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Frequently Used Terms |
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Chapter 1: |
Introduction |
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- § 1:1 : In General1-1
- § 1:2 : What Is a Derivative?1-4
- § 1:2.1 : Interest Rate Swaps1-5
- Diagram 1-1 : Interest Rate Swap1-6
- § 1:2.2 : Currency Swaps1-7
- Diagram 1-2 : FX Fixed Currency Swap1-9
- § 1:2.3 : Equity Swaps1-10
- Diagram 1-3 : Equity Swap1-11
- Diagram 1-4 : Equity Swap1-13
- Diagram 1-5 : Equity Swap1-14
- § 1:2.4 : Commodity Swaps1-15
- Diagram 1-6 : Commodity Swap1-16
- § 1:2.5 : Credit Default Swaps1-17
- Diagram 1-7 : Credit Default Swap1-18
- § 1:2.6 : Other Derivatives1-19
- § 1:3 : Terminology1-20
- § 1:4 : What Is the Purpose of Derivative Transactions?1-21
- § 1:5 : Guide to Documentation of Derivative Transactions1-22
- § 1:6 : Overview of Close-Out Netting1-27
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Chapter 2: |
Events of Default and Termination Events |
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- § 2:1 : Introduction2-2
- § 2:2 : 1992 and 2002 Master Agreements Events of Default2-3
- § 2:2.1 : Failure to Pay or Deliver (Section 5(a)(i) of Master Agreements)2-3
- § 2:2.2 : Breach of Agreement (Section 5(a)(ii) of Master Agreements)2-4
- § 2:2.3 : Credit Support Default (Section 5(a)(iii) of Master Agreements)2-5
- § 2:2.4 : Misrepresentation (Section 5(a)(iv) of Master Agreements)2-6
- § 2:2.5 : Default Under Specified Transaction (Section 5(a)(v) of Master Agreements)2-7
- § 2:2.6 : Cross-Default (Section 5(a)(vi) of Master Agreements)2-12
- § 2:2.7 : Bankruptcy (Section 5(a)(vii) of Master Agreements)2-14
- § 2:2.8 : Merger Without Assumption (Section 5(a)(viii) of Master Agreements)2-18
- § 2:3 : Termination Events2-18
- § 2:3.1 : Illegality (Section 5(b)(i) of Master Agreements)2-18
- § 2:3.2 : Tax Event (Section 5(b)(ii) of 1992 Master Agreement and Section 5(b)(iii) of 2002 Master Agreement)2-19
- § 2:3.3 : Tax Event upon Merger (Section 5(b)(iii) of 1992 Master Agreement and Section 5(b)(iv) of 2002 Master Agreement)2-21
- § 2:3.4 : Credit Event upon Merger (Section 5(b)(iv) of 1992 Master Agreement and Section 5(b)(v) of 2002 Master Agreement)2-22
- § 2:3.5 : Additional Termination Event (Section 5(b)(v) of 1992 Master Agreement and Section 5(b)(vi) of 2002 Master Agreement)2-23
- § 2:3.6 : Force Majeure (Section 5(b)(ii) of Master Agreements)2-23
- § 2:4 : Termination at Election of Non-Defaulting or Non-Affected Party: Suspension of Obligation2-24
- § 2:5 : Events of Default Chart2-28
- Chart 2-1 : Events of Default2-29
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Chapter 3: |
Collateral and Security Arrangements |
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- § 3:1 : Introduction3-2
- § 3:2 : Types of Credit Support Annexes3-3
- § 3:2.1 : U.S. CSA3-3
- § 3:2.2 : English Law CSA3-4
- § 3:2.3 : Japanese CSA3-4
- § 3:2.4 : Main Terms of CSA3-5
- § 3:2.5 : Alternative Security Documentation3-5
- § 3:3 : Collateral Postings3-5
- § 3:4 : Rating Agency Downgrade Triggers in Rated Transactions3-6
- § 3:4.1 : Downgrade Triggers3-8
- § 3:4.2 : Mitigating Actions3-11
- § 3:4.3 : Failure to Take Necessary Mitigating Actions3-12
- § 3:4.4 : Other Considerations3-14
- § 3:5 : Key Terms of CSA3-16
- § 3:5.1 : Exposure3-16
- § 3:5.2 : Other Key Provisions for Collateral Postings3-19
- § 3:5.3 : Eligible Collateral and Valuation3-22
- § 3:6 : Dispute Resolution Mechanics3-24
- § 3:6.1 : Business Day One: Valuation Date3-24
- § 3:6.2 : Business Day Two: Dispute Notification3-25
- § 3:6.3 : Business Day Two/Three: Resolution Attempt3-25
- § 3:6.4 : Business Day Three: Delivery of Undisputed Amount3-25
- § 3:6.5 : Business Day Three: Failure of Resolution Attempt3-25
- § 3:6.6 : Business Day Three: Dispute Resolution Mechanics3-25
- § 3:6.7 : Business Day Four: Notification to Counterparty3-25
- § 3:6.8 : Business Day Five: Delivery of Eligible Collateral3-26
