724-6 (daily ed. 481 (Bankr. Tex. See 124 Cong. N. D. Del. 2004). 548. 7. 225 (Bankr. Tex. 2006): a party who buys and sells gas using forward contracts qualifies as a merchant.
548 ± probably not.R.3d 1042 (9th Cir. 2001). But ± entities that do not qualify as forward contract merchants could still qualify as financial participants. Borden Chemicals.R.R. 267 F.C. v. v. 310 B. 214. which is a forward. Davies.D. California Power Exchange Corp.L.3d 1110 (9th Cir. And in Natural Gas. A person that has only one forward contract but is otherwise a very large business. 2001). L. Duke Energy Trading & Marketing. 245 F. 2006). 336 B. Del. What is ³forward contract trade´? ± ± Type of forward contracts that are traded? Type of goods or services that are commonly the subject of forward contracts? There is an active forward contract market in electricity. Tex. 15 Derivatives in Bankruptcy .R. FERC.Forward Contracts (cont¶d) Query: ± ± ± A person having only one asset/contract. 310 B. 310 B. 2004). 548 ± probably not. 548 (Bankr. 21819 (Bankr. N. qualifies as forward contract merchant? Mirant. Mirant. D. qualifies? Mirant.
or interest therein (including any interest therein or based on value thereof). or mortgage loans or interests therein (including any interest therein or based on the value thereof). 686 (Bankr.N. or option on any of the foregoing. interest. certificate of deposit. 671. certificates of deposit. mortgage loan. securities. certificate of deposit. ± ± 16 Derivatives in Bankruptcy . group or index. for purchase. Securities Contracts Defined in § 741(7) (not part of the regular chapter 7. sale or loan (query-is redemption/prepayment in full of debt instruments qualifies as a purchase? Not clear. group or index of securities.Y. by or to a securities clearing agency of a settlement of cash. option entered on a national securities exchange relating to foreign securities. including by novation. ± of a security. group or index of securities. Enron. 2005). certificates of deposit. but the sub-chapter applicable to stockbroker liquidation): ± ± Contract. or any option to purchase or sell any of the foregoing and any repo or reverse repo on the foregoing (whether or not the repo or reversed repo comes within the definition of a ³repurchase agreement´). including an option to purchase or sell any such security.IV. S. mortgage loan or any interest in a mortgage loan. or mortgage loans. mortgage loans or interests therein. 325 B.D.R. or option (whether or not such settlement is in connection with any agreement or transaction referred to in the definition of a´securities contract´). the guarantee.
or any total return swap transaction coupled with securities sale transaction. the definition includes any combination of agreements or transactions. Extension of credit for the clearance or settlement of securities transactions. ± 17 Derivatives in Bankruptcy .Securities Contracts (cont¶d) ± ± ± ± ± any margin loan. master agreements with all supplements and security and credit enhancement agreements. with damages subject to § 562. any other agreement or transaction that is similar to an agreement or transaction referred to in the section. sale or repurchase obligation under a participation in a commercial mortgage loan. Similarly to forwards and repos. option to enter into these agreements or transactions. any prepaid forward securities transaction. Loan transaction coupled with securities collar transaction. does not include purchase.
Securities Contracts (cont¶d)
Security defined in § 101(49) to include (not inclusive):
stock, treasury stock, Note, bond, debenture, collateral trust certificate, pre-organization certificate or subscription, transferable share, voting trust certificate, certificate of deposit, certificate of deposit of a security, investment contract or certificate of interest or participation in a profit- sharing agreement or in oil, gas or mineral royalty or lease, it if is required to be registered under the Securities Act of 1933 or is exempt from registration under § 3(b) of the 33 Act, interest in a limited partnership, other claim or interest commonly known as a security, certificate of interest of participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase or sell, a security.
Derivatives in Bankruptcy
Securities Contracts (cont¶d)
currency, check, draft, bill of exchange or bank letter of credit. leverage transaction (§ 761) commodity futures contract forward contracts option, warrant or right to subscribe or purchase/sell a commodity futures contract debt or evidence of indebtedness for goods sold or services rendered.
Limited liability company interests ± constitute a security of the debtor. Iridium Africa, 197 F. Supp. 2d 120, 133 (D. Del. 2002) (Mag. J.), adopted in part, rejected in part on other grounds, 2004 WL 323178 (D. Del. Feb. 13, 2004) (D. J.), and adopted in part, rejected in part on other grounds, 307 F. Supp. 2d 608 (D. Del. 2004). Short term commercial paper ± should be; but the court left it open. Enron, 325 B.R. 671, 686 (Bankr. S.D.N.Y. 2005). CLO notes (notes issued in connection with a collateralized loan obligation structure), are securities. Enron Corp. v. Int¶l Finance Corp., 341 B.R. 451 (Bankr. S.D.N.Y. 2006).
Derivatives in Bankruptcy
Securities Contracts (cont¶d)
Employee stock options are securities. Enron, 341 B.R. 141, 150 (Bankr. S.D.N.Y. 2006). Securities exempt from registration under any exemption other than § 3(b) of the 1933 Act are not securities within the Bankruptcy Code¶s definition. Basin Resources, 182 B.R. 489, 491 (Bankr. N.D. Tex. 1995) (case involved investment contracts and should probably be applied only to these instruments, not to other items listed in the definition). Margin contract where stockbroker advances loans against pledged securities in a margin account qualifies as securities contract. Weisberg, 136 F.3d 655 , 658-59 (9th Cir. 1998). The 2005 amendments specifically list margin loans as a securities contract. § 741(7)(A)(iv). Legislative history to the 2005 amendments states the intent to cover any loans known in the securities industry as margin loans, such as credit permitted under Regulation T of the Federal Reserve or where a protected party extends credit in connection with the purchase, sale, carrying or trading of securities; loans merely secured by securities are not included.
Derivatives in Bankruptcy
M. relying on its 10-Q). supra (Lehman Brothers is a stockbroker.D.Securities Contracts (cont¶d) Non qualified repos for securities. Lehman Brothers. 98 B. Hamilton Taft. 388 B. qualify as securities contracts. The legislative history to the 2005 amendments also states the same intent. 23 (Bankr. and the 2006 amendments amended section 741(7)(A) to so provide. 2008) Protected Parties: ± ± Financial participant (§ 101(22A)) Stockbrokers (§ 101(53A)): has a customer as defined in § 741and is engaged in effecting securities transactions for the account of others or with the general public. Lehman Brothers. Residential Resources. from of for such person¶s account. Del. 2007) (Morgan Stanley is protected for a challenged payment although the debtor transferor directed the margin payment be made to an account of a third party (insider)). 1997). 2.R. 1989). Ga.3d 991 (9th Cir. 525 F.3d 805. Repos for notes secured by mortgage loans qualify both as repurchase agreement and a securities contract. American Home Mortgage v. Securities clearing agencies (§ 101(48)) ± 21 Derivatives in Bankruptcy . 816-19 (9th Cir. Slatkin. Ariz.. D. 2008) (analyzing ³customer´ and ³stockbroker´). 69 (Bankr. 2007 WL 1032263 (Bankr. Stewart Finance Co. D.R. American Home Mortgage v. 114 F.
W. 2006). the 2006 amendments made clear that the definition of customer in § 741(2) is inapplicable § 741(2) defines a customer essentially as a person with whom the stockbroker acts as principal or agent. Quality Stores. 22 Derivatives in Bankruptcy . 98 F. 21.R. 1996) (No.D. 355 B. Mich. or as collateral. 610 (11th Cir. acknowledging the involvement of a financial institution. held or acquired by the broker in its ordinary course of business as a broker from or for the account of the customer for safekeeping. W. 2007 (Yes. Dec. Mich. such customer While customer is not defined. LBO transaction.D. aff¶d. 629 (Bankr. pursuant to a purchase. Investment companies registered under the Investment Companies Act of 1940.3d 604. Private LBO transaction). but noting that it acted as a mere intermediary or conduit). Query: Is a private securities transaction subject to the safe-harbor provisions merely because a financial institution is inserted to act as an agent? Munford. with a view to sale. and the person has a claim against the broker for security received.Securities Contracts (cont¶d) ± Financial institutions (§ 101(22)) mainly banks when a bank acts as agent for a ³customer´ in connection with a securities contract.
at 895). Emissions swap. option. a spot. or forward agreement (is the term different from the defined term forward contract? Nat¶l Gas.R. a debt index or debt swap. or forward agreement. 369 B. tomorrow-next. a currency swap. option. a weather swap. future. option future. or future agreement. or other foreign exchange. weather derivative. an equity index or equity swap. precious metals or other commodity agreement. option. or forward agreement. or forward agreement. future. cross-currency rate swap. and basis swap. option. or forward agreement. option. a total return. future.V. future. an interest rate swap. same day-tomorrow. rate collar. including a rate floor. ± ± ± ± ± ± ± ± ± 23 Derivatives in Bankruptcy . forward. rate cap. future. future. a commodity index or a commodity swap. or weather options. or Inflation swap. option. or forward agreement. credit spread or credit swap. Swaps Swap agreement is defined in § 101(53B): ± ± Any agreement (including terms and conditions incorporated by reference in such agreement). option. or forward agreement.
and is a forward. The definition applies only for Bankruptcy Code purposes and shall not be applied to challenge or affect the characterization or treatment of swaps under any other statute. the definition includes any combination of these agreements or transactions. or other equity instruments. among other things. which included ³any other similar agreements.Swaps (cont¶d) ± any agreement or transaction that is similar to any other agreement or transaction referred to in this paragraph and that is of a type that has been. The 2005 amendments significantly expanded the definition to specifically cover. The legislative history notes that the original definition. or economic consequence. debt securities or other debt instruments. extent of an occurrence. with damages subject to § 562. any master agreement and the supplements and any security or credit enhancement agreement. 24 Derivatives in Bankruptcy . future. any option thereon. is presently. quantitative measures associated with an occurrence. equity and credit derivatives. equity securities. or in the future becomes. or economic or financial indices or measures of economic or financial risk or value. Similar to the other financial contracts. option or spot transaction on one or more rates. commercial. currencies.´ was intended to provide sufficient flexibility to avoid the need to amend the definition as the nature and uses of swaps mature. The amended definition is designed to clarify such intent. the subject of recurrent dealings in the swap markets (including terms and conditions incorporated by reference therein). swap. commodities. or contingency associated with a financial. regulation or rule.
