ABI Journal Article Sheds Light on Treatment of Derivatives in Bankruptcy
ABI Journal Article Sheds Light on Treatment of Derivatives in Bankruptcy
Contact: John Hartgen
703-894-5935
[email protected]
ABI JOURNAL ARTICLE SHEDS LIGHT ON TREATMENT OF DERIVATIVES IN BANKRUPTCY
April 11, 2011, Alexandria, Va. — As debates
about the regulation of derivatives continue swirl among regulators and
lawmakers, the Bankruptcy Code already provides professionals with
prescriptions of how derivatives are to be treated in a bankruptcy
proceeding, according to an article in the April edition of the ABI
Journal. In “Deciphering Derivatives in Bankruptcy,”
authors Nicholas M. McGrath of K&L Gates LLP
(Boston) and Ji Hun Kim of GrayRobinsson PA (Miami)
provide an overview of derivative contracts and examine recent case law
involving derivatives and the Bankruptcy Code.
The authors explain that derivative contracts are afforded special
treatment under the Code, which contains 'safe-harbor' provisions that
allow derivatives to be exempted from the automatic stay, certain
avoidance actions and the unenforceability of ipso facto
clauses. Even if a firm enters bankruptcy, nondebtor counterparties can
enforce a contractual right to close out, terminate and accelerate all
amounts owed under a derivative contract. Pointing to Lehman Brothers'
chapter 11 filing and AIG's financial deterioration, McGrath and Kim
pointed to the provisions of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 establishing how Congress intended to
deal with derivatives in bankruptcy.
“Congress' reason in providing derivative contracts with these
protections was to promote stability within the financial sector,”
McGrath and Kim wrote. “If participants in certain activities were
unable to enforce their rights to terminate financial contracts with an
insolvent entity in a timely manner, or to offset or net their various
contractual obligations, the resulting uncertainty and potential lack of
liquidity could wreak havoc in the financial market.” The authors
pointed to In re Lehman Brothers Holding Inc., et al., as a
case that has rendered significant decisions in the Code's treatment of
derivatives.
As companies continue to utilize derivatives to hedge against market
fluctuations, the authors encourage new and upcoming insolvency
professionals to learn more about how derivatives are treated in
bankruptcy. “More bankruptcy proceedings will involve the
application of the safe-harbor provisions of the Bankruptcy Code for
treatment of derivatives,” McGrath and Kim wrote.
To obtain a copy of “Deciphering Derivatives in Bankruptcy,”
published in the April edition of the ABI Journal, please
contact John Hartgen at 703-894-5935 or via email at [email protected].
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