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
at S1416. forward contracts. Public Securities Association. H261 (daily ed. 1982)." 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. 9. 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. Id. I am not aware of any opposition to the legislation. Id. Feb. New York Clearinghouse Association. 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. 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.Public Policy Concerns (cont¶d) The legislation is supported by the Federal Reserve Board. As new financial instruments have been developed. The same rationale supported the 1984 amendments. and others. at S1415. International Swap Dealers Association. 4 Derivatives in Bankruptcy . Rec. commodity contracts and repurchase agreements. Securities Industry Association." 128 Cong.
No. counterparties could be faced with substantial losses if forced to await bankruptcy court decision on assumption or rejection of financial transaction agreements.R. at 1 (1982).´ H. 5 Derivatives in Bankruptcy . 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. where the markets change gradually. Id. ± S. Because of the structure of the clearing systems in these industries and the sometimes volatile nature of the markets. No. . . the financial markets can move significantly in a manner of minutes. at S1417. 98-65. 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. Rep.Public Policy Concerns (cont¶d) As Congress recognized at the time of the 1982 and 1984 amendments. Unlike ordinary leases or executory contracts. 97-420. 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. ± ³The commodities and securities markets operate through a complex system of accounts and guarantees. The markets will not wait for a court decision . . Rep.
2005. Rep. 2006.Public Policy Concerns (cont¶d) ± ± H. at 1-4 (1990) contains description of importance and vulnerability of swap and forward contract markets. Pub. 101-484. L. 2005. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. No. makes certain technical amendments and clarifications to the various provisions dealing with derivative and financial contract transactions. Pub. ± 6 Derivatives in Bankruptcy . 109-8.R. The Financial Netting Improvements Act of 2006. amends the Bankruptcy Code effective October 17. signed into law on April 20. 109-390. and contains provisions expanding the protections for derivative and financial contract transactions. signed into law on December 12. L.
qualified foreign government securities (representing a direct obligation of. including related terms provides for a transfer. eligible bankers¶ acceptances. a master agreement that provides for an agreement or transaction referred to above.S. an option to enter into an agreement or transaction described in (i) or (ii).S.II. of certificates of deposit. or that is fully guaranteed by. mortgage related securities (as defined in Section 3 of the Securities Exchange Act of 1934). ± ± ± any combination of agreements or transactions described in (i) and (iii). with simultaneous agreement by transferee to transfer the instruments back. mortgage loans. or on demand. or are fully guaranteed by the U. securities that are direct obligations of. the central government of a member of the organization for Economic Cooperation and Development). Repurchase Agreements Defined in §101(47): ± an agreement. agency. at a date certain not later than one year after the transfer. 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. together with all supplements to any such master agreement. or 7 Derivatives in Bankruptcy . against transfer of funds by the transferee. or U. interests in mortgage related securities or mortgage loans. without regard to whether such master agreement provides for an agreement or transaction that is not a repurchase agreement under this paragraph. against transfer of fund.
R. is the initial buyer. 2008) (notes secured by mortgages rated BBB by S&P and Baa2 by Moody¶s. American Home Mortgage v. measured in accordance with section 562.Repurchase Agreements (cont¶d) ± any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in clause (i). Applies to reverse repos: A Repo in which the broker-dealer rather than being the initial seller. or (iv). D. 8 Derivatives in Bankruptcy . 69 (Bankr. Lehman Brothers. 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. (iii). 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. (ii). do not meet the definition). but not to exceed the damages in connection with any such agreement or transaction. Del. 388 B. Does not include a repurchase obligation under a participation in a commercial mortgage loan.
Bankers¶ acceptances are essentially thirdparty obligations which the bank committed to honor. Agency? ± Legislative History: Intended to cover entities whose obligations are eligible for purchase by federal reserve banks. pursuant to resolutions of the Board of Governors of the Federal Reserve System. American Home Mortgage v. Eligible bankers¶ acceptances: Probably refers to bankers¶ acceptances authorized under § 13(7) of the Federal Reserve Act.S. lists 20 principal type obligations that qualify.108 (2005). § 201. What is a U. codified at 12 C. 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. ± 9 Derivatives in Bankruptcy .F. supra.R. Board of Governors¶ interpretation FRRS 2-040.Repurchase Agreements (cont¶d) Interest in mortgage loans: Notes secured by mortgage loans qualify. Lehman.
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 $1.000. repurchase agreement.000 in notional or actual principal amount outstanding on any day during the15month period prior to the petition date. or forward contract. or a clearing organization (as defined in section 402 of the Federal Deposit Insurance Corporation Improvement Act of 1991). commodities contracts.000.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. A repo is essentially a current sale and a forward contract.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. at the time it enters into a securities contract. 10 Derivatives in Bankruptcy . or has gross mark-to-market positions of not less than $100. has one or more securities contracts. forward contracts. repos. commodity contract. or at the time of the date of the filing of the petition. swap agreement.000.
N. Del. D. D. 503 (Bankr.P.R..4 (Bankr. but under the plain meaning cannon of interpretation a contract that meets the statutory definition will be treated is such.. Bevill. American Home Mortgage Corp. 379 B. 802-05 (Bankr. 796. 503 (Bankr. 165 (Bankr. 11 Derivatives in Bankruptcy .R. 124 B. 9th Cir. 251 B. 47 (B. 1998). 134 (1994) (loans for state tax law purposes). 23 B. ± ± Courts are split on whether non-qualified repos are sales or loans. Lowenstein.Y. ± ± Undecided: CRIIMI MAE. Bressler. Bear Stearns. Caylon NY Branch v. 806. Lombard-Wall. 1982). Del. 379 B. 123. Supp. 145 B. 785 F. S.J. 809 n.2d 38. 1994) (loans for insurance law purposes). Comark.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. 578-80 (7th Cir. 25 F. Loans: RTC v. 1991). 2000) (whether a repo is a sale or a loan is a factual question. ± Sales: Granite Partners v. 67 B. 513 U. 300-04 (S.D.D. 1986). SEC v. 1986).R. Servicing Rights: Not protected and not subject to the safe harbor provisions even if included in the repo agreement. 596-98 (D. 2008).D.N.. Cal. Aetna. Drysdale Securities. 1992). Nebraska Dep¶t of Revenue v. C.3d 570. aff¶d. Caylon NY Branch v. finding the standard repo form to be ambiguous on this point). 2008). 41 (2d Cir. 17 F.R.N.R.R. D.Y. Md.A. 2d 275.S.R. American Home Mortgage Corp. 557.
article. 565 n. master agreements. deposit. and security and credit enhancement agreements. or any other similar agreement. N.D. maturity date of more than 2 days after the contract is entered into (Mirant. 310 B. Borden Chemicals. reverse repos.III. D. with damages subject to § 562. of a commodity. 219 (Bankr. allocated or unallocated transaction. Forward Contracts Defined in §101(25): ± ± ± a contract (not a commodity contract). monthly nomination of quantities to be delivered six days before delivery date satisfies this requirement)).R. Del. ± ± ± 12 Derivatives in Bankruptcy . 336 B. 214. or product or by product thereof. loan.R. Tex. lease. swap. including any combination of agreements or transactions. sale or transfer. including. consignment. hedge. but not limited to: repos. including any similar good. maturity means the due date for commencement of performance. any option to enter into these agreements or transactions.26 (Bankr. 2004). 548. service or interest which is presently or in the future becomes the subject of dealing with in the forward contract trade. for purchase. 2006). option. Similar to the repo definition.
not ³repurchase agreement´. Financial participant (§ 101 (22A)). 2003) (holding that governmental entities are not protected.R. Entity whose business consists in whole or in part of entering into forward contracts. Which presently or in the future becomes part of the forward contract trade ± Appears to overrule Mirant.D. N. ± 13 Derivatives in Bankruptcy . as a merchant or with merchants. service or interests. ± Note: ± ± ³swap´ is mentioned as included. 319. 326-27 (Bankr. old definition used ³person´ which excludes governmental entities). Tex. not a ³swap agreement´ ³repurchase transaction´ and ³reverse repurchase transaction´ are 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).Forward Contracts (cont¶d) Protected Party ± forward contract merchant (§ 101(26)): ± ± Federal Reserve Bank. in commodities or other similar good. 303 B.