(§ 101(22A)) Legislative history to the 2005 amendments states that agreements are not protected just because they are documented as swaps.D.N. ± Financial Participant. 369 B. 898 (Bankr. 2007) (refusing to treat a forward gas supply agreement as a swap agreement because it was a private supply agreement with no impact on financial markets). Legislative history also states that a forward transaction could qualify as a swap even if not qualified as a forward. National Gas Distributors.R.Swaps (cont¶d) Protected Parties ± ³Swap participants´ (§ 101(53C)): An entity that. E. at any time before the bankruptcy filing. 25 Derivatives in Bankruptcy . 884.C. LLC. has an outstanding swap agreement with the debtor (no timing limitations).
Commodity Broker is defined in CFTC¶s Rule 190. and all services. 2002) (term has the same meaning in § 101(25) (forward contract exclusion)). including clearing organizations. 294 F. ± 26 Derivatives in Bankruptcy .02. at 9 (1st.´ The quoted phrase above was added to CEA in 1974 and was intended by Congress to expand ³the definition of commodity to encompass virtually anything that is or becomes the subject of futures trading. ± CEA § 1a(4) defines ³commodity´ to include a list of agricultural products ³and all other goods and articles. except onions as provided in section 13-1 of this title.´ except for onions. contained in the sub-chapter dealing with commodity broker liquidation. intangible as well as tangible. and interests in which contracts for future delivery are presently or in the future dealt in. 1 Phillip McBride Johnson & Thomas Lee Hagen. 741 (5th Cir. 2004). as to which there is a customer. as well as other specified entities. Commodity Contracts Defined in § 761(4).3d 737. Commodity is defined in § 761(8) through cross-reference to the Commodity Exchange Act (³CEA´). rights. This drafting glitch was corrected in the 2006 amendments to section 101(25). are they applicable when the term is used in other chapters without cross-reference? Olympic Natural Gas.VI. Definitions are limited only to this sub-chapter. Derivatives Regulation § 1.01(f) as any person registered or required to be registered as a futures commission merchant under the CEA. ed.
securities. or other property. a contract market or board of trade. or secure any trade or contract that results from such a solicitation or acceptance. corporation. "Foreign futures commission merchant" is defined in section 761(12) of the Bankruptcy Code as an "entity engaged in soliciting or accepting orders for the purchase or sale of a foreign future or that. or secure any trades or contracts that result or may result therefrom. as "an individual. or extends credit to margin. or trust that ± (A) is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility. which definition is incorporated by section 761(8) of the Bankruptcy Code. or subject to the rules of. association. a security. or property (or extends credit in lieu thereof) to margin. accepts any money. "Futures commission merchant" is defined in CEA § 1a(20). in connection with such a solicitation or acceptance. or subject to the rules of. a board of trade outside the United States. partnership." "Foreign future" is defined in section 761(11) of the Bankruptcy Code as a "contract for the purchase or sale of a commodity for future delivery on. accepts cash." 27 Derivatives in Bankruptcy . foreign future. contract for the purchase or sale of a commodity for future delivery on. guarantee. and (B) in or in connection with such solicitation or acceptance of orders. guarantee." ± (B) with respect to a foreign futures commission merchant.Commodity Contracts (cont¶d) Section 761(4) of the Bankruptcy Code defines a commodity contract as: ± (A) with respect to a futures commission merchant.
or the liquidation or rescission of any such leverage contract by or to the leverage transaction merchant.F. margin contract. the delivery of the leverage commodity. the repurchase or resale of any leverage contract." 17 C." 28 Derivatives in Bankruptcy . or subject to the rules of. codified as 7 U. leverage transaction. a contract market or board of trade that is cleared by such clearing organization. § 31. ± (D) with respect to a clearing organization." "Leverage transaction" is defined in section 761(13) of the Bankruptcy Code as an "agreement that is subject to regulation under section 19 of the [CEA.C.4(x) (2004).Commodity Contracts (cont¶d) ± (C) with respect to a leverage transaction merchant. or commodity option traded on. § 23]. The CFTC's regulations define a leverage contract as a "contract. "Clearing organization" is defined in section 761(2) of the Bankruptcy Code as "a derivatives clearing organization registered under the [CEA].R. or leverage contract.S. for the long-term (ten years or longer) purchase ('long leverage contract') or sale ('short leverage contract'). § 31." 17 C." The CFTC's regulations under CEA § 19 describe a leverage transaction as ³the purchase or sale of any leverage contract.F. and that is commonly known to the commodities trade as a margin account.R. standardized as to terms and conditions. or subject to the rules of.4(w) (2004). contract for the purchase or sale of a commodity for future delivery on. a contract market or board of trade that is cleared by such clearing organization. "Leverage transaction merchant" is defined in section 761(14) of the Bankruptcy Code as a "person in the business of engaging in leverage transactions. leverage account.
' 'put. 29 Derivatives in Bankruptcy ." Section 4c(b) of the CEA regulates option trading: "No person shall offer to enter into.' 'privilege. § 6c(b)]. a security. or that accepts cash.' 'bid. regulation or order of the [CFTC] .Commodity Contracts (cont¶d) ± (E) with respect to a commodity options dealer.' or 'decline guaranty." "Commodity option" is defined in section 761(5) of the Bankruptcy Code as an "agreement or transaction subject to regulation under section 4c(b) of the [CEA. master agreements and security and credit enhancement agreements. or is commonly known to the trade as. any transaction involving any commodity regulated under this chapter which is of the character of. . an 'option.S.³ ± The 2005 amendments expanded the definition to cover combinations of agreements and transactions.' 'offer." "Commodity options dealer" is defined in section 761(6) of the Bankruptcy Code as a "person that extends credit to. a customer of such person for the purchase or sale of an interest in a commodity option. .' 'advance guaranty.C.' 'indemnity.' contrary to any rule.' 'call. options. with damages subject to § 562. enter into or confirm the execution of. . commodity option. or other property from. codified as 7 U.
´).3d 737. and futures (or ³commodity´ contracts). which are regulated by the Commodity Futures Trading Commission (³CFTC´) ± Olympic Natural Gas. 740-41 (5th Cir. . 294 F. are indeed forward contracts. .exchange transactions´ as futures and to ³off-exchange transactions´ as forwards). non-regulated contracts. Distinction Between Forwards and Commodities Contracts The terms forward contracts and commodity contracts. . 30 Derivatives in Bankruptcy . which are private. specified quantity of natural gas to be delivered at some certain. a contract market or board of trade . 165 (³[C]ontracts for the purchase and sale of a certain.VII.R.3d at 741 (³The term µcommodity contract¶ µencompasses purchases and sales of commodities for future delivery on. . Olympic Natural Gas. 258 B.¶ In contrast. specified future date . taken together. or subject to the rules of. µforward contracts¶ are µcontracts for the future purchase or sale of commodities that are not subject to the rules of a contract market or board of trade. cover the entirety of transactions in the commodity and forward contract markets. 2002) The distinction is essentially between forwards. aff¶g Olympic Gas. at 163 (referring to ³on.¶´) (citations omitted). . 294 F.
