The U.S. government passed the Financial Netting Improvements Act into law last month, clarifying treatment of inflation and other newer swaps in bankruptcy situations. The Act was designed to update and make corrections to 2005's Bankruptcy Code which had not included inflation or emissions instruments in its definitions of swap agreement. As well as giving peace of mind to investors and dealers of such swaps, it also signals these instruments are moving into the financial mainstream.
David Dykhouse, partner at Patterson Belknap Webb & Tyler in New York, said the Act had been bouncing around Congress in Bill form for the whole of last year. There is little in it that will come as any surprise to investors or derivative dealers, he explained, but it does give clarity and certainty that the Bankruptcy Code applies to inflation and emissions swaps. The Act, however, is only relevant to bankruptcies since it was enacted Dec. 12.