316 B. Merchant is not one acting as the end-user or producer. a forward contract merchant engaging in collection activities for gas it sold may not qualify as a forward contract merchant for settlement payment protections. sell or trades in the market. Aurora Natural Gas. 2004): a person that. 2004). it buys.R. 481 (Bankr. users of commodities and other traders opportunity to buy and sell commodities on a forward basis. merchants.Forward Contracts (cont¶d) Query: What about a ³mixed´ contract ± Party A purchase gas from Party B. Legislative history suggests that it is a commercial trading firm that offers producers. 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. 548.R. N. See 124 Cong.´) ± ± 14 Derivatives in Bankruptcy . or with. 225 (Bankr. engages in forward contract trade as a. Borden Chemicals. 310 B.D. 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. 14724-6 (daily ed. Del.R. 336 B. 214. 568 (Bankr. Sept. Tex. 2006): a party who buys and sells gas using forward contracts qualifies as a merchant. in order to profit. D.D. 7. N. Tex. Rec.
qualifies as forward contract merchant? Mirant. Del. D. A person that has only one forward contract but is otherwise a very large business. 2001). FERC.Forward Contracts (cont¶d) Query: ± ± ± A person having only one asset/contract.3d 1110 (9th Cir. 310 B.C. 548 (Bankr. And in Natural Gas. 245 F. California Power Exchange Corp.R. v. 21819 (Bankr.D. 2004).R. Borden Chemicals.R.3d 1042 (9th Cir. v. Davies. Tex. 548 ± probably not. 2006). 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. 214.L. L. 310 B. 548 ± probably not. Duke Energy Trading & Marketing. 15 Derivatives in Bankruptcy .R. 267 F. which is a forward. But ± entities that do not qualify as forward contract merchants could still qualify as financial participants. qualifies? Mirant. Mirant. 2001). N. 336 B. 310 B.
certificates of deposit.Y. but the sub-chapter applicable to stockbroker liquidation): ± ± Contract. mortgage loan.R. including an option to purchase or sell any such security. or option on any of the foregoing. 2005). securities. S. Securities Contracts Defined in § 741(7) (not part of the regular chapter 7. group or index of securities. or interest therein (including any interest therein or based on value thereof).N. 325 B. for purchase. mortgage loan or any interest in a mortgage loan.IV. certificate of deposit. group or index.D. group or index of securities. interest. certificate of deposit. the guarantee. or mortgage loans. option entered on a national securities exchange relating to foreign securities. ± ± 16 Derivatives in Bankruptcy . including by novation. or option (whether or not such settlement is in connection with any agreement or transaction referred to in the definition of a´securities contract´). or mortgage loans or interests therein (including any interest therein or based on the value thereof). certificates of deposit. 671. mortgage loans or interests therein. ± of a security. by or to a securities clearing agency of a settlement of cash. sale or loan (query-is redemption/prepayment in full of debt instruments qualifies as a purchase? Not clear. Enron. 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´). 686 (Bankr.
or any total return swap transaction coupled with securities sale transaction. sale or repurchase obligation under a participation in a commercial mortgage loan. Similarly to forwards and repos. does not include purchase. the definition includes any combination of agreements or transactions.Securities Contracts (cont¶d) ± ± ± ± ± any margin loan. any other agreement or transaction that is similar to an agreement or transaction referred to in the section. with damages subject to § 562. any prepaid forward securities transaction. Extension of credit for the clearance or settlement of securities transactions. option to enter into these agreements or transactions. Loan transaction coupled with securities collar transaction. master agreements with all supplements and security and credit enhancement agreements. ± 17 Derivatives in Bankruptcy .
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
Securities clearing agencies (§ 101(48)) ± 21 Derivatives in Bankruptcy . Stewart Finance Co. 2007 WL 1032263 (Bankr. from of for such person¶s account. Repos for notes secured by mortgage loans qualify both as repurchase agreement and a securities contract. 1997). Residential Resources.R. 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)). 98 B.3d 991 (9th Cir. Ga. American Home Mortgage v. Del.. 2. D. 1989). M. American Home Mortgage v.Securities Contracts (cont¶d) Non qualified repos for securities. Ariz. Slatkin. Lehman Brothers. 388 B. 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.D. 69 (Bankr. 525 F. qualify as securities contracts. 23 (Bankr. The legislative history to the 2005 amendments also states the same intent.R. and the 2006 amendments amended section 741(7)(A) to so provide. supra (Lehman Brothers is a stockbroker. 816-19 (9th Cir. relying on its 10-Q). D.3d 805. 114 F. Lehman Brothers. 2008) (analyzing ³customer´ and ³stockbroker´). Hamilton Taft.
D. 98 F. 21. such customer While customer is not defined. with a view to sale. Private LBO transaction).3d 604. 22 Derivatives in Bankruptcy . W.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. 610 (11th Cir. 2007 (Yes. Dec. or as collateral. but noting that it acted as a mere intermediary or conduit). W.D. LBO transaction. 629 (Bankr. 355 B. and the person has a claim against the broker for security received. 2006). Investment companies registered under the Investment Companies Act of 1940. acknowledging the involvement of a financial institution. pursuant to a purchase.R. Quality Stores. 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. Mich. 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. aff¶d. Mich. 1996) (No. 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.
± ± ± ± ± ± ± ± ± 23 Derivatives in Bankruptcy . forward. same day-tomorrow. or forward agreement. an equity index or equity swap. future. a debt index or debt swap. or forward agreement. Emissions swap. a commodity index or a commodity swap. future. or future agreement. and basis swap. Swaps Swap agreement is defined in § 101(53B): ± ± Any agreement (including terms and conditions incorporated by reference in such agreement). a spot.V. option future. or forward agreement. or forward agreement (is the term different from the defined term forward contract? Nat¶l Gas. future. option. weather derivative. or forward agreement. credit spread or credit swap. an interest rate swap. tomorrow-next. option. option. a weather swap. rate collar. future. cross-currency rate swap. or other foreign exchange. at 895). including a rate floor. option. a currency swap. option. 369 B. a total return. or weather options. precious metals or other commodity agreement.R. future. option. or forward agreement. or Inflation swap. future. option. rate cap. or forward agreement.
among other things. The amended definition is designed to clarify such intent. currencies. equity securities. 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. or in the future becomes. regulation or rule. the subject of recurrent dealings in the swap markets (including terms and conditions incorporated by reference therein). which included ³any other similar agreements. is presently. with damages subject to § 562. or economic consequence. extent of an occurrence. commodities.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. any option thereon. any master agreement and the supplements and any security or credit enhancement agreement. Similar to the other financial contracts. debt securities or other debt instruments. swap. or economic or financial indices or measures of economic or financial risk or value. The legislative history notes that the original definition. option or spot transaction on one or more rates. the definition includes any combination of these agreements or transactions. equity and credit derivatives. or contingency associated with a financial. future. The 2005 amendments significantly expanded the definition to specifically cover. commercial. 24 Derivatives in Bankruptcy . or other equity instruments.´ was intended to provide sufficient flexibility to avoid the need to amend the definition as the nature and uses of swaps mature. quantitative measures associated with an occurrence. and is a forward.
E. has an outstanding swap agreement with the debtor (no timing limitations). 884.R. (§ 101(22A)) Legislative history to the 2005 amendments states that agreements are not protected just because they are documented as swaps. 369 B. LLC. ± Financial Participant.C. at any time before the bankruptcy filing. National Gas Distributors.D. 898 (Bankr.N. 25 Derivatives in Bankruptcy .Swaps (cont¶d) Protected Parties ± ³Swap participants´ (§ 101(53C)): An entity that. Legislative history also states that a forward transaction could qualify as a swap even if not qualified as a forward. 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).