Forwards and Commodities Contracts (cont¶d) The jurisdictional focus of the CEA is not on what is a commodity..3d 766. Inc.2d 573.2d 309. Inc. ± 31 Derivatives in Bankruptcy . In re Bybee. but on whether the contract is a futures contract. however. almost everything is a commodity. the actual transfer of the commodity is deferred. Knight Enters. 67 F. was on a common practice in agricultural trade of making binding sales with postponed delivery. When the contract contemplates actual delivery.Y. Noble Metals Int¶l.´ CEA § 1a(7). these arrangements frequently are referred to as forward contracts. v. Derivatives Regulation § 1.´ The term ³contract of sale´ is defined to include ³sales.N. The ³future delivery´ component. MG Refining & Marketing. Inc. ³transactions involving contracts of sale of a commodity for future delivery.D. agreements of sale.. but the obligation is deferred the forward contract exception applies. Co Petro Marketing Group. Supp.02. CFTC v.´). at 23-24. for the convenience of the parties or otherwise. 581 (9th Cir. 2d 175. CFTC v. 1982) (³[N]o bright-line definition or list of characterizing elements is determinative. 182 (S. 1995) (forward contract exception did not apply because actual delivery was not contemplated). 25 F. is defined in the CEA only by way of exclusion: ³the term µfuture delivery¶ does not include any sale of any cash commodity for deferred shipment or delivery. 680 F. in historical context. The transaction must be viewed as a whole with a critical eye toward its underlying purpose. 772 (9th Cir. 1991). and agreements to sell. ± CEA § 2 grants to the CFTC exclusive jurisdiction over. As a leading commentator notes: [T]he phrase future delivery eliminates transactions where an immediate sale occurs but where. 1998) (same). ± There is no fixed definition for a futures contract. 945 F.. 315 (9th Cir.´ CEA § 1a(19). The primary focus of this exclusion. among other things.
and the customer generally has no business use for the commodity. quantity. in a forward all of the sale terms are negotiated including price. at 32-33. 590-92 (7th Cir. 1984): ± ± ± forwards are privately negotiated transactions while futures are traded on an exchange. quality and date of delivery. in a futures contract actual delivery of the commodity is not expected to occur. in forwards the terms are negotiated directly among the parties.02. 32 Derivatives in Bankruptcy . and in futures a clearing house is required to effect the sale.Forwards and Commodities Contracts (cont¶d) The differences and similarities between forwards and futures were explained in Abrams. The CFTC and the courts have developed certain criteria relevant to the determination: ± ± ± ± the designation of the contract as a futures or forward is not controlling. Commodities Regulation § 1. but futures generally are not used to obtain actual delivery and are discharged by entering into offsetting transactions while forwards often contemplate actual delivery. both are designed to shift risks.2d 582. both in theory require actual delivery. ± ± The ultimate determination of whether a contract is a futures contract is highly factual. the only open term to be negotiated in a futures is the price. 737 F. the use of standardized forms is significant in finding a futures contract to exist.
Andersons. CFTC v. aff¶d.D. Supp. ADM Inv. Tauber. Supp. Inc. 1263 (S. Supp. Bybee. CFTC v. 2002).3d 308 (6th Cir. In reviewing the expectation of delivery element."). 71 F. 1993).3d at 772-73). the contract is among industry participants. 67 F. IBS. Midland.02. 33 Derivatives in Bankruptcy . Midland Rare Coin Exchange. Inc. 2d 1257. 680 F. 166 F. 294 F. Horton Farms. courts examine the parties' objective ability to actually take delivery. Commodities Regulation § 1. Fla.D. at 33-34 & n. 1998). 441 (7th Cir. 2d 830. and delivery cannot be deferred forever. v. 8 F. v. 2000).C. Nagel v.2d at 313-15. the contract is a forward contract not subject to CFTC's regulation: ± ± ± it has idiosyncratic terms regarding place of delivery. 971 (4th Cir. quantity or other terms. The Seventh Circuit has refined the multi-factor test and held that if the following three factors exist. Inc. 945 F. Servs. Inc. 2000).3d 436. 1999).3d 966.. Noble Metals. and is not fungible with other contracts for the sale of the commodity. Inc.2d at 581 ("The contracts here represent speculative ventures in commodity futures which were marketed to those for whom delivery was not an expectation.3d at 741. 2d at 1263. 71 F. not the general public. Inc. 113 F.3d 187 (4th Cir.Forwards and Commodities Contracts (cont¶d) The lack of expectation of delivery is the most significant factor. Olympic Gas. 276 F. Salomon Forex. 217 F.139 (citing Petro Marketing. 846 (W.....N.
± Mirant.VIII. 541(c)(1). 310 B. 548 (Bankr.D. N. 11 U. or resolution of their board.S. Tex.R. a national securities association. bankruptcy termination. a derivative transaction execution facility designated under the CEA.C. Derivatives in Bankruptcy . §§ 365(e)(1). An exception to this general rule is provided for ± ± ± ± Securities contracts (§ 555) Forward and commodities contracts (§ 556) Repos (§ 559) Swaps (§ 560) The exception applies to a ³contractual right. or a board of trade as defined in the CEA. also known as ipso facto clauses are unenforceable in bankruptcy. securities clearing agency).´ which includes rights provided for in a rule or by law of a clearing organization (derivative clearing organization as defined in the CEA. 34 The exception requires a qualified protected counter-party. law of merchant or by reason of usual business practice. 2004) ± parties assumed that Southern California Gas Company is a clearing organization. Ipso Facto Provisions Enforceable Generally. a national securities exchange. arising under common law. or contract market designated under the CEA. multilateral clearing organization as defined in the FDIC Improvement Act of 1991.
Deputy General Counsel of SIPC advised counsel to The Public Securities Associations (now known as The Bond Market Association. The letter indicates that it is expected that SIPC would consent (and would urge the trustee to consent) if it received an affidavit of the counterparty attesting that it has no knowledge of fraud in the transaction and. and was made applicable to reverse repos by a letter dated June 5. if it is the lender. ± ± ± 35 Derivatives in Bankruptcy . that SIPC would act promptly to determine whether the subject securities are necessary to satisfy the claims of customers (stating 4 to 5 days after the initiation of the proceeding as a hoped-for time frame). that it has a perfected security interest in the collateral. including securities loans and repurchases agreements. 559) ± At the commencement of SIPA proceeding. by transferring their customer accounts and giving up their broker/dealer licenses prepetition (thus ceasing to be stockbrokers). In two major stockbroker failures.Ipso Facto Provisions Enforceable (cont¶d) Courts may interfere with enforcement of ipso facto clauses in securities contracts and repos. the stockbroker entities filed chapter 11 petitions and did not become subject to SIPA proceedings. ³BMA´) that SIPC would modify its standard from of order. 1986. A similar letter addressing repos was issued on February 4. if authorized by the Securities Investor Protection Act of 1970. By letter dated August 29. administered by SIPC. or by any statute administered by the SEC (§§ 555. while still barring the immediate close-out of securities lending transactions which would otherwise by protected under Section 555 upon written consent of SIPC and the trustee appointed in the case (thus eliminating the need for court relief). SIPC generally seeks and obtains an order staying the close-out of at least some securities contracts. 2002. Drexel Burnham and Thomson McKinnon. 1988. and thereafter would lift the stay or perform the debtor¶s obligations under the transaction.
and securities lent under a securities lending agreement. "the right to liquidate does not constitute the right to transfer cash. 97th Cong. 420. As to swaps the exception applied to the right ³to cause the termination´ of the swap. Prior to the 2005 amendments. 556.¶´). 448 (Bankr. ± The ³liquidation´ term used is understood to mean. the termination of the contract.Ipso Facto Provisions Enforceable (cont¶d) ± The 2005 amendments amend Section 5(b)(2) of SIPA to block SIPC from seeking a stay of the exercise of contractual rights with respect to the various protected contracts. Thus.N. forwards. The 2005 amendments to the Bankruptcy Code. In re R.J.R. is µthe right to close out an open position. 4 (1982). except that it may seek to stay the foreclosure on or disposal of securities collateral pledged by the debtor. ± 36 Derivatives in Bankruptcy .. at a minimum. the right to liquidate a commodity contract pursuant to Section 556. commodities contracts and repos. securities. D. securities sold by the debtor under a repurchase agreement. No.M. 77 B." H. but might be stayed from foreclosing on the related securities collateral. a counterparty would be able to terminate/accelerate a securities contract (and reduce its exposure to market movements). Rep. or acceleration´ of these contracts. or property held with respect to such contracts. except to the extent otherwise provided in this title. modified sections 555. 559 and 560 by allowing not only the liquidation. 441. but also the ³termination.R. these sections exempt from the ipso-facto prohibition the right ³to cause the liquidation of´ the securities contracts. 2d Sess. 1987) (³As the legislative history makes clear. But. Cordova Int¶l.
R. Courts may rely on the doctrine of waiver. Case No. Mirant. Programs may contain variety of features: Collateral. (super) administrative expense priority. N. 347 (Bankr. preferably on the first day it learns of the bankruptcy. Tex. U. aff'd sub nom.Ipso Facto Provisions Enforceable (cont¶d) Unless a protected party exercises its right as soon as possible after the counter-party's bankruptcy.. guaranties. 1991). courts may refuse to apply the safe harbors. Nat'l Westminster Bank. Nat¶l Westminster. Mirant. prohibiting termination.D.Y.g..D. could provide that any party participating waives termination right based on bankruptcy filing.Y. Yaeger v. letters of credit. 03-46590 (Bankr. Practical advice to reduce termination risks: Obtain court approval for counter-party assurance programs designed to encourage counter-parties not to terminate.) 37 Derivatives in Bankruptcy .2d 1 (2d Cir. a year after Amcor's filing. S. 962 F.N.. but see. Ross. 553 (D.S. 130 B. 656. 465 (Bankr. finding that the forward contract merchant's continuing post-petition performance and failure to enforce the event of default constitute waiver. 1990) (Drexel prohibited from terminating its securities contract under section 555.R. thus.N. N. Tex. In re Amcor Funding Corp. 2004) (late termination due to reliance on being protected by bankruptcy court¶s orders allowed). Enron Corp. See e. Az. 306 B. 549. 675 (S.D. 314 B. 2004) (city transit authority sought to terminate cash settled swap for natural gas based on unenforceability of the agreement).A. due to Drexel's bankruptcy rather than due to Amcor's bankruptcy).D.R. v. 117 B. Courts may refuse to allow termination of safe harbor contracts.R. 1992). for reasons wholly unrelated to the counter-party's bankruptcy.