- § 3:6.9 : Business Day Five: Failure to Deliver Collateral3-26
- § 3:6.10 : Business Day Seven/Eight: Event of Default3-26
- § 3:6.11 : Occurrence of Another Valuation Date During Dispute3-27
- § 3:6.12 : Dispute Resolution Procedure3-28
- § 3:7 : Events of Default3-29
- § 3:7.1 : Failure to Pay or Deliver3-29
- § 3:7.2 : Breach of Agreement3-29
- § 3:7.3 : Failure to Comply3-30
- § 3:8 : Termination Events3-30
- § 3:9 : Other Security Agreements3-32
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Chapter 4: |
Early Termination |
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- § 4:1 : Events of Default and Termination Events Are Treated Differently4-1
- § 4:1.1 : Non-Defaulting Party’s Option to Terminate4-2
- § 4:2 : Termination Relating to Events of Default4-4
- § 4:2.1 : Automatic Early Termination4-5
- § 4:3 : Termination Events Under the Master Agreements4-9
- § 4:3.1 : Notification to Non-Affected Party4-10
- § 4:3.2 : Transfer to Avoid Termination4-11
- § 4:3.3 : Consent to Transfer4-12
- § 4:3.4 : Two Affected Parties4-12
- § 4:3.5 : Examples4-12
- [A] : Tax Event4-12
- [B] : Illegality4-14
- § 4:3.6 : 2002 Master Agreement Illegality and Force Majeure4-15
- § 4:4 : Termination Events4-17
- Chart 4-1 : Termination Events4-18
- § 4:5 : Delivery of Notice of Occurrence of Event of Default or Termination Event4-22
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Chapter 5: |
Early Termination Amounts |
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- § 5:1 : Overview5-3
- § 5:2 : Valuation Statement5-3
- § 5:3 : First Method and Second Method Under 1992 Master Agreement5-5
- § 5:3.1 : Hypothetical Example of Early Termination Amount Calculations5-5
- § 5:4 : Second Method, Market Quotation Under 1992 Master Agreement5-7
- § 5:5 : Second Method and Loss5-11
- § 5:5.1 : Loss of Bargain5-12
- § 5:5.2 : Cost of Funding5-13
- § 5:5.3 : Hedging Costs5-14
- § 5:5.4 : Discretion of Non-Defaulting Party5-16
- § 5:6 : Unpaid Amounts5-17
- § 5:7 : Out-of-Pocket Expenses5-19
- § 5:8 : Termination Currency5-20
- § 5:8.1 : Foreign Exchange Agent5-21
- § 5:8.2 : Conversion Time5-21
- § 5:8.3 : Conversion Amount5-23
- § 5:9 : Calculation of Early Termination Amount Under 1992 Master Agreement5-23
- § 5:9.1 : Tables for Early Termination Amount Calculations5-24
- Table 5-1 : Early Termination Amount for Transactions Terminated Due to Event of Default5-25
- Table 5-2 : Early Termination Amount for Transactions Terminated Due to Termination Event with One Affected Party5-26
- Table 5-3 : Early Termination Amount for Transactions Terminated Due to Termination Event with Two Affected Parties5-27
- § 5:9.2 : Applicable Rate5-28
- § 5:9.3 : Interest Accrual Dates5-29
- § 5:9.4 : Payment Date of Early Termination Amount5-30
- § 5:10 : Close-Out Amounts Under 2002 Master Agreement5-31
- § 5:10.1 : Determining Party and Commercial Reasonableness5-32
- § 5:10.2 : Economic Equivalence5-33
- § 5:10.3 : Market Data and Information5-34
- § 5:10.4 : Unpaid Amounts5-36
- § 5:10.5 : Costs of Funding and Hedging Costs5-36
- § 5:10.6 : Out-of-Pocket Expenses5-36
- § 5:10.7 : Termination Currency Equivalent5-36
- § 5:10.8 : Calculation of Early Termination Amount Under 2002 Master Agreement5-37
- § 5:10.9 : Tables for Early Termination Amount Calculations5-38
- Table 5-4 : Early Termination Amount for Transactions Terminated Due to Event of Default5-39
- Table 5-5 : Early Termination Amount for Transactions Terminated Due to Termination Event with One Affected Party Other Than an Illegality or Force Majeure5-40
- Table 5-6 : Early Termination Amount for Transactions Terminated Due to Termination Event with Two Affected Parties Other Than an Illegality or Force Majeure5-41
- Table 5-7 : Early Termination Amount for Transactions Terminated Due to Illegality or Force Majeure with One Affected Party5-42
- Table 5-8 : Early Termination Amount for Transactions Terminated Due to Illegality or Force Majeure with Two Affected Parties5-43