Commodity Broker is defined in CFTC¶s Rule 190. ± 26 Derivatives in Bankruptcy . rights. This drafting glitch was corrected in the 2006 amendments to section 101(25). ± CEA § 1a(4) defines ³commodity´ to include a list of agricultural products ³and all other goods and articles.3d 737. and all services. as to which there is a customer. including clearing organizations. contained in the sub-chapter dealing with commodity broker liquidation. Definitions are limited only to this sub-chapter. 1 Phillip McBride Johnson & Thomas Lee Hagen. as well as other specified entities. 2002) (term has the same meaning in § 101(25) (forward contract exclusion)). Commodity is defined in § 761(8) through cross-reference to the Commodity Exchange Act (³CEA´).01(f) as any person registered or required to be registered as a futures commission merchant under the CEA. at 9 (1st. Derivatives Regulation § 1. ed. 2004).´ 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.´ except for onions. intangible as well as tangible. Commodity Contracts Defined in § 761(4). except onions as provided in section 13-1 of this title. 741 (5th Cir.02.VI. are they applicable when the term is used in other chapters without cross-reference? Olympic Natural Gas. 294 F. and interests in which contracts for future delivery are presently or in the future dealt in.
which definition is incorporated by section 761(8) of the Bankruptcy Code." 27 Derivatives in Bankruptcy . a contract market or board of trade. "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 subject to the rules of. as "an individual. accepts any money. association." "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. foreign future." ± (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 property (or extends credit in lieu thereof) to margin. contract for the purchase or sale of a commodity for future delivery on. or other property. guarantee. accepts cash. in connection with such a solicitation or acceptance. or secure any trade or contract that results from such a solicitation or acceptance. or secure any trades or contracts that result or may result therefrom. 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. and (B) in or in connection with such solicitation or acceptance of orders. a board of trade outside the United States. partnership. guarantee. securities. or subject to the rules of. or extends credit to margin. "Futures commission merchant" is defined in CEA § 1a(20). corporation. a security.
R. § 23]. leverage account. standardized as to terms and conditions. "Leverage transaction merchant" is defined in section 761(14) of the Bankruptcy Code as a "person in the business of engaging in leverage transactions. a contract market or board of trade that is cleared by such clearing organization. and that is commonly known to the commodities trade as a margin account. § 31. or subject to the rules of. § 31.F.S.R.4(x) (2004). or the liquidation or rescission of any such leverage contract by or to the leverage transaction merchant. the delivery of the leverage commodity. or leverage contract.C. margin contract. or commodity option traded on. contract for the purchase or sale of a commodity for future delivery on. "Clearing organization" is defined in section 761(2) of the Bankruptcy Code as "a derivatives clearing organization registered under the [CEA]." The CFTC's regulations under CEA § 19 describe a leverage transaction as ³the purchase or sale of any leverage contract. leverage transaction. or subject to the rules of." "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. a contract market or board of trade that is cleared by such clearing organization. the repurchase or resale of any leverage contract. codified as 7 U." 28 Derivatives in Bankruptcy .4(w) (2004)." 17 C. for the long-term (ten years or longer) purchase ('long leverage contract') or sale ('short leverage contract').Commodity Contracts (cont¶d) ± (C) with respect to a leverage transaction merchant." 17 C. ± (D) with respect to a clearing organization.F. The CFTC's regulations define a leverage contract as a "contract.
a security.C. with damages subject to § 562." "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.' 'put. commodity option. . codified as 7 U." "Commodity options dealer" is defined in section 761(6) of the Bankruptcy Code as a "person that extends credit to." Section 4c(b) of the CEA regulates option trading: "No person shall offer to enter into. an 'option. or that accepts cash.³ ± The 2005 amendments expanded the definition to cover combinations of agreements and transactions. options.' 'call.' or 'decline guaranty. any transaction involving any commodity regulated under this chapter which is of the character of.' 'privilege.S. . or is commonly known to the trade as. or other property from.Commodity Contracts (cont¶d) ± (E) with respect to a commodity options dealer. § 6c(b)]. 29 Derivatives in Bankruptcy .' 'bid. regulation or order of the [CFTC] . a customer of such person for the purchase or sale of an interest in a commodity option.' contrary to any rule. .' 'offer.' 'advance guaranty. enter into or confirm the execution of.' 'indemnity.
294 F. or subject to the rules of.3d 737. 740-41 (5th Cir. 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.exchange transactions´ as futures and to ³off-exchange transactions´ as forwards). Olympic Natural Gas.¶´) (citations omitted). specified future date . . 165 (³[C]ontracts for the purchase and sale of a certain.VII. non-regulated contracts. 30 Derivatives in Bankruptcy . .R.3d at 741 (³The term µcommodity contract¶ µencompasses purchases and sales of commodities for future delivery on. . specified quantity of natural gas to be delivered at some certain. are indeed forward contracts. Distinction Between Forwards and Commodities Contracts The terms forward contracts and commodity contracts. 2002) The distinction is essentially between forwards. aff¶g Olympic Gas. a contract market or board of trade . .¶ In contrast. taken together. which are private. which are regulated by the Commodity Futures Trading Commission (³CFTC´) ± Olympic Natural Gas. 294 F.´). and futures (or ³commodity´ contracts). cover the entirety of transactions in the commodity and forward contract markets. . at 163 (referring to ³on. 258 B.
at 23-24. ± CEA § 2 grants to the CFTC exclusive jurisdiction over. The primary focus of this exclusion.´ CEA § 1a(7). but the obligation is deferred the forward contract exception applies. in historical context. Inc. 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. 581 (9th Cir. the actual transfer of the commodity is deferred.Y. 2d 175.N.02. and agreements to sell. In re Bybee. 1991). When the contract contemplates actual delivery..D. 1995) (forward contract exception did not apply because actual delivery was not contemplated). 67 F. 680 F.3d 766.´ The term ³contract of sale´ is defined to include ³sales. 772 (9th Cir.Forwards and Commodities Contracts (cont¶d) The jurisdictional focus of the CEA is not on what is a commodity. Noble Metals Int¶l. Inc. 945 F. 1998) (same). The transaction must be viewed as a whole with a critical eye toward its underlying purpose. Supp. ± 31 Derivatives in Bankruptcy . 315 (9th Cir. The ³future delivery´ component. MG Refining & Marketing.2d 573. almost everything is a commodity. ³transactions involving contracts of sale of a commodity for future delivery. v. CFTC v. 25 F.. was on a common practice in agricultural trade of making binding sales with postponed delivery. however. for the convenience of the parties or otherwise. among other things. Inc.´). Derivatives Regulation § 1.. CFTC v. agreements of sale.´ CEA § 1a(19). As a leading commentator notes: [T]he phrase future delivery eliminates transactions where an immediate sale occurs but where. but on whether the contract is a futures contract. these arrangements frequently are referred to as forward contracts.2d 309. Co Petro Marketing Group. ± There is no fixed definition for a futures contract. Knight Enters. 1982) (³[N]o bright-line definition or list of characterizing elements is determinative. 182 (S.
in a forward all of the sale terms are negotiated including price. and the customer generally has no business use for the commodity. both in theory require actual delivery.2d 582. 737 F. but futures generally are not used to obtain actual delivery and are discharged by entering into offsetting transactions while forwards often contemplate actual delivery. the use of standardized forms is significant in finding a futures contract to exist. 1984): ± ± ± forwards are privately negotiated transactions while futures are traded on an exchange.02. 32 Derivatives in Bankruptcy . both are designed to shift risks. ± ± The ultimate determination of whether a contract is a futures contract is highly factual.Forwards and Commodities Contracts (cont¶d) The differences and similarities between forwards and futures were explained in Abrams. Commodities Regulation § 1. quantity. at 32-33. 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. in a futures contract actual delivery of the commodity is not expected to occur. and in futures a clearing house is required to effect the sale. the only open term to be negotiated in a futures is the price. in forwards the terms are negotiated directly among the parties. quality and date of delivery. 590-92 (7th Cir.
the contract is among industry participants. and is not fungible with other contracts for the sale of the commodity. 2000).3d 187 (4th Cir. 2000).3d 966.C. 71 F. Olympic Gas. at 33-34 & n.. 33 Derivatives in Bankruptcy .139 (citing Petro Marketing. 67 F. In reviewing the expectation of delivery element. 294 F.N. Midland Rare Coin Exchange. CFTC v.D.Forwards and Commodities Contracts (cont¶d) The lack of expectation of delivery is the most significant factor. 166 F. Fla. v. Andersons. IBS. 113 F.3d at 772-73). Supp. Horton Farms. 2d 830. and delivery cannot be deferred forever. not the general public. 945 F. ADM Inv. the contract is a forward contract not subject to CFTC's regulation: ± ± ± it has idiosyncratic terms regarding place of delivery."). Salomon Forex. 1999). v. 971 (4th Cir. Inc. Inc.2d at 313-15. Inc. Supp. 1993). Nagel v..3d at 741. 441 (7th Cir.2d at 581 ("The contracts here represent speculative ventures in commodity futures which were marketed to those for whom delivery was not an expectation. 2d 1257.. Bybee.D.. quantity or other terms. Midland.02. 2002). 276 F. 8 F. The Seventh Circuit has refined the multi-factor test and held that if the following three factors exist. Inc. Commodities Regulation § 1.3d 308 (6th Cir. 1998). 1263 (S. Noble Metals. 2d at 1263. Tauber. 217 F. Servs. 71 F. Inc. Supp. 846 (W. courts examine the parties' objective ability to actually take delivery. CFTC v. 680 F.3d 436.. Inc. aff¶d.