1 (Bankr. 116 B.D. 639. N. Mirant. 2006).. 1987) (held.D. Tex.R. N. Siegal (In re Siegal). 1980). ± 38 Derivatives in Bankruptcy .R.2d 725. Inc. Tex. N. In re Cardinal Indus. § 362 automatically stayed termination.. Inc. 440 F.3d 238 (5th Cir. Merchants Bonding Co. Tex. Mirant.D. 327-28 (Bankr.D. 49 B. S. Inc. (In re Adana Mortgage Bankers. 310 B. 1996). Mirant.R. "even if § 365(e)(2) allowed [the nondebtor party] to terminate the contract. Ga. Computer Communications. D.IX. Ariz. held the automatic stay not to stay termination. 303 B. which exempts ipso facto clauses in certain types of contracts from the general unenforceability of such clauses. the nondebtor party to the executory contract must first seek relief from the automatic stay of section 362.R. N.). Application of Automatic Stay to Termination Few courts have addressed whether the automatic stay applies to a nondebtor party's right to exercise its right to terminate a contact exempt from the ipso facto prohibition. Those that have are split. 964.D. 983 (Bankr. explaining its seemingly contrary decision. N.R. 314 B. Ohio 1990). 2004) (forward contract).R. 12 B. 977. 445 (Bankr. 2004) (swap). v. Mirant. 640 n. 319. 440. 730 (9th Cir. 824 F. v.R. Inc.D.. 2003) The Courts of Appeals for the Fifth and Ninth Circuits held that to effectuate a termination clause that is enforceable under section 365(e)(2). Iowa 1985). 564 (Bankr.). 548. Wegner Farms Co. (In re Wegner Farms Co. Gov't Nat'l Mortgage Corp. Adana Mortgage Bankers. 190 B. 347 (Bankr.´) Accord: Calvin v. 971 (Bankr. ± The only court to address safe harbor transactions.
(In re Alert Holdings. The court held that the termination of advances did not violate stay: "Section 365(e)(2)(B).R. 6th Circuit: Elder-Beerman Stores Corp. 1096 (3d Cir. 806-07 (Bankr. Inc.N. S.).R. Co. 876 F. unequivocally and without qualification. Inc. 1992). 250 B. 1992). 329 (Bankr. W. 776 (2d Cir. another section should not be interpreted to cause an irreconcilable conflict'"). 1993). Ohio 1998).R. 2nd Circuit: Shimer v.Y. 148 B.2d 769.S. Alert Holdings. ± ± 39 Derivatives in Bankruptcy .N..R..). and at best an imposition of a pro forma requirement that the creditor must ask for what the Code plainly grants him. Inc.´ Accord In re New Town Mall.Y. For example. v. which covers Delaware. 202 (Bankr. Inc. 609 (S. disagrees. a state agency that had agreed to lend debtor money to avert foreclosure ceased advances upon commencement of case.D. 206 B.D. Fugazy (In re Fugazy Express. 794. 1982) (automatic stay did not prevent ipso facto termination of contract to make loan.D. Ohio 1997). rev'd in part. Hous. Interstate Protective Servs. 142.).R. 326. S. D. v. provides for the termination of a contract to make a loan after the commencement of a bankruptcy case. at the same time. In Watts v. 982 F. The law in the other circuits is not clear.2d 1090. 154 (Bankr. Fin.Application of Automatic Stay to Termination (cont¶d) ± The Court of Appeals for the Third Circuit. 194. 17 B.D. but they have yet to address this specific issue. 1989). aff'd in part. Inc. Inc. (In re Elder-Beerman Stores. "'where one section of the Bankruptcy Code explicitly governs an issue. To hold that such termination is. Inc. Slater v. Pa.D. Smith (In re Albion Disposal. 152 B. courts within the Second Circuit refer to both Computer Communications and Watts. stayed under section 362 would be at worst anomalous. Thomasville Furniture Indus. Courts in the Sixth Circuit seem to prefer the approach of Computer Communications.).
548. The 2005 amendments supplemented the protections by also amending section 362 accordingly (§ 362(o)) Query: Should Computer Communications be extended to contracts that require an advance termination notice? 40 Derivatives in Bankruptcy . 2004). specifically provides that the contractual right to liquidate. 310 B.D. it was not entirely clear whether the Fifth and Ninth Circuits¶ rationale should apply to safe harbor contracts. terminate or accelerate a safe harbor contract "shall not be stayed.R. 554 (Bankr. dealing with the enforceability of ipso facto clauses. Section 365(e)(2).Application of Automatic Stay to Termination (cont¶d) Prior to the 2005 amendments. N." The post-2005 amendments safe harbor provisions of the Bankruptcy Code. provides for the enforceability of an ipso facto clause but does not specifically mention the term "stay.´ Accord Mirant. which was the subject of the decisions. avoided. Tex. or otherwise limited by operation of any provision of this title or by order of the court.
548. 2004). Tex. No.S.R. at 585 (specifically referring to forward contract merchants).3d 1. 584.A. see also id. N. Rep.N.X. Mirant. Recoupment does not apply to claims arising from post rejection/termination of the contracts. 560 (Bankr.D. at 2 (1982).(7). Exercise of setoff rights and other secured creditor¶s remedies are generally subject to the automatic stay." H. 97-420. Holyoke Nursing. Setoff/Netting Legislative Intent: Focus is on stability of financial markets: ± "[T]he stay provisions of the Code are not construed to prevent brokers from closing out the open accounts of insolvent customers or brokers. 372 F. reprinted in 1982 U. 3 (1st Cir. 553 Recoupment is generally held to be exempt from the stay. The prompt closing out or liquidation of such open accounts freezes the status quo and minimizes the potentially massive losses and chain reactions that could occur if the market were to move sharply in the wrong direction.C.C. ± ± Setoff allows parties to setoff obligations arising from various transactions among them. 310 B. 2004). §§ 362(a)(4).(6). 41 Derivatives in Bankruptcy .R. 583. recoupment is limited to the same transaction.
Repos: § 362(b)(7). or other transfer obligation arising under under. avoided or limited. The safe harbor provisions and certain sub-sections of § 362 exempt certain setoffs from the automatic stay: ± Securities contracts. Supplemented by § 560: contractual right to offset or net-out any termination values or payment amounts shall not be stayed. The 2005 amendments specifically include in the definitions of the various financial contracts. Swaps: § 362(b)(17) Similar to § 362(b)(6). the parties assumed they were. at 560. master agreements with all supplements thereto.R. credit enhancement and any master agreement. Mirant.protected parties¶ right to variation or maintenance margin payment received from a trustee under those contracts shall not be stayed. Forwards and commodity contracts are also subject to the exemption of § 556 -. similar to § 362(b)(6). or in connection with these contracts. ± ± ± 42 Derivatives in Bankruptcy . avoided or limited.Setoff/Netting (cont¶d) Query: Do various confirmations under a single master deemed one transaction or several transactions? ± ± In Mirant. forwards and commodity contracts: § 362(b)(6) exempt the exercise of contractual right to setoff or net termination values. 310 B. including any security agreement or arrangement. payment amounts.
136 F. Query: What is the scope of payments due ³in connection with´ a safe harbor contract? Setoff is allowed regardless of whether the post-petition termination of a safe harbor contract is deemed to give rise to a post-petition. or pre-petition claim. 43 Derivatives in Bankruptcy . 657-59 (9th Cir. notwithstanding § 553 requiring both claims to arise pre-petition.3d 655. 1998) (affirming application of § 362(b)(6) to liquidation of collateral posted prepetition as margin to cover unanswered post-petition margin calls). Weisberg.Setoff/Netting (cont¶d) Master Netting Agreements: § 362(b)(27) allows setoffs and netting under masternetting agreements. Section 362(o): Supplements the protections by prohibiting any court or administrative agency from staying the exercise of rights exempt from the stay with respect of protected transactions.
or any security agreement or arrangement or other credit enhancement related to one or more of the foregoing. or close out. Master netting agreement is defined as ± An agreement providing for the exercise of rights. liquidation. commodity contracts. it shall be deemed to be a master netting agreement only with respect to those agreements or transactions that qualify as such. forward contracts. repos or swaps. swap agreements or master netting agreements. repos or swaps.Setoff/Netting (cont¶d) Cross Product Netting ± prior to the 2005 amendments did not appear to be covered by the safe harbor provisions. including rights of netting. repurchase agreements. or net termination values. acceleration. Section 561(a) provides that the right to terminate. avoided or limited by operation of the bankruptcy code or by order of a court or administrative agency. commodities contracts. ± 44 Derivatives in Bankruptcy . forwards. under or in connection with one or more securities contracts. commodities contracts. accelerate or liquidate. termination. payment amounts or other transfer obligations arising under or in connection with one or more securities contracts. If the agreement contains provisions relating to agreements or transactions that are not securities contracts. including any guarantee or reimbursement obligation related to one or more of the foregoing. shall not be stayed. setoff. or to offset. forwards. ± ± New section 561(a) specifically allows cross product netting.
