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Derivatives

Court Ruling Questions Restructuring As Credit Event

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A U.S. District Court has called into question the meaning of the Restructuring credit event in International Swaps and Derivatives Association credit definitions and granted hedge fund Eternity the right to take JPMorgan to court for breach of contract, at the third time of asking.

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A U.S. District Court has called into question the meaning of the Restructuring credit event in International Swaps and Derivatives Association credit definitions and granted hedge fund Eternity the right to take JPMorgan to court for breach of contract, at the third time of asking. The debate hinges on whether a 'voluntary' debt exchange by Argentina in 2001 could be seen as 'mandatory' because it could be considered 'economic[ly] coercive' and therefore trigger the Restructuring credit event in default swaps. Eternity attempted to trigger the contracts in November 2001 and JPMorgan refused to settle them.

"A U.S. court has recognized there is ambiguity," said Simon Firth, partner at Linklaters in London, adding that this is not a final decision.

The contention revolves around the meaning of mandatory, according to Patrick Clancy, counsel at Shearman & Sterling in London. JPMorgan's argument is that mandatory means a legal obligation. "A gun to the head is merely pressurizing you, it's not mandatory," said Firth. Eternity, however, argues that to credit risk protection buyers such as itself, a "mandatory transfer" includes any obligation exchange achieved by "economic coercion." The panel of judges has not made a ruling, it has simply said there is a case to answer, noted Firth.

If the court does decide that mandatory can include economic coercion, it will leave lawyers guessing where to draw the line, said another lawyer.

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