a national securities exchange. 541(c)(1). or contract market designated under the CEA. or a board of trade as defined in the CEA. a national securities association. Tex. N. also known as ipso facto clauses are unenforceable in bankruptcy.R. ± Mirant. law of merchant or by reason of usual business practice.C. or resolution of their board.S.´ which includes rights provided for in a rule or by law of a clearing organization (derivative clearing organization as defined in the CEA. a derivative transaction execution facility designated under the CEA. multilateral clearing organization as defined in the FDIC Improvement Act of 1991. Ipso Facto Provisions Enforceable Generally. 2004) ± parties assumed that Southern California Gas Company is a clearing organization. bankruptcy termination. 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. Derivatives in Bankruptcy . 34 The exception requires a qualified protected counter-party. securities clearing agency).D.VIII. 11 U. 548 (Bankr. 310 B. §§ 365(e)(1). arising under common law.
Ipso Facto Provisions Enforceable (cont¶d) Courts may interfere with enforcement of ipso facto clauses in securities contracts and repos. and was made applicable to reverse repos by a letter dated June 5. 1986. In two major stockbroker failures. 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). and thereafter would lift the stay or perform the debtor¶s obligations under the transaction. including securities loans and repurchases agreements. A similar letter addressing repos was issued on February 4. 559) ± At the commencement of SIPA proceeding. ± ± ± 35 Derivatives in Bankruptcy . 1988. if it is the lender. by transferring their customer accounts and giving up their broker/dealer licenses prepetition (thus ceasing to be stockbrokers). the stockbroker entities filed chapter 11 petitions and did not become subject to SIPA proceedings. 2002. administered by SIPC. Deputy General Counsel of SIPC advised counsel to The Public Securities Associations (now known as The Bond Market Association. 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). that it has a perfected security interest in the collateral. SIPC generally seeks and obtains an order staying the close-out of at least some securities contracts. or by any statute administered by the SEC (§§ 555. By letter dated August 29. Drexel Burnham and Thomson McKinnon. ³BMA´) that SIPC would modify its standard from of order. if authorized by the Securities Investor Protection Act of 1970. 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.
at a minimum.R.M. "the right to liquidate does not constitute the right to transfer cash. 420. The 2005 amendments to the Bankruptcy Code.¶´). 556. Rep. 559 and 560 by allowing not only the liquidation. modified sections 555. but might be stayed from foreclosing on the related securities collateral. 4 (1982). securities sold by the debtor under a repurchase agreement. 441.N. forwards. In re R.J. except that it may seek to stay the foreclosure on or disposal of securities collateral pledged by the debtor. or acceleration´ of these contracts.R. the right to liquidate a commodity contract pursuant to Section 556.." H. 448 (Bankr. No. Prior to the 2005 amendments. is µthe right to close out an open position. 1987) (³As the legislative history makes clear. ± The ³liquidation´ term used is understood to mean. securities.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. or property held with respect to such contracts. 97th Cong. 2d Sess. Thus. the termination of the contract. these sections exempt from the ipso-facto prohibition the right ³to cause the liquidation of´ the securities contracts. and securities lent under a securities lending agreement. except to the extent otherwise provided in this title. As to swaps the exception applied to the right ³to cause the termination´ of the swap. Cordova Int¶l. ± 36 Derivatives in Bankruptcy . D. but also the ³termination. 77 B. commodities contracts and repos. a counterparty would be able to terminate/accelerate a securities contract (and reduce its exposure to market movements). But.
D. 1990) (Drexel prohibited from terminating its securities contract under section 555.S. Practical advice to reduce termination risks: Obtain court approval for counter-party assurance programs designed to encourage counter-parties not to terminate. Tex.Y.. 675 (S. guaranties. S.g.R. thus. See e.Y.R. for reasons wholly unrelated to the counter-party's bankruptcy.A. In re Amcor Funding Corp. Mirant.N. Nat¶l Westminster. 656. 347 (Bankr. v. 314 B. 549. Courts may refuse to allow termination of safe harbor contracts. Tex. Enron Corp. N. Mirant. 1992).D. 2004) (late termination due to reliance on being protected by bankruptcy court¶s orders allowed). but see.2d 1 (2d Cir. U. 465 (Bankr.D. a year after Amcor's filing.Ipso Facto Provisions Enforceable (cont¶d) Unless a protected party exercises its right as soon as possible after the counter-party's bankruptcy. aff'd sub nom.D.N.) 37 Derivatives in Bankruptcy . preferably on the first day it learns of the bankruptcy. (super) administrative expense priority. Az. finding that the forward contract merchant's continuing post-petition performance and failure to enforce the event of default constitute waiver. Nat'l Westminster Bank. letters of credit. 130 B. Yaeger v. 1991)..R. Courts may rely on the doctrine of waiver. courts may refuse to apply the safe harbors. 2004) (city transit authority sought to terminate cash settled swap for natural gas based on unenforceability of the agreement). 117 B. prohibiting termination.R. due to Drexel's bankruptcy rather than due to Amcor's bankruptcy). Case No. 03-46590 (Bankr. 553 (D.. 962 F. Programs may contain variety of features: Collateral. Ross. 306 B. N. could provide that any party participating waives termination right based on bankruptcy filing.
Ga. Ariz. 440.´) Accord: Calvin v. N. explaining its seemingly contrary decision.D. 977.2d 725. 824 F. (In re Adana Mortgage Bankers. Inc. Merchants Bonding Co. 319. 1 (Bankr. 310 B.D.R. the nondebtor party to the executory contract must first seek relief from the automatic stay of section 362. Those that have are split.R. 2004) (forward contract).IX.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). 964.). 190 B. 2004) (swap). 347 (Bankr. 640 n. Iowa 1985). 564 (Bankr. Inc. Tex. Computer Communications. Inc. Tex. D. ± 38 Derivatives in Bankruptcy . Ohio 1990). v. ± The only court to address safe harbor transactions. v. 314 B. 548. which exempts ipso facto clauses in certain types of contracts from the general unenforceability of such clauses. 116 B. 639. 730 (9th Cir.R. N. Mirant.R. N. Mirant. 971 (Bankr. "even if § 365(e)(2) allowed [the nondebtor party] to terminate the contract.. held the automatic stay not to stay termination. S. 2006). 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.D. N.. Wegner Farms Co. 1996).3d 238 (5th Cir. Mirant.D. Mirant. Inc. 1987) (held. (In re Wegner Farms Co.). Tex. 445 (Bankr. 303 B. 983 (Bankr. Gov't Nat'l Mortgage Corp. Adana Mortgage Bankers.D. 440 F. § 362 automatically stayed termination..R. Siegal (In re Siegal). 1980). 12 B. N. In re Cardinal Indus. 49 B. 327-28 (Bankr.R.R.