2004) (reversal of a wire.3d 655. but it was not clear whether realization on collateral was exempt from the stay. 136 F. violated the stay.Setoff/Netting (cont¶d) The legislative history is clear: ³The definition of µMaster Netting Agreement¶ is designed to protect the termination and closeout netting provisions of cross-product master agreements between parties.´ Foreclosure ± Prior to the 2005 amendments.R. (17) were drafted in terms of setoff.) The 2005 amendments specifically allow realization against pledged collateral. after the amount was deposited into the debtors¶ account. Tex. 548. N. but see Mirant. (7). 1998) (§ 362(b)(6) applies to liquidation of collateral posted pre-petition as margin to cover unanswered post-petition margin calls). The legislative history is also crystal clear on this point: 45 Derivatives in Bankruptcy . 310 B. 657-59 (9th Cir. ± Weisberg. § 362(b)(6).D. 559-60 (Bankr.
and master netting agreements free from the automatic stay apply to collateral pledged by the debtor but that cannot technically be µheld by¶ the creditor. as well as in section 362(b)(6) and (7) of the Bankruptcy Code. Because the relevant definitions include related security agreements. master netting agreements. the references to µsetoff¶ in these provisions. are intended to refer also to rights to foreclose on. forward contracts. Enforcement of these agreements and arrangements free from the automatic stay is consistent with the policy goal of minimizing systemic risk. collateral securing swap agreements. forward contracts. Collateral may be pledged to cover the cost of replacing the defaulted transactions in the relevant market. and repurchase agreements. commodity contracts. This provision parallels the other provisions of the Bankruptcy Code that protect netting provisions of securities contracts.´ ± 46 Derivatives in Bankruptcy . such as receivables and book-entry securities. and to collateral that has been repledged by the creditor and securities re-sold pursuant to repurchase agreements. and to set off against obligations to return.Setoff/Netting (cont¶d) ± ³Subsection (d) amends section 362(b) of the Bankruptcy Code to protect enforcement. securities contracts. commodity contracts. free from the automatic stay. commodity contracts. of setoff or netting provisions in swap agreements and in master netting agreements and security agreements or arrangements related to one or more swap agreements or master netting agreements. Subsection (d) also clarifies that the provisions protecting setoff and foreclosure in relation to securities contracts. repurchase agreements. repurchase agreements. or forward contracts. swap agreements. as well as other costs and expenses incurred or estimated to be incurred for the purpose of hedging or reducing the risks arising out of such termination.
R. index or other property. not rejection date). 47 Derivatives in Bankruptcy .. the claim is a pre petition claim. In any objection to timing.XI.D. (§ 562(a)). Tenn. the objecting party carries the burden of proof. damages will be measured at the earliest subsequent date or dates on which values can be determined in a commercially reasonable manner. 2004) (Damages for rejection of a warrant agreement to purchase debtor¶s common stock will be based on the value of the shares on the petition date. Inc. (§ 562 (c)) ± ± ± Measure of Damages: ± ± could be costs to replace the derivative. 740-41 (M. Damages Relevant Date ± Prior to the 2005 amendments was not clear whether it is the petition date or termination date. If there is no way to determine the values involved in a commercially reasonable manner. (§ 502(g)(2)) Not clear which date controls (liquidation. ± Bank of Montreal v. (§ 562 (b)). 309 B. 738. termination or acceleration date. termination or acceleration) if values shifted in between these dates. The 2005 amendments to Bankruptcy Code provide that the measure of damages is determined on the earlier of rejection of the agreement or the liquidation. American Homepatient. or difference between derivative price and market value of the underlying security.
D. 1989) (Market Quotation method is a reasonable method of determining damages even though claimant did not actually enter into a replacement agreement).S. The commonly used ³Market Quotation´ measure of damages under the 1992 ISDA Master Agreement (Multicurrency-Cross Border) does not use the lowest bid.Mcorp. v.N. 1992 U. LEXIS 21223 (S. 1992). Dist. 10. but uses either (i) the average of the two middle bids obtained from four reference market makers or (ii) the middle bid of three bids so obtained. Ct. v. Super. Drexel Burnham Lambert Products Corp. ± ± 48 Derivatives in Bankruptcy . at *6-*7 (Del.Damages (cont¶d) Swaps: ± The practice (no longer common) of denying a defaulting swap counterparty the termination value of a swap transaction (known as the ³first method´) was held enforceable in Drexel Burnham Lambert products Corp. Nov. Midland Bank PLC. Feb. 1989 WL 16981. 23. costs and loss of the bargain incurred by a counterparty) ± expressly includes the cost of unwinding hedges related to the terminated swap agreement. First method was eliminated in the 2002 ISDA Master.Y. The other commonly used measure of damages under the ISDA Master Agreement ± ³Loss´ (essentially losses.
3d 1039 (9th Cir. 543-51 (S. 69 (Bankr.´ It involves a determination as to losses and costs incurred and gains realized in replacing the terminated transactions or providing the economic equivalent of the material terms of these transactions. Del. UCC Article 9 Inapplicable: Article 9 requirement that the secured creditor liquidate collateral in a commercially reasonable manner inapplicable to protected repos. D.R.Damages (cont¶d) ± Damages under interest rate swap agreements are not subject to disallowance as unmatured interest under § 502(b)(2). 2003). 537.D. TXU Electricity. 2008). 249 B. 322 F.  NSWSC 1169. refused to compel TXU to designate an early termination date and refused to allow Enron to ³disclaim´ the swap because the effect of which would be to re-write the terms of the swap.R. refuses to designate an early termination event because it is ³out of the money´ at the time of bankruptcy (which prevents the bankrupt from getting the termination payment it would have been entitled to)? The New South Wales Supreme Court in Enron Australia v. aff¶d. What if the non-defaulting party under a swap in which the parties chose not to declare automatic termination upon bankruptcy event. ± ± ± 49 Derivatives in Bankruptcy . Cal. 388 B. Thrifty Oil Co. 2000). Lehman Brothers. The 2002 ISDA Master adopts a single measure of damages²the ³closed out amount. American Home Mortgage v. held the contract provisions enforceable..
deleted the reference to margin and settlement payment and apply to any transfer made ³in connection with a repurchase agreement. stockbroker. ± ± ± 50 Derivatives in Bankruptcy . or in connection with a swap agreement but does not reference margin or settlement payments. (f). protect from avoidance transfers that constitutes margin or settlement payments made by. dealing with margin or settlement payments to a commodity broker.´ Note that § 546(g) dealing with swaps. it is not clear that it requires that the margin or settlement payments referred to be made under a qualified contract. or transfers made in connection with qualified contracts. apply to transfers made under qualified contracts. forward contract merchant. financial participant or securities clearing agencies. to or for the benefit of a master netting agreement participant (defined in § 101(38B) as an entity that any time before the petition is a party to an outstanding master netting agreement with the debtor). exempt a transfer under. Avoidance Actions Exception Except for actual fraudulent transfers. ± While the 2006 amendments provide that § 546(e).XII. except if such transfer is avoidable under a contract covered by the master netting agreement. or for the benefit of a protected party. financial institutions. to. The 2006 amendments to § 546(f) dealing with repos. (g). § 546(e). The 2005 amendments added § 546(j) protecting from avoidance a transfer made by. in connection with a master-netting agreement.
M. respectively. 220 B. prior to any trading. Margin Payments ± Margin payment for forward contract purposes is defined in section 101(38) of the Bankruptcy Code as a "payment or deposit of cash.D. 367 B. initial margin. Farmer's Commodities Corp. 1998) ("The term 'margin payment' is not broad enough.R.C. is not a margin payment. Cal.D. however. at a time when no trades took place and no deficiency exists. D. C. 229. No. a security or other property. (In re Yeagley). 1996) ("[T]he terms 'margin payments and 'settlement payment' do not include all payments into a margin account. 909 (Bankr. 402. 101-484. (C). Rep.N. For example.S. that is commonly known in the forward contract trade as original margin. 935. Ga.Avoidance Actions Exception (cont¶d) Protection is supplemented by § 548(d)(2)(B). or variation payments. 51 Derivatives in Bankruptcy .R..C.´ H. constituted a margin payment. 2007) at *5 (³Margin payment is a broadly construed term and includes any payment by a debtor to pay for the purchase of securities or to reduce a deficiency in a margin account. to encompass payment made to open a margin account before any trading is conducted or any deficiency incurred.A. 405 (Bankr. Kan. Biggs v." Sections 741(5) and 761(15) of the Bankruptcy Code contain similar definitions of margin payment for the securities trade and commodities trade. (In re David). 223. Inc. 940 (Bankr."). ± Legislative History: ³[T]his provision exempts these types of customary setoff payments in the forward contract trade from scrutiny as to whether they are actually fair value for the amount used. including mark-to-market payments. In re Stewart Finance Co. Smith Barney. reprinted in 1990 U. 193 B.R.´) ± At least two courts suggested that an initial payment made to open a margin account. at 7 (1990)."). maintenance margin. or variation margin. (D) providing that protected parties that receive margin or settlement payments are deemed to have provided value.R. the court would be hard-pressed to find that a payment made to open an account with a stockbroker. Seitter v.