- § 5:10.10 : Applicable Rate5-44
- [A] : Interest on Defaulted Amounts Prior to Termination5-44
- [B] : Interest on Unpaid Amounts5-45
- [C] : Interest on Deferred Payments or Deliveries Due to Illegality or Force Majeure5-46
- [D] : Interest on Deferred Payments or Deliveries Due to Failure of Conditions Precedent5-48
- [E] : Interest on Early Termination Amount5-48
- § 5:10.11 : Payment Date of Early Termination Amount5-50
- § 5:10.12 : Payment of Early Termination Amount if Force Majeure or Illegality5-51
- § 5:11 : Legal Enforceability of Termination Amount Calculations5-51
- § 5:11.1 : Liquidated Damages Under New York Law5-52
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Chapter 6: |
Risk Mitigation and Close-Out Netting |
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- § 6:1 : In General6-2
- § 6:2 : Payment Netting6-3
- § 6:2.1 : Single Transaction Netting6-3
- § 6:2.2 : Multiple Transaction Netting6-4
- § 6:2.3 : Netting Elections6-5
- § 6:2.4 : Netting After Early Termination Date6-6
- § 6:3 : Escrow Arrangements6-7
- § 6:4 : Adequate Assurances Provisions6-8
- § 6:5 : Suspension of Payments or Deliveries6-10
- § 6:6 : Collateral Arrangements6-12
- § 6:6.1 : Collateral Rights Under CSA Upon Occurrence of Event of Default6-14
- [A] : Rights of Secured Party6-14
- [B] : Rights of Pledgor6-16
- § 6:6.2 : Uniform Commercial Code Considerations6-17
- [A] : Mandatory UCC Provisions6-18
- [B] : Purchase of Collateral by Secured Party or Its Affiliates6-24
- [C] : Commercial Reasonableness6-27
- § 6:7 : Setoff Rights6-29
- § 6:7.1 : Bilateral Setoffs6-30
- [A] : Examples of Bilateral Setoff Provisions6-31
- [B] : Legal Enforceability of Bilateral Setoff Provisions6-34
- § 6:7.2 : Triangular Setoffs6-39
- [A] : Examples of Triangular Setoff Provisions6-40
- [B] : Legal Enforceability of Triangular Setoff Provisions6-44
- § 6:7.3 : Cross-Product Netting and Master Netting Agreement6-50
- § 6:8 : Close-Out Netting6-52
- § 6:9 : Lessons from Lehman Brothers Bankruptcy6-54
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Chapter 7: |
U.S. Bankruptcy Implications of Close-Out Netting |
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- § 7:1 : In General7-2
- § 7:2 : General Provisions of the U.S. Bankruptcy Code7-4
- § 7:2.1 : The Automatic Stay—Bankruptcy Code Section 3627-4
- § 7:2.2 : Executory Contracts—Bankruptcy Code Section 3657-5
- § 7:2.3 : Avoidance Powers—Bankruptcy Code Sections 544, 547, and 5487-8
- § 7:2.4 : Setoffs—Bankruptcy Code Section 5537-9
- § 7:2.5 : Property of Estate—Bankruptcy Code Section 5417-10
- § 7:3 : Exercise of Contractual Rights for Derivatives7-11
- § 7:3.1 : Contractual Rights Under Bankruptcy and Validity of Section 2(a)(iii) of Master Agreements7-11
- [A] : Exercise of Contractual Rights in Derivative Transactions7-13
- [B] : Enforceability of Section 2(a)(iii) in U.S. and U.K. Insolvency Proceedings7-14
- [C] : Implications of Metavante Under the Code7-18
- § 7:3.2 : Definitions of Code Sections7-22
- § 7:3.3 : Waiver of Termination Right7-31
- § 7:4 : Setoff Rights for Derivatives in Bankruptcy7-34
- § 7:4.1 : Automatic Stay Exceptions7-34
- § 7:4.2 : Section 553 and the Concept of Mutuality in Setoff Rights7-35
- § 7:4.3 : Applicability of the Mutuality Requirement to Derivative and Other Financial Market Agreements7-38
- [A] : State of New York7-38
- [B] : Other U.S. Jurisdictions7-44
- § 7:4.4 : Damages Arising from Liquidation of Derivative and Other Financial Market Agreements Fixed Post-Petition May Be Pre-Petition Debts7-47
- § 7:4.5 : Escrowed Property7-48
- § 7:5 : Cross-Product Netting7-52
- § 7:6 : Ipso Facto Clauses and Credit Default Swaps7-53
- § 7:6.1 : Ballyrock ABS CDO 2007-1 and U.S. Synthetic CDOs7-54
- [A] : Ballyrock7-54
- [B] : U.S. Synthetic CDOs7-59
- § 7:6.2 : Dante ABS CDO 2007-1 and U.K. Synthetic CDOs7-59
- § 7:7 : Lehman Brothers’ Bankruptcy Proceedings and Impact on Close-Out Netting