unequivocally and without qualification..). Interstate Protective Servs. The law in the other circuits is not clear. which covers Delaware. To hold that such termination is. 1992). D. 794. 876 F. (In re Alert Holdings. 152 B.N.R.S. (In re Elder-Beerman Stores. rev'd in part. Inc. Pa. 329 (Bankr. courts within the Second Circuit refer to both Computer Communications and Watts. 982 F. S. In Watts v. Inc.D. and at best an imposition of a pro forma requirement that the creditor must ask for what the Code plainly grants him.. Fugazy (In re Fugazy Express. "'where one section of the Bankruptcy Code explicitly governs an issue.D. Thomasville Furniture Indus. 1989).Y. 776 (2d Cir. provides for the termination of a contract to make a loan after the commencement of a bankruptcy case. 148 B.´ Accord In re New Town Mall. v. 17 B.2d 1090. Inc. The court held that the termination of advances did not violate stay: "Section 365(e)(2)(B). Inc. Inc. 1982) (automatic stay did not prevent ipso facto termination of contract to make loan. 194. Fin. Hous.Y. 206 B. 1992). 1096 (3d Cir.R. 609 (S.). Alert Holdings.). disagrees. 250 B.). 202 (Bankr. stayed under section 362 would be at worst anomalous.N.R. Inc. a state agency that had agreed to lend debtor money to avert foreclosure ceased advances upon commencement of case.2d 769. v. Inc. S.D.R.R. 1993). another section should not be interpreted to cause an irreconcilable conflict'"). Courts in the Sixth Circuit seem to prefer the approach of Computer Communications.D. Co. 2nd Circuit: Shimer v. 806-07 (Bankr. 326.Application of Automatic Stay to Termination (cont¶d) ± The Court of Appeals for the Third Circuit. aff'd in part. at the same time. but they have yet to address this specific issue. 154 (Bankr. 142. Slater v. ± ± 39 Derivatives in Bankruptcy . Ohio 1997). Smith (In re Albion Disposal. For example. Ohio 1998). W.D. 6th Circuit: Elder-Beerman Stores Corp.
´ Accord Mirant. 554 (Bankr. Tex. provides for the enforceability of an ipso facto clause but does not specifically mention the term "stay." The post-2005 amendments safe harbor provisions of the Bankruptcy Code.D. terminate or accelerate a safe harbor contract "shall not be stayed. 2004). 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 . which was the subject of the decisions.Application of Automatic Stay to Termination (cont¶d) Prior to the 2005 amendments.R. 548. 310 B. Section 365(e)(2). avoided. it was not entirely clear whether the Fifth and Ninth Circuits¶ rationale should apply to safe harbor contracts. specifically provides that the contractual right to liquidate. N. or otherwise limited by operation of any provision of this title or by order of the court. dealing with the enforceability of ipso facto clauses.
see also id.S. at 585 (specifically referring to forward contract merchants).(7).R. 560 (Bankr. 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.X. No." H.3d 1. 548.N. ± ± Setoff allows parties to setoff obligations arising from various transactions among them. 3 (1st Cir. Mirant. 584. §§ 362(a)(4). 583.(6). 553 Recoupment is generally held to be exempt from the stay.C. Tex. reprinted in 1982 U.R. 97-420. Exercise of setoff rights and other secured creditor¶s remedies are generally subject to the automatic stay. 372 F. 2004). 2004).A. 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. recoupment is limited to the same transaction. N. Recoupment does not apply to claims arising from post rejection/termination of the contracts. Rep.D. Holyoke Nursing. at 2 (1982). 310 B. 41 Derivatives in Bankruptcy .C.
R. The safe harbor provisions and certain sub-sections of § 362 exempt certain setoffs from the automatic stay: ± Securities contracts. Swaps: § 362(b)(17) Similar to § 362(b)(6). The 2005 amendments specifically include in the definitions of the various financial contracts. 310 B.protected parties¶ right to variation or maintenance margin payment received from a trustee under those contracts shall not be stayed. or in connection with these contracts.Setoff/Netting (cont¶d) Query: Do various confirmations under a single master deemed one transaction or several transactions? ± ± In Mirant. the parties assumed they were. Supplemented by § 560: contractual right to offset or net-out any termination values or payment amounts shall not be stayed. ± ± ± 42 Derivatives in Bankruptcy . credit enhancement and any master agreement. including any security agreement or arrangement. forwards and commodity contracts: § 362(b)(6) exempt the exercise of contractual right to setoff or net termination values. avoided or limited. similar to § 362(b)(6). Repos: § 362(b)(7). avoided or limited. or other transfer obligation arising under under. Mirant. Forwards and commodity contracts are also subject to the exemption of § 556 -. at 560. payment amounts. master agreements with all supplements thereto.
657-59 (9th Cir. 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. 43 Derivatives in Bankruptcy . notwithstanding § 553 requiring both claims to arise pre-petition. Weisberg. 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.Setoff/Netting (cont¶d) Master Netting Agreements: § 362(b)(27) allows setoffs and netting under masternetting agreements. 1998) (affirming application of § 362(b)(6) to liquidation of collateral posted prepetition as margin to cover unanswered post-petition margin calls).3d 655. or pre-petition claim.
avoided or limited by operation of the bankruptcy code or by order of a court or administrative agency. under or in connection with one or more securities contracts. commodity contracts. setoff. Section 561(a) provides that the right to terminate. or any security agreement or arrangement or other credit enhancement related to one or more of the foregoing. forwards. or net termination values. it shall be deemed to be a master netting agreement only with respect to those agreements or transactions that qualify as such. accelerate or liquidate. payment amounts or other transfer obligations arising under or in connection with one or more securities contracts.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. including any guarantee or reimbursement obligation related to one or more of the foregoing. Master netting agreement is defined as ± An agreement providing for the exercise of rights. acceleration. repurchase agreements. liquidation. ± ± New section 561(a) specifically allows cross product netting. forward contracts. repos or swaps. shall not be stayed. termination. commodities contracts. commodities contracts. swap agreements or master netting agreements. or to offset. If the agreement contains provisions relating to agreements or transactions that are not securities contracts. forwards. ± 44 Derivatives in Bankruptcy . repos or swaps. or close out.
± Weisberg. violated the stay. (7).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. 548. 559-60 (Bankr.´ Foreclosure ± Prior to the 2005 amendments. 1998) (§ 362(b)(6) applies to liquidation of collateral posted pre-petition as margin to cover unanswered post-petition margin calls). 2004) (reversal of a wire. Tex. 136 F. The legislative history is also crystal clear on this point: 45 Derivatives in Bankruptcy . but it was not clear whether realization on collateral was exempt from the stay. N. (17) were drafted in terms of setoff.3d 655. § 362(b)(6).D. 310 B.R.) The 2005 amendments specifically allow realization against pledged collateral. but see Mirant. after the amount was deposited into the debtors¶ account. 657-59 (9th Cir.
swap agreements. such as receivables and book-entry securities. are intended to refer also to rights to foreclose on. and to collateral that has been repledged by the creditor and securities re-sold pursuant to repurchase agreements. Subsection (d) also clarifies that the provisions protecting setoff and foreclosure in relation to securities contracts. commodity contracts. Enforcement of these agreements and arrangements free from the automatic stay is consistent with the policy goal of minimizing systemic risk. This provision parallels the other provisions of the Bankruptcy Code that protect netting provisions of securities contracts. repurchase agreements. 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. collateral securing swap agreements. and to set off against obligations to return. Collateral may be pledged to cover the cost of replacing the defaulted transactions in the relevant market. free from the automatic stay. or forward contracts. forward 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.Setoff/Netting (cont¶d) ± ³Subsection (d) amends section 362(b) of the Bankruptcy Code to protect enforcement. 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.´ ± 46 Derivatives in Bankruptcy . and repurchase agreements. master netting agreements. as well as in section 362(b)(6) and (7) of the Bankruptcy Code. securities contracts. the references to µsetoff¶ in these provisions. commodity contracts. Because the relevant definitions include related security agreements. forward contracts. repurchase agreements. commodity contracts.
American Homepatient. In any objection to timing. Damages Relevant Date ± Prior to the 2005 amendments was not clear whether it is the petition date or termination date.XI. If there is no way to determine the values involved in a commercially reasonable manner. the claim is a pre petition claim. termination or acceleration date. 47 Derivatives in Bankruptcy . 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. termination or acceleration) if values shifted in between these dates. (§ 562 (b)). 740-41 (M. not rejection date). damages will be measured at the earliest subsequent date or dates on which values can be determined in a commercially reasonable manner.D. Inc. Tenn. (§ 562 (c)) ± ± ± Measure of Damages: ± ± could be costs to replace the derivative. index or other property. 309 B.R. or difference between derivative price and market value of the underlying security. 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. (§ 502(g)(2)) Not clear which date controls (liquidation. ± Bank of Montreal v. (§ 562(a)). the objecting party carries the burden of proof.. 738.
v. 1992).Mcorp. Nov. 10.Y. v.S. 1989) (Market Quotation method is a reasonable method of determining damages even though claimant did not actually enter into a replacement agreement). 23. ± ± 48 Derivatives in Bankruptcy .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. Ct. Super. Drexel Burnham Lambert Products Corp. 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. Feb. Dist.N. Midland Bank PLC.D. at *6-*7 (Del. The commonly used ³Market Quotation´ measure of damages under the 1992 ISDA Master Agreement (Multicurrency-Cross Border) does not use the lowest bid. 1989 WL 16981. 1992 U. The other commonly used measure of damages under the ISDA Master Agreement ± ³Loss´ (essentially losses. 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. LEXIS 21223 (S.