Wieboldt Stores. 1996) (held. 198 B. 352.R.P.D. 356-60 (Bankr. Tex.3d 604. 131 B.R. D. payment must implicate the "system of intermediaries and guarantees" of the securities industry "wherein parties use intermediaries to make trades of public stock which are instantaneously credited." Section 741(8) of the Bankruptcy Code contains a substantially similar definition of settlement payment for the securities trade. 491-95 (Bankr. Zahn v. in the securities context. 983 (Bankr. 527 (Bankr. or any other similar payment commonly used in the forward contract trade. 1996) (LBO is essentially a private transaction. 367 B. 675-76 (D.D. 98 F. v. 1996) (LBO).R. Norstan Apparel Shops. private stock sale not protected by the Bankruptcy Code because it "lack[s] the impact on the public market trading systems that Congress intended to protect").D.D. ± 52 Derivatives in Bankruptcy .R. 2005) (redemption of equity in an LLC run as a ponzi scheme. 655.R. 195 B. a net settlement payment. Mass. 656. Healthco. Ill. 1996) (spin-off).R. 609-10 (11th Cir.. 348. 2007) (LBO of a private company). a settlement payment on account. not protected-not involving public markets and involving illegally unregistered securities). L. 9th Cir.I. have held that at a minimum the payment must involve the system of intermediaries and guarantees typical of the securities industry. Although the statutory definition is circular and not particularly illuminating. an interim settlement payment. N.R. Grand Eagle. a partial settlement payment. 971. Yucaipa Capital Fund. 218 B. Integra Realty.R. 1991) (LBO). but in which the actual exchange of stock and consideration therefor take place at a later date"). Colo. 68 (Bankr.N.Avoidance Actions Exception (cont¶d) Settlement Payments ± Settlement payment is defined in § 101(51A) for forward contract purposes as "a preliminary settlement payment. 484. D. 288 B.R. no protection from avoidance). 664-65 (N. even if interpreted broadly. E. Jewel Recovery. Gordon. Ohio 2003) (private sale through financial intermediary). 353 (N. to qualify as settlement payment for purposes of statute. Grafton.Y. Inc. 196 B. 321 B. 1998) (court held that. Munford. courts. a final settlement payment.
R. W. 1999) (LBO). 451 (Bankr. 2007 WL 4557855 (W. S. 575.Y.D. Hechinger. 83-89 (D. Mich.. where the notes were not redeemable or prepayable pursuant to their terms and the offering document (and also at significantly above market value) are not common and thus do not qualify). Quality Stores. 2008) (LBOs of privately held companies). 341 B. 359 B. Corp. 952 F. Mich.. IT Group. Del. 671. 97 2006 (Bankr. S. Loranger Mfg. 274 B. ± ± ± 53 Derivatives in Bankruptcy . v. 1989) (Repo).R. does not qualify.D. 318 (Bankr. qualifies as a settlement payment.2d 742.. 355 B. 2007 (private LBO). Dec. 1991) (LBO).R. 2007) (private LBO).D. Enron Corp. 71. aff¶d 388 B. Mich.R. 583-86 (Bankr. Enron. 2005). 325 B. Resorts Int¶l. Bevill. 629 (Bankr. 2005) (Prepayments made to retire short terms CP notes. QSI Holdings.R. 750-53 (3d Cir.Avoidance Actions Exception (cont¶d) ± Other cases refuse to deny protection simply because the transaction does not impact the public markets or involve illegal securities law transactions. 2006). 2002) (LBO).N. 878 F. Payment made contrary to the applicable contractual terms. 2007). D.Y.2d 1230. Plassein Int¶l Corp.D.3d 505. Kaiser Steel.D. 324 B. 21. 514-16 (3d Cir. W. D. aff¶d.R. Pa. Del.R. Del. Bresler. 46 (D. 181 F.D. A CLO¶s sponsor¶s purchase of CLO notes to provide credit support and to prevent investors¶ losses through financial institutions and stockbrokers. Del. 366 B.R. Applies to ³private´ stock redemption. 685-86 (Bankr. 2006) (private stock sale transaction). 2006). Int'l Finance Corp. W. 1236-37 (10th Cir.N.
294 F. at 165-66 (payments made under forward contracts were settlement payments for forward contract purposes although their avoidance "would have no impact on the securities system"). a settlement payment includes a "similar payment commonly used in the forward contract trade. 54 Derivatives in Bankruptcy .R. 548. 310 B.R. ± The Fifth Circuit expressed its agreement with precedents outside the securities area that the term should be interpreted broadly. qualified as settlement payments under section 101(51A) as "a similar payment commonly used in the forward contract trade").R. 336 B.R." Olympic Gas. D. Borden Chemicals. 563 (Bankr. 294 F. 2004) (setoff of claims arising from termination of forward contract is a settlement payment). 229 (Bankr. N. 258 B. Tex. 369 B. 214. 2006) (payments made under the contract following delivery of gas are settlement payments).3d at 742.Avoidance Actions Exception (cont¶d) These authorities are probably inapplicable to forwards and swaps as these transactions are typically private.R. at 166 (net payments exchanged monthly among the parties on account of forward contracts for natural gas.3d at 742. and in the context of forward contracts does not require the payment to be made on a financial derivative. aff'd. at 898 (refusing to treat a forward gas supply agreement as a swap agreement because it was a private supply agreement with no impact on financial markets). aff'g 258 B. Mirant. Olympic Gas. Del.D. The legislative history to section 101(51A) as well as the section itself state that. But see National Gas Distrib. as to forward contracts. under on-market transaction or to be cleared or settled through a centralized system..
2d 322. may not qualify.R.D.8 (Bankr. 971 F. Ill. 477 (Bankr. Bresler & Schulman Asset Management Corp. Interbulk.Y. Payment obtained through attachment did not qualify as a protected payment under a swap under the pre-2005 amendments version of section 546(g).R. Bevill. 2004) (forward). 390 B. 240 B. Payment for gas purchased after initial failure to pay and collection activities by the seller. 55 Derivatives in Bankruptcy . 1989) (interpreting the term settlement payment to fit the settlement process applicable to repurchase agreements).R. & Loan Ass'n. 316 B. S. 481 (Bankr.2d 742. 1997) (reverse repo). 201 n. but does qualify post 2005 amendments. 195. 2008).Avoidance Actions Exception (cont¶d) Courts applied this definition to repos. and the return of additional margin posted in connection with the repo. v. may not qualify. Tex. 595 (Bankr. 2004) (forward).D. is a settlement payment). 316 B. N. Casa de Cambio. 326 (9th Cir. 993 (9th Cir. 751-53 (3d Cir. Spencer Sav. Resolution Trust Corp. N. N. Exercise of setoff to recover erroneous payments. (In re Comark). Tex.3d 991. GPR Holdings.R. 1992) (party's withdrawal from a repurchase transaction. 1999). 878 F. 114 F.D. Jonas v.N. Aurora Natural Gas.D. Hamilton Taft.
98 B. v.. Section 105 Allows courts to issue any order to carry out the provisions of Bankruptcy Code. See Thomson McKinnon Sec. except that courts may temporarily enforce the stay or prevent close-outs of protected transactions to enable the courts to decide whether all of the necessary elements are satisfied. Ariz. 20-24 (Bankr. 1989) (staying broker-dealer from liquidating repurchase agreement to enable the court to first determine whether the contract was in fact a repo). 56 Derivatives in Bankruptcy . D.R. Inc. It would appear that § 105 should not be used to override the specific provisions protecting safe harbor transactions.. 2.XIII. Residential Resources Mortgage Invs.
aff'd.XIV. 800-05 (Bankr. 2003). Cal. Cal.R. 212 B. rather than based on their form. 249 B. Repos have the economics of a secured loan and carry a significant recharacterization risks. Courts seem less than willing to recharacterize sophisticated financial products.3d 1039 (9th Cir.. Recharacterization Issues Bankruptcy courts generally have the power to recharacterize transactions based on their economic substance.D. 57 Derivatives in Bankruptcy . Md. In re CRIIMI MAE. 150-53 (Bankr S. 2000) (same).R. Inc. 2d 275. 1998) (question of fact whether a repo is "true" repo or disguised financing). 322 F. 1997).R. 147. Supp. In re Thrifty Oil Co. 796. based on a counter-party's post-hoc view as to their alleged economic substance. Courts in the Ninth Circuit refused to recharacterize a swap and floating rate loan as one transaction representing in substance a fixed rate loan. 537 (S. L.P. Bear.N.Y.D. 251 B. Stearns & Co. Granite Partners.D. v. 298-99 (S. 2000).. D. 17 F.. aff'd.
