Court Ruling Could Chill Swap Market

Derivative practitioners fear a court decision expected in the coming month could destabilize the over-the-counter swaps market.

  • 07 Jan 2005
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Derivative practitioners fear a court decision expected in the coming month could destabilize the over-the-counter swaps market. An Enron vs. Lehman Brothers Finance lawsuit could invalidate the current exemptions swaps enjoy from the bankruptcy code's automatic stay and cherry-picking provisions. "It could chill the market," said Craig Goldblatt, a partner with Wilmer Cutler Pickering Hale and Dorr in Washington, D.C.

The suit concerns OTC equity swaps Enron entered with Lehman in 2000 and 2001. Enron is arguing it should be able to recover payments it made prior to its bankruptcy, explained Kimberly Summe, legal counsel with the International Swaps and Derivatives Association in New York. The case was held at the Southern District of New York's Bankruptcy Court in October and lawyers familiar with the case except the Judge to make a decision next month.

Enron argues its equity transactions with Lehman are not covered by the bankruptcy code's safe harbor provision because they do not fall within the Commodity Exchange Acts' definition of a commodity. But Summe thinks equity swaps were included when Congress expanded the CEA's definition in the bankruptcy code. More importantly for this case, in its 1990 amendment to the code, Congress specifically protects swap transactions, she added.

Goldblatt, who also co-drafted an amicus brief filed on behalf of ISDA and others, said, "This is exactly the problem Congress was worried about." He said if Enron wins the case, counterparties will worry every time they enter such trades. Summe noted, "If another large counterparty in the market files for bankruptcy, the implications of this case, if decided in Enron's favor, would be adding an element of legal uncertainty as to when parties can close out and net transactions in the OTC derivatives market."

The lawsuit could also limit the jurisdiction of the Commodity Futures Trading Commission, said Kenneth Raisler, a partner with Sullivan & Cromwell in New York. There were no futures on single stocks at the time of the Enron swaps in question. Enron argues that since there was no futures exchange trading these contracts, they were not commodities, he explained. According to Enron, a commodity is not a commodity until it's the subject of futures trading.

"The scope of the definition of commodity is central to the CFTC's jurisdiction particularly in policing off-exchange fraud," Raisler said. He pointed to an earlier case in which the CFTC shut down an outfit selling retail off-exchange gasoline futures before the New York Mercantile Exchange started trading them. The CFTC would not have jurisdiction to shut down such operations if Enron's argument prevails, he said.

Enron has brought similar cases against Bear Stearns, UBS and Credit Suisse First Boston. All have yet to be decided.

  • 07 Jan 2005

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 35,941.13 111 8.93%
2 Barclays 31,588.47 86 7.85%
3 JPMorgan 27,799.55 107 6.91%
4 Bank of America Merrill Lynch 27,706.86 75 6.88%
5 HSBC 21,949.38 82 5.45%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 Commerzbank Group 114.00 1 66.16%
2 CaixaBank 37.05 1 21.50%
3 UniCredit 10.62 1 6.17%
3 BNP Paribas 10.62 1 6.17%
Subtotal 172.30 3 100.00%

Bookrunners of all EMEA ECM Issuance

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1 SG Corporate & Investment Banking 770.06 2 16.80%
2 Goldman Sachs 656.16 2 14.32%
3 JPMorgan 527.28 4 11.50%
4 Emirates NBD PJSC 408.38 1 8.91%
5 Deutsche Bank 321.53 3 7.01%