D. UCC Article 9 Inapplicable: Article 9 requirement that the secured creditor liquidate collateral in a commercially reasonable manner inapplicable to protected repos. Del. 322 F. 543-51 (S.R. What if the non-defaulting party under a swap in which the parties chose not to declare automatic termination upon bankruptcy event. 69 (Bankr. ± ± ± 49 Derivatives in Bankruptcy . 2008). TXU Electricity.´ 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.Damages (cont¶d) ± Damages under interest rate swap agreements are not subject to disallowance as unmatured interest under § 502(b)(2). 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.3d 1039 (9th Cir. Lehman Brothers. Thrifty Oil Co. Cal. The 2002 ISDA Master adopts a single measure of damages²the ³closed out amount. aff¶d.D. 249 B. 388 B. 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.  NSWSC 1169. 2000).. 537. 2003). held the contract provisions enforceable. American Home Mortgage v.
dealing with margin or settlement payments to a commodity broker.XII. § 546(e). (f). in connection with a master-netting agreement. protect from avoidance transfers that constitutes margin or settlement payments made by. Avoidance Actions Exception Except for actual fraudulent transfers. apply to transfers made under qualified contracts. deleted the reference to margin and settlement payment and apply to any transfer made ³in connection with a repurchase agreement. it is not clear that it requires that the margin or settlement payments referred to be made under a qualified contract. exempt a transfer under. ± While the 2006 amendments provide that § 546(e). or in connection with a swap agreement but does not reference margin or settlement payments. or transfers made in connection with qualified contracts. stockbroker. The 2006 amendments to § 546(f) dealing with repos. ± ± ± 50 Derivatives in Bankruptcy . The 2005 amendments added § 546(j) protecting from avoidance a transfer made by. except if such transfer is avoidable under a contract covered by the master netting agreement. 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). financial institutions. (g). to. or for the benefit of a protected party. financial participant or securities clearing agencies. forward contract merchant.´ Note that § 546(g) dealing with swaps.
In re Stewart Finance Co.´ H.R.C. the court would be hard-pressed to find that a payment made to open an account with a stockbroker. 405 (Bankr. Cal.R. 402.S. 940 (Bankr. 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.A. constituted a margin payment. reprinted in 1990 U.´) ± At least two courts suggested that an initial payment made to open a margin account. 193 B.C. 367 B. or variation margin.D. including mark-to-market payments. 935. (In re David). M. at 7 (1990). (In re Yeagley).D."). 1998) ("The term 'margin payment' is not broad enough. Kan. however. D. respectively. maintenance margin. 101-484.N."). 51 Derivatives in Bankruptcy .R. 220 B. Inc. Rep. (D) providing that protected parties that receive margin or settlement payments are deemed to have provided value.. to encompass payment made to open a margin account before any trading is conducted or any deficiency incurred. at a time when no trades took place and no deficiency exists. Smith Barney. initial margin. C. 229. Biggs v.Avoidance Actions Exception (cont¶d) Protection is supplemented by § 548(d)(2)(B). 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." Sections 741(5) and 761(15) of the Bankruptcy Code contain similar definitions of margin payment for the securities trade and commodities trade. Ga. is not a margin payment. 223.R. Farmer's Commodities Corp. (C). ± 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. that is commonly known in the forward contract trade as original margin. or variation payments. a security or other property. For example. 1996) ("[T]he terms 'margin payments and 'settlement payment' do not include all payments into a margin account. Seitter v. 909 (Bankr. prior to any trading. No.
484. Yucaipa Capital Fund. 1996) (held. Wieboldt Stores. no protection from avoidance). Norstan Apparel Shops. a settlement payment on account. 2007) (LBO of a private company). 1991) (LBO). 655. 675-76 (D. 68 (Bankr.R. Gordon. Inc. Integra Realty. courts.R.R. Zahn v. N..D. Mass. an interim settlement payment. a final settlement payment. Colo. 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"). 983 (Bankr. Healthco. 98 F. Grafton.I.Avoidance Actions Exception (cont¶d) Settlement Payments ± Settlement payment is defined in § 101(51A) for forward contract purposes as "a preliminary settlement payment. 367 B.Y. 609-10 (11th Cir. even if interpreted broadly. 527 (Bankr. 352. L. Tex. ± 52 Derivatives in Bankruptcy . 656. 348. v. have held that at a minimum the payment must involve the system of intermediaries and guarantees typical of the securities industry. Jewel Recovery. 131 B. Munford. not protected-not involving public markets and involving illegally unregistered securities).R. 1996) (LBO). 9th Cir. Ohio 2003) (private sale through financial intermediary).N. Although the statutory definition is circular and not particularly illuminating. 353 (N. D.D. 321 B. a net settlement payment.D.R. 196 B.P." Section 741(8) of the Bankruptcy Code contains a substantially similar definition of settlement payment for the securities trade. Grand Eagle. 1998) (court held that. 2005) (redemption of equity in an LLC run as a ponzi scheme. a partial settlement payment. 198 B. 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. D.D. 218 B. 971.R. 491-95 (Bankr. in the securities context. 356-60 (Bankr. but in which the actual exchange of stock and consideration therefor take place at a later date"). 1996) (spin-off). 664-65 (N. E. 195 B. 288 B. to qualify as settlement payment for purposes of statute.3d 604.R. Ill. 1996) (LBO is essentially a private transaction.R.R. or any other similar payment commonly used in the forward contract trade.
2d 1230.2d 742. 324 B. S. does not qualify. Plassein Int¶l Corp. 1991) (LBO). D. W.R. 2007).R.D. Mich. Del. 2005). Quality Stores. Int'l Finance Corp. 83-89 (D. Resorts Int¶l.R. 46 (D. Loranger Mfg.R. 325 B.. W. Kaiser Steel. Bevill. QSI Holdings. 1236-37 (10th Cir. 1989) (Repo).R. 2007 (private LBO).Y. Applies to ³private´ stock redemption.R. Del. 514-16 (3d Cir. Payment made contrary to the applicable contractual terms. 878 F. 629 (Bankr.D..R.Y.R. Pa. 2006) (private stock sale transaction).N. Enron. 575. Del. v. 318 (Bankr.. 97 2006 (Bankr.3d 505. 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).D. 671. aff¶d. 952 F. 355 B. Mich. Dec. 366 B. A CLO¶s sponsor¶s purchase of CLO notes to provide credit support and to prevent investors¶ losses through financial institutions and stockbrokers. aff¶d 388 B. 451 (Bankr.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). Mich. 1999) (LBO). 750-53 (3d Cir. 274 B. 2007) (private LBO). Del. Hechinger. 2006). 583-86 (Bankr. 685-86 (Bankr. 181 F.D.N. 71. Enron Corp. 359 B. qualifies as a settlement payment. 2002) (LBO). 21. 2007 WL 4557855 (W. IT Group. 2008) (LBOs of privately held companies). 341 B.D. Corp. S. 2005) (Prepayments made to retire short terms CP notes. ± ± ± 53 Derivatives in Bankruptcy . Bresler. W.D. D.