U. 844-45 (Bankr. Washington Bancorporation. at *20 (D. 921 (Bankr. 256 (2d Cir.XV. Montgomery Ward. 920.R. D. D. 91 B. Wireless."). 272 B. . 341 B. see also NationsRent.3d 251. 58 Derivatives in Bankruptcy .R.D. D. then any holder of a note issued by the debtor or an affiliate may be subordinated.R. 639. 1996). 2006).N. swap.C. 1988).. . § 510(b) does not apply to a claim seeking recovery of an unpaid debt due upon a promissory note. Mo. If that what it means. Del. Purchase includes claims for the failure to issue securities or options under employment agreements or termination agreements. 642 (Bankr. such claims represent the bargained for sales price. Mar. 384 B. 836. 1991) (³[T]he term 'damages' implies more than a simple debt . 2008) (make whole claims not subordinated. Mandatory Subordination Issues Section 510(b) of the Bankruptcy Code requires mandatory subordination of damage claims arising from purchase of sale of a security of the debtor or its affiliates. 1996 WL 148533. 461 F.R.R. ± ± Technically.H. 19. the investors filed claims based on the unpaid amounts outstanding on the debtor's notes. Id. 2008 WL 114864 (Bankr.S. repos or securities contracts where the underlying security is a security of the debtor or its affiliates.D. This section may subordinate claims under forwards. a result that makes no sense as held by Blondheim. at 640. not damages). sale or issuance of the debt instrument. Med Diversified. Damages: It is not entirely clear what the term means. the rejection of any agreement is a breach of the contract which gives rise to damages.´). Del. D. Enron. But. at 151. in that case. 713. Wyeth. Del. 718-18 (Bankr. 2001) (absent an allegation of fraud in the purchase. W. 134 B. . 2008).
231-32 (Bankr.Mandatory Subordination Issues (cont¶d) ± In other contexts.J. 1999) (breach of best efforts to register securities. 88 (D. NAL.R. 2002) (debtor's refusal to repurchase shares. A related question may be whether a claim resulting from the acceleration of a safe harbor contract upon bankruptcy filing. 283 B. Fla.R.D. S. S.N. 237 B.D. If the contract by its terms refers to it as a credit event type default." but generally. constitutes a claim for damages resulting from a breach of the safe harbor contract. Enron. question is whether a change in the formulation would make a difference. breach of contract yields claim for damages).R. 613. 141 (Bankr. 2003) (claimant who sold shares in a third company to the debtor in exchange for debtor's cash and stock was subordinated. Vista Eyecare. N. the argument for it constituting a breach and damages is straightforward. Ga. the investment was an equity investment and the damages resulted from the debtor's failure to pay under the stock purchase agreement). damages can result either from tort type claim or from a breach of contract. courts did apply the more comprehensive meaning of damages. ± 59 Derivatives in Bankruptcy .D.N. 341 B. 2006) (claims of employees on account of their stock options subordinated whether framed in terms of fraudulent inducement.Y.R. damages equal the repurchase price minus shares' value). 225. 288 B. Response USA. ± Section 510(b) does not mention the term "breach. 627-28 (Bankr. Breach. fraudulent retention or breach of contract).
301 B.Mandatory Subordination Issues (cont¶d) Nature of Risk Assumed by Investors. however. or the re-sale of the security back to the debtor is mandatory through one mechanism or another. 257 B. D. they were equity investors). claimant's intent to fix the value discounted. however. except that the underlying property used in the transaction is debtor's or affiliate's securities.R. 2000).e. Betacom. Relying on the legislative history.R. such claim would be subordinated under section 510(b). ± ± Acknowledging that section 510(b) is not a model of clarity. and in effect is not taking a position of an equity investor. Telegroup. D.3d at 142 (dismissing claimants' argument that they didn't intend to retain their investment. Del. 281 F. 150. 2002). Telegroup. 2004) (refusing to subordinate claim based on a judgment entered for breach of employment agreement to issue stock. 138 (3d Cir.R. 306 B. 2003 (same).R. 281 F.e. holding no difference between a judgment and equity exchanged for notes) It is arguable. section 510(b) would not be applied. The literal language of section 510(b). 508 (Bankr. Einstein/Noah Bagel. Alta+Cast. U. D. Some courts. it was held to be ambiguous. D. Ariz. held that when a former equity¶s holder¶s claim is based on a money judgment for the value of the shares. 2008) (money judgment on account of value of shares due under breached employment agreement subordinated). i. i. and had the ability not to sell). 778. at 625-28 (put option on debtor's common stock subordinated. 2001) (claims of shareholders resulting from merger agreement subordinated. forwards and securities contracts. 2004) (section 510(b) does not apply when notes are issued in exchange for equity). they covenanted for the ability to register the stock so they can freely sell it enjoying any appreciation. Mobile Tool. Del. that when the debtor's or its affiliate's securities are used as the underlying property in swaps. Del. while if the claim was converted pre-petition to a debt instrument. 782 (Bankr. the non-debtor party is not intending to. it had the right not to put and the debtor didn't have a call).R. the non-debtor party may take the risk of a creditor. Del.3d 133.S. 384 B. Wireless. especially in Delaware. did the claimant take an equity or creditor type risk. no rewards upon stock's appreciation or loss upon failure. courts attempt to capture the risk associated with the transaction. 283 B.3d 823 (9th Cir. 240 F. contra Cybersight. Vista Eyecare.. 152-53 (Bankr.R. is broad and the recent trend is to apply it liberally. 306 B. That may be especially so if the debtor has a call against the put. 2004 WL 2713098 (D. 499. ± ± 60 Derivatives in Bankruptcy . 713 (Bankr.
D. 2001) (claims of shareholders of the parent with respect of the subsidiary stock subordinated only to subsidiary's creditors. VF Brands.R. Del.R. in bankruptcy a debtor may not repurchase its own equity securities and thus the claim can be disallowed in its entirety under section 502(b)(1) of the Bankruptcy Code. D. 264 B. "installment" tests). 725 (Bankr. 61 Derivatives in Bankruptcy . L&H. Affiliate's Securities: Very few cases have addressed the application of section 510(b) in such a situation. at 620-25. 275 B. 336 (Bankr. Vista Eyecare. ± A subsidiary issue may involve a determination whether (i) the underlying corporate obligation to repurchase or acquire its equity securities was valid when made and thus valid or not at the time an actual payment must be made ("outset" vs. 2002) (claims against parent resulting from sale of its subsidiary stock subordinated to unsecured creditors of parent). not parent's creditors).R.Mandatory Subordination Issues (cont¶d) Corporate Law Principles: If the contract is deemed to be a contract for the debtor to purchase its own equity securities. The VF Brands court gave to this notion a short shrift by stating that section 510(b) makes no distinction between the debtor's and affiliates' stock. 283 B. Del. ± An issue that has not been explored is what role should the rationale for section 510(b) play in this context. and (ii) how do bankruptcy courts treat the applicable state law.
No: Enron Corp. Del. 592 (D. 336 F..R. 592 (D. 62 Derivatives in Bankruptcy . 95-98 (D. 291 B. even if creditors assigned the claims to the trustee).N. Del. 2002) (unjust enrichment).XVI. 2005).R. § 546(e) is inapplicable as it applies to trustee/debtor in possession).3d 94. But See Bennett Funding Group. 2003) (Trustee may not pursue claims belonging to creditors. a prohibited distribution to shareholders ± is state law preempted? ± ± ± Yes: PHP.R. 2003) (illegal redemption). 857 (Bankr. v. Del. i. 102 (2d Cir. 274 B. Can a chapter 11 plan avoid § 546? ± ± Yes: PHP. 291 B. Maybe Not: Kaiser Steel.R. Hechinger. 323 B. 952 F. 2003) (creditors assigned claims to liquidating trust. 71. Preemption/Chapter 11 Plan Conflict If the safe harbor transaction is in violation of a state corporate law provision.e.2d 1230. Bear Stearns Int¶l Ltd.D. 1241 (10th Cir.Y. 1991).. S.
applicable. ± Section 103(a) provides that chapters 1. The 2005 amendments abolished § 304.A. 2001) (§ 560 not applicable to a swap entered with Argentinean debtor). 63 Derivatives in Bankruptcy . 556. Ancillary proceedings are neither as they are governed by § 304. ± ± The 2005 amendments to the Bankruptcy Code make these provisions. adopted new chapter 15 entitled Ancillary and Other Cross-Border Cases. In the Orange County case several counterparties closed out positions. 104 (Bankr. 11.N.R. 3 and 5 apply in chapter 7. 12 and 13 cases.XVII.D. of Directors of Compañia General de Combustibles S. 559 and 560 were not incorporated into chapter 9 (municipal bankruptcies) under § 901(a). 269 B. as well as new sections 561 and 562. in appeared that these sections were not applicable to an ancillary proceeding. Prior to the 2005 amendments. S. Applicability to Chapter 9/Ancillary Proceedings Prior to the 2005 Amendments. Accord Petition of Bd. Orange County sued one debtor (Namura) as a test case but withdrew its complaint.Y. sections 555.. and 559-562 apply to cases under chapter 15. Section 103 was amended to provide that sections 555557.