369 B.D. 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").. N. But see National Gas Distrib.R. 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). Borden Chemicals. ± The Fifth Circuit expressed its agreement with precedents outside the securities area that the term should be interpreted broadly.R.3d at 742.R. a settlement payment includes a "similar payment commonly used in the forward contract trade. Del.R. 54 Derivatives in Bankruptcy . 563 (Bankr. aff'g 258 B. 2004) (setoff of claims arising from termination of forward contract is a settlement payment).R.3d at 742. under on-market transaction or to be cleared or settled through a centralized system.Avoidance Actions Exception (cont¶d) These authorities are probably inapplicable to forwards and swaps as these transactions are typically private. Tex. qualified as settlement payments under section 101(51A) as "a similar payment commonly used in the forward contract trade"). 336 B." Olympic Gas. at 166 (net payments exchanged monthly among the parties on account of forward contracts for natural gas. 294 F. 214. 2006) (payments made under the contract following delivery of gas are settlement payments). The legislative history to section 101(51A) as well as the section itself state that. Olympic Gas. 294 F. 548. and in the context of forward contracts does not require the payment to be made on a financial derivative. 310 B. as to forward contracts. aff'd. 229 (Bankr. 258 B. Mirant.
D. 477 (Bankr. 878 F. 481 (Bankr. Exercise of setoff to recover erroneous payments.D. Resolution Trust Corp. 316 B. 1999). is a settlement payment).R. Ill. 114 F. v. 240 B.D. Hamilton Taft. 971 F. 2004) (forward). 993 (9th Cir. 1989) (interpreting the term settlement payment to fit the settlement process applicable to repurchase agreements).R. 595 (Bankr.Avoidance Actions Exception (cont¶d) Courts applied this definition to repos. Jonas v.8 (Bankr. S. Payment for gas purchased after initial failure to pay and collection activities by the seller. & Loan Ass'n. may not qualify.2d 742.3d 991. 326 (9th Cir. GPR Holdings. may not qualify. 1992) (party's withdrawal from a repurchase transaction. Aurora Natural Gas. and the return of additional margin posted in connection with the repo.D. Bevill. 390 B. Tex. 316 B.R. 55 Derivatives in Bankruptcy . Spencer Sav. Casa de Cambio. 2008). N. but does qualify post 2005 amendments. 195.R. 751-53 (3d Cir. Interbulk. N. Bresler & Schulman Asset Management Corp.N. 201 n. 1997) (reverse repo). Payment obtained through attachment did not qualify as a protected payment under a swap under the pre-2005 amendments version of section 546(g). N. Tex. (In re Comark).Y.2d 322. 2004) (forward).
. 98 B. v.R. 2. 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. Inc. 1989) (staying broker-dealer from liquidating repurchase agreement to enable the court to first determine whether the contract was in fact a repo). 20-24 (Bankr.XIII. Section 105 Allows courts to issue any order to carry out the provisions of Bankruptcy Code. D. Residential Resources Mortgage Invs. See Thomson McKinnon Sec. It would appear that § 105 should not be used to override the specific provisions protecting safe harbor transactions. 56 Derivatives in Bankruptcy .. Ariz.
R.D.N. 2003). 800-05 (Bankr. D.. Cal. Md. L. Supp. 537 (S. Courts in the Ninth Circuit refused to recharacterize a swap and floating rate loan as one transaction representing in substance a fixed rate loan. Recharacterization Issues Bankruptcy courts generally have the power to recharacterize transactions based on their economic substance. Cal. v.P. 251 B. 57 Derivatives in Bankruptcy .D. Inc. 1998) (question of fact whether a repo is "true" repo or disguised financing). 147. 249 B. 2000) (same).. 212 B. 17 F.3d 1039 (9th Cir.R. In re CRIIMI MAE. 1997). 2d 275. 298-99 (S.R. Courts seem less than willing to recharacterize sophisticated financial products. based on a counter-party's post-hoc view as to their alleged economic substance. rather than based on their form. 322 F.XIV.. 150-53 (Bankr S. Repos have the economics of a secured loan and carry a significant recharacterization risks.D.Y. Stearns & Co. In re Thrifty Oil Co. Granite Partners. 796. aff'd. Bear. aff'd. 2000).
1991) (³[T]he term 'damages' implies more than a simple debt . Mar. 642 (Bankr. § 510(b) does not apply to a claim seeking recovery of an unpaid debt due upon a promissory note. 58 Derivatives in Bankruptcy . 920. .R. swap. 836. Del.D.. 2001) (absent an allegation of fraud in the purchase. 384 B. 2008) (make whole claims not subordinated. 91 B. . see also NationsRent. 2008 WL 114864 (Bankr.3d 251. 1988). Montgomery Ward. Del. the investors filed claims based on the unpaid amounts outstanding on the debtor's notes. D. Del. .R. such claims represent the bargained for sales price.R. then any holder of a note issued by the debtor or an affiliate may be subordinated. If that what it means. 341 B. repos or securities contracts where the underlying security is a security of the debtor or its affiliates."). 256 (2d Cir. in that case. Enron. Med Diversified. 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. But. 2006).D. a result that makes no sense as held by Blondheim. D.´). the rejection of any agreement is a breach of the contract which gives rise to damages. 718-18 (Bankr.S. Washington Bancorporation. 2008). Id. W. at 640.XV. 639. 272 B. 844-45 (Bankr. 19. D.R. 134 B. D. 461 F. not damages).H. 713. Wyeth. ± ± Technically.R. 1996).N. at 151.C. sale or issuance of the debt instrument. Wireless. Mo. This section may subordinate claims under forwards. U. 921 (Bankr. at *20 (D. 1996 WL 148533. Damages: It is not entirely clear what the term means. Purchase includes claims for the failure to issue securities or options under employment agreements or termination agreements.
288 B. Ga. damages can result either from tort type claim or from a breach of contract. 2002) (debtor's refusal to repurchase shares. 237 B. 613.N. constitutes a claim for damages resulting from a breach of the safe harbor contract. If the contract by its terms refers to it as a credit event type default. S.R. breach of contract yields claim for damages). A related question may be whether a claim resulting from the acceleration of a safe harbor contract upon bankruptcy filing. 283 B. 88 (D.Mandatory Subordination Issues (cont¶d) ± In other contexts.N.J. the argument for it constituting a breach and damages is straightforward. 141 (Bankr. the investment was an equity investment and the damages resulted from the debtor's failure to pay under the stock purchase agreement).D. question is whether a change in the formulation would make a difference. 627-28 (Bankr. NAL. Fla. N.D.R. 1999) (breach of best efforts to register securities. 2006) (claims of employees on account of their stock options subordinated whether framed in terms of fraudulent inducement.R. 231-32 (Bankr. S. Breach. Response USA.R. Vista Eyecare. ± 59 Derivatives in Bankruptcy . 225. 341 B. Enron. 2003) (claimant who sold shares in a third company to the debtor in exchange for debtor's cash and stock was subordinated. damages equal the repurchase price minus shares' value).D. ± Section 510(b) does not mention the term "breach. courts did apply the more comprehensive meaning of damages. fraudulent retention or breach of contract).Y." but generally.
is broad and the recent trend is to apply it liberally. however. at 625-28 (put option on debtor's common stock subordinated. U. and had the ability not to sell). or the re-sale of the security back to the debtor is mandatory through one mechanism or another. 384 B. D. Del. 2004) (section 510(b) does not apply when notes are issued in exchange for equity). Del. such claim would be subordinated under section 510(b).Mandatory Subordination Issues (cont¶d) Nature of Risk Assumed by Investors.R. claimant's intent to fix the value discounted. 2004 WL 2713098 (D. 257 B. Mobile Tool.R.e. i. 301 B. 2004) (refusing to subordinate claim based on a judgment entered for breach of employment agreement to issue stock.. forwards and securities contracts. ± ± 60 Derivatives in Bankruptcy . no rewards upon stock's appreciation or loss upon failure. 306 B. holding no difference between a judgment and equity exchanged for notes) It is arguable. Betacom. 138 (3d Cir. 283 B. 150. while if the claim was converted pre-petition to a debt instrument.e. D. 2001) (claims of shareholders resulting from merger agreement subordinated.3d 133. section 510(b) would not be applied. courts attempt to capture the risk associated with the transaction. 499. did the claimant take an equity or creditor type risk. the non-debtor party may take the risk of a creditor. held that when a former equity¶s holder¶s claim is based on a money judgment for the value of the shares. contra Cybersight. D. Del. however. Telegroup. that when the debtor's or its affiliate's securities are used as the underlying property in swaps. That may be especially so if the debtor has a call against the put.S. D. 2000).3d at 142 (dismissing claimants' argument that they didn't intend to retain their investment.R.R. they covenanted for the ability to register the stock so they can freely sell it enjoying any appreciation. Telegroup. and in effect is not taking a position of an equity investor. Wireless. 306 B.R. 281 F. 2002). 281 F. 2003 (same). the non-debtor party is not intending to. Ariz. Alta+Cast. Del. Vista Eyecare. Relying on the legislative history. Einstein/Noah Bagel. 240 F. they were equity investors). 2008) (money judgment on account of value of shares due under breached employment agreement subordinated). i. except that the underlying property used in the transaction is debtor's or affiliate's securities. 782 (Bankr. ± ± Acknowledging that section 510(b) is not a model of clarity. 778. 713 (Bankr. 152-53 (Bankr. it was held to be ambiguous. 508 (Bankr. it had the right not to put and the debtor didn't have a call).3d 823 (9th Cir. especially in Delaware. The literal language of section 510(b). Some courts.R.