The option may be settled by physical delivery of Bullion in exchange for the strike price or may be cash settled based on the difference between the market price of Bullion on the exercise date and the strike price. Swaine & Moore. On the Enforceability of the Termination. Bullion swaps include cap. Bullion Option. collar. Cravath. Bullion Swap. A transaction in which one party grants to the other party (in consideration for a premium payment) the right. or floor transactions in respect of Bullion. at a specified strike price. The bond option can be settled by physical delivery of the bonds in exchange for the strike price or may be cash settled based on the difference between the market price of the bonds on the exercise date and the strike price.XVIII. Bond Option. all calculations are based on a notional amount of the given currency. Glossary of Commonly Used Terms* Basis Swap. with both rates reset periodically. A transaction in which one party grants to the other party (in consideration for a premium payment) the right. A transaction in which one party pays periodic amounts of a given currency based on a floating rate and the other party pays periodic amounts of the same currency based on another floating rate. 1998). but not the obligation. Close-out and Multi-branch Netting Provisions of the 1987 and 1992 ISDA Master Netting Agreements (March 12. A transaction in which one party pays periodic amounts of a given currency based on a fixed price or a fixed rate and the other party pays periodic amounts of the same currency or a different currency calculated by reference to a Bullion reference price (for example Gold-COMEX on the New York Commodity Exchange) or another method specified by the parties. but not the obligation. to purchase (in the call of a call) or sell (in the case of a put) a specified number of ounces of Bullion at a specified strike price. to purchase (in the case of a call) or sell (in the case of a put) a bond of an issuer. * 64 Derivatives in Bankruptcy .
a troy ounce. "Bullion" means gold. and in the case of silver. A collar is a combination of a cap and a floor where one party is the floating rate or floating commodity price payer on the cap and the other party is the floating rate or floating commodity price payer on the floor. A transaction in which one party pays a single or periodic fixed amount and the other party pays periodic amounts of the same currency based on the excess. in the case of gold. Cap Transaction. of a specified floating rate (in the case of an interest rate cap) or commodity price (in the case of a commodity cap) in each case that is reset periodically over a specified per annum rate (in the case of an interest rate cap) or commodity price (in the case of a commodity cap). Collar Transaction. A Bullion Trade may be settled by physical delivery of Bullion in exchange for a specified price or may be cash settled based on the difference between the market price of Bullion on the settlement date and the specified price. 65 Derivatives in Bankruptcy . Commodity Forward. For purposes of Bullion Trades. among other things. The payment calculation is based on the quantity of the commodity and is settled based. on the difference between the agreed forward price and the prevailing market price at the time of settlement. A transaction in which one party agrees to purchase a specified quantity of a commodity at a future date at an agreed price and the other party agrees to pay a price for the same quantity to be set on a specified date in the future. silver. a fine troy ounce. A transaction in which one party agrees to buy from or sell to the other party a specified number of Ounces of Bullion at a specified price for settlement either on a "spot" or two-day basis or on a specified future date. Bullion Options and Bullion Swaps. if any.Glossary of Commonly Used Terms (cont¶d) Bullion Trade. platinum and palladium. platinum or palladium and "Ounce" means.
A transaction in which one party pays periodic amounts of a given currency based on a fixed price and the other party pays periodic amounts of the same currency based on the price of a commodity. to purchase (in the case of a call) or sell (in the case of a put) a specified quantity of a commodity at the specified strike price. Credit protection transactions may also be physically settled by payment of a specified fixed amount by one party against delivery of specified Reference Obligations by the other party. guaranteed or otherwise entered into by the Reference Entity. but not the obligation. Commodity Swap. A transaction in which one party grants to the other party (in consideration for a premium payment) the right. The option can be settled either by physically delivering the quantity of the commodity in exchange for the strike price or by cash settling the option. in which case the seller of the option would pay to the buyer the difference between the market price of that quantity of the commodity on the exercise date and the strike price. A credit protection transaction may also refer to a "basket" or two or more Reference Entities. The amount payable by the credit protection seller is typically determined based upon the market value of one or more debt securities or other debt instruments issued. and the other party (the credit protection seller) pays either a fixed amount or an amount determined by reference to the value of one or more loans. Some market participants may refer to credit protection transactions as credit swaps. debt securities or other financial instruments (each a "Reference Obligation") issued. all calculations are based on a notional quantity of the commodity. guaranteed or otherwise entered into by a third party (the "Reference Entity") upon the occurrence of one or more specified credit events with respect to the Reference Entity (for example. A transaction in which one party pays either a single fixed amount or periodic fixed amounts or floating amounts determined by reference to a specified notional amount. or a futures contract on a commodity. such as natural gas or gold. bankruptcy or payment default). credit default swaps or credit default options. 66 Derivatives in Bankruptcy .Glossary of Commonly Used Terms (cont¶d) Commodity Option. Credit Protection Transaction.
A transaction involving either a forward or an option where the value of the transaction is calculated based on the credit spread implicit in the price of the underlying instruments. A transaction in which one party pays periodic amounts in one currency based on a specified fixed rate (or a floating rate that is reset periodically) and the other party pays periodic amounts in another currency based on a floating rate that is reset periodically. Such swaps may involve initial and or final payments that correspond to the notional amount.Glossary of Commonly Used Terms (cont¶d) Credit Spread Transaction. A transaction in which one party pays fixed periodic amounts of one currency and the other party pays fixed periodic amounts of another currency. Payments are calculated on a notional amount. Currency Option. but not the obligation. Currency Swap. to purchase (in the case of a call) or sell (in the case of a put) a specified amount of a given currency at a specified strike price. often such swaps will involve initial and or final exchanges of amounts corresponding to the notional amounts. All calculations are determined on predetermined notional amounts of the two currencies. Cross Currency Rate Swap. A transaction in which one party grants to the other party (in consideration for a premium payment) the right. 67 Derivatives in Bankruptcy .
of a specified per annum rate (in the case of an interest rate floor) or a specified price (in the case of a commodity floor) over a specified floating rate (in the case of an interest rate floor) or commodity price (in the case of a commodity floor). A transaction in which one party agrees to pay an agreed price for a specified quantity of shares of an issuer.Glossary of Commonly Used Terms (cont¶d) Equity Forward. a basket of shares of several issuers or an equity index at a future date and the other party agrees to pay a price for the same quantity of shares of an issuer to be set on a specified date in the future. A transaction in which one party pays a single or periodic amount and the other party pays periodic amounts of the same currency based on the excess. The payment calculation is based on the number of shares and can be physically-settled (where delivery occurs in exchange for payment) or cash-settled (where settlement occurs based on the difference between the agreed forward price and the prevailing market price at the time of settlement). A transaction in which one party pays periodic amounts of a given currency based on a fixed price or a fixed rate and the other party pays periodic amounts of the same currency or a different currency based on the performance of a share of an issuer. Equity Index Option. Equity or Equity Index Swap. 68 Derivatives in Bankruptcy . A transaction in which one party grants to the other party (in consideration for a premium payment) the right to receive a payment equal to the amount by which an equity index either exceeds (in the case of a call) or is less than (in the case of a put) a specified strike price. a basket of shares of several issuers or an equity index. Floor Transaction. such as the Standard and Poor's 500 Index. if any.
A transaction which provides for the purchase of an amount of a commodity. at a fixed or floating price for actual delivery on one or more dates. such a the London inter-bank offered rate. but not the obligation.Glossary of Commonly Used Terms (cont¶d) Foreign Exchange Transaction. 69 Derivatives in Bankruptcy . among other things. Interest Rate Swap. Forward Rate Transaction. such as coal. on the difference between the agreed forward rate and the prevailing market rate at the time of settlement. A transaction in which one party grants to the other party (in consideration for a premium payment) the right. A transaction in which one party agrees to pay a fixed rate for a defined period and the other party agrees to pay a rate to be set on a specified date in the future. all calculations are based on a national amount of the chosen currency. Interest Rate Option. to receive a payment equal to the amount by which an interest rate either exceeds (in the case of a call option) or is less than (in the case of a put option) a specified strike rate. The payment calculation is based on a notional rate and is settled based. electricity or gas. A transaction providing for the purchase of one currency with another currency providing for a settlement either on a "spot" or two-day basis or a specified future date. Physical Commodity Transaction. A transaction in which one party pays periodic amounts of a given currency based on a specified fixed rate and the other party pays periodic amounts of the same currency based on a specified floating rate that is reset periodically.
structured in the form of a swap. cap. to enter into a swap with certain specified terms. cooling. debt securities or other financial instruments (each a "Reference Obligation") issued. Swap Option. guaranteed or otherwise entered into by a third party (the "Reference Entity"). 70 Derivatives in Bankruptcy . A transaction in which one party agrees to sell securities to the other party and such party has the right to repurchase those securities from such other party at a future date. Weather Index Transaction.Glossary of Commonly Used Terms (cont¶d) Repurchase Transaction. A transaction in which one party grants to the other party the right (in consideration for a premium payment). A transaction in which one party pays either a single amount or periodic amounts based on the total return on one or more loans. collar. between two parties in which the underlying value of the transaction is based on a rate or index pertaining to weather conditions. but not the obligation. dividend and fee payments and any appreciation in the market value of each Reference Obligation. and the other party pays either a single amount or periodic amounts determined by reference to a specified notional amount and any depreciation in the market value of each Reference Obligation. floor or some combination thereof. In some cases the swap option may be settled with a cash payment equal to the market value of the underlying swap at the time of the exercise. A transaction in which one party transfers securities to a party acting as the borrower in exchange for a payment or a series of payments from the borrower and the borrower's obligation to replace the securities at a defined date with identical securities. which may include measurements of heating. precipitation and wind. calculated by reference to interest. Securities Lending Transaction. Total Return Swap. A transaction.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.