± 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. Del. not parent's creditors). Del. 2001) (claims of shareholders of the parent with respect of the subsidiary stock subordinated only to subsidiary's creditors. 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. at 620-25. 264 B.R. 283 B. 2002) (claims against parent resulting from sale of its subsidiary stock subordinated to unsecured creditors of parent). "installment" tests). Vista Eyecare. 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. 725 (Bankr. Affiliate's Securities: Very few cases have addressed the application of section 510(b) in such a situation. 336 (Bankr. 275 B. and (ii) how do bankruptcy courts treat the applicable state law.R. D. VF Brands. 61 Derivatives in Bankruptcy . L&H.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. D. ± An issue that has not been explored is what role should the rationale for section 510(b) play in this context.
291 B. 336 F. 323 B. i. 1991). Preemption/Chapter 11 Plan Conflict If the safe harbor transaction is in violation of a state corporate law provision. 2003) (creditors assigned claims to liquidating trust. 62 Derivatives in Bankruptcy . 95-98 (D. Hechinger. Del. Del.e..3d 94. No: Enron Corp.R. a prohibited distribution to shareholders ± is state law preempted? ± ± ± Yes: PHP. 102 (2d Cir. Del. 274 B. 857 (Bankr. But See Bennett Funding Group.Y.N. even if creditors assigned the claims to the trustee). 952 F.R. 71. S. 2003) (Trustee may not pursue claims belonging to creditors. 1241 (10th Cir. v. Can a chapter 11 plan avoid § 546? ± ± Yes: PHP.R.2d 1230.R. Bear Stearns Int¶l Ltd. 2005). § 546(e) is inapplicable as it applies to trustee/debtor in possession). 2003) (illegal redemption). Maybe Not: Kaiser Steel. 2002) (unjust enrichment)..D. 592 (D. 291 B.XVI. 592 (D.
N. Orange County sued one debtor (Namura) as a test case but withdrew its complaint. 12 and 13 cases. 559 and 560 were not incorporated into chapter 9 (municipal bankruptcies) under § 901(a). 63 Derivatives in Bankruptcy . sections 555. 3 and 5 apply in chapter 7.R.D. adopted new chapter 15 entitled Ancillary and Other Cross-Border Cases. of Directors of Compañia General de Combustibles S. applicable. Section 103 was amended to provide that sections 555557. 2001) (§ 560 not applicable to a swap entered with Argentinean debtor). Ancillary proceedings are neither as they are governed by § 304. Accord Petition of Bd. In the Orange County case several counterparties closed out positions.A. 11.Y. 104 (Bankr. ± ± The 2005 amendments to the Bankruptcy Code make these provisions. 556. S. 269 B. in appeared that these sections were not applicable to an ancillary proceeding. as well as new sections 561 and 562.XVII. The 2005 amendments abolished § 304. and 559-562 apply to cases under chapter 15. ± Section 103(a) provides that chapters 1. Prior to the 2005 amendments. Applicability to Chapter 9/Ancillary Proceedings Prior to the 2005 Amendments..
collar. A transaction in which one party grants to the other party (in consideration for a premium payment) the right. Bullion swaps include cap. Bullion Option. Bond Option. with both rates reset periodically. A transaction in which one party grants to the other party (in consideration for a premium payment) the right.XVIII. Bullion Swap. Cravath. to purchase (in the case of a call) or sell (in the case of a put) a bond of an issuer. at a specified strike price. but not the obligation. all calculations are based on a notional amount of the given currency. 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. * 64 Derivatives in Bankruptcy . 1998). 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. 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. Swaine & Moore. On the Enforceability of the Termination. or floor transactions in respect of Bullion. 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. 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. Glossary of Commonly Used Terms* Basis Swap.
Commodity Forward. 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). a troy ounce. 65 Derivatives in Bankruptcy . For purposes of Bullion Trades. Cap Transaction. 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. and in the case of silver. The payment calculation is based on the quantity of the commodity and is settled based. 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. platinum and palladium. platinum or palladium and "Ounce" means. on the difference between the agreed forward price and the prevailing market price at the time of settlement. silver. Collar Transaction. in the case of gold. 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. 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. Bullion Options and Bullion Swaps. 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. among other things. "Bullion" means gold.Glossary of Commonly Used Terms (cont¶d) Bullion Trade. a fine troy ounce. if any.
A credit protection transaction may also refer to a "basket" or two or more Reference Entities. all calculations are based on a notional quantity of the commodity. credit default swaps or credit default options. 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.Glossary of Commonly Used Terms (cont¶d) Commodity Option. or a futures contract on 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. Some market participants may refer to credit protection transactions as credit swaps. 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. Credit Protection Transaction. bankruptcy or payment default). debt securities or other financial instruments (each a "Reference Obligation") issued. 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. 66 Derivatives in Bankruptcy . 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. 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. but not the obligation. Commodity Swap. 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. 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. guaranteed or otherwise entered into by the Reference Entity. 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. such as natural gas or gold. A transaction in which one party grants to the other party (in consideration for a premium payment) the right.
Such swaps may involve initial and or final payments that correspond to the notional amount. 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 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. Payments are calculated on a notional amount. All calculations are determined on predetermined notional amounts of the two currencies. 67 Derivatives in Bankruptcy . Currency Swap. often such swaps will involve initial and or final exchanges of amounts corresponding to the notional amounts. but not the obligation. 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. Currency Option. A transaction in which one party pays fixed periodic amounts of one currency and the other party pays fixed periodic amounts of another currency. Cross Currency Rate Swap.Glossary of Commonly Used Terms (cont¶d) Credit Spread 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.
Glossary of Commonly Used Terms (cont¶d) Equity Forward. A transaction in which one party agrees to pay an agreed price for a specified quantity of shares of an issuer. if any. Equity or Equity Index Swap. 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. Floor Transaction. 68 Derivatives in Bankruptcy . 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 basket of shares of several issuers or an equity index. Equity Index Option. 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. 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. 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 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. such as the Standard and Poor's 500 Index.
A transaction which provides for the purchase of an amount of a commodity. on the difference between the agreed forward rate and the prevailing market rate at the time of settlement. such a the London inter-bank offered rate.Glossary of Commonly Used Terms (cont¶d) Foreign Exchange Transaction. 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. Interest Rate Option. The payment calculation is based on a notional rate and is settled based. among other things. Forward Rate Transaction. such as coal. 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. but not the obligation. Interest Rate Swap. 69 Derivatives in Bankruptcy . electricity or gas. all calculations are based on a national amount of the chosen currency. 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. at a fixed or floating price for actual delivery on one or more dates. 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.
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. Total Return Swap. structured in the form of a swap. A transaction in which one party grants to the other party the right (in consideration for a premium payment). but not the obligation. Weather Index Transaction. collar. guaranteed or otherwise entered into by a third party (the "Reference Entity"). floor or some combination thereof. A transaction. calculated by reference to interest. A transaction in which one party pays either a single amount or periodic amounts based on the total return on one or more loans. 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. between two parties in which the underlying value of the transaction is based on a rate or index pertaining to weather conditions. cap. debt securities or other financial instruments (each a "Reference Obligation") issued.Glossary of Commonly Used Terms (cont¶d) Repurchase Transaction. 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. Securities Lending Transaction. 70 Derivatives in Bankruptcy . to enter into a swap with certain specified terms. dividend and fee payments and any appreciation in the market value of each Reference Obligation. cooling. precipitation and wind. Swap Option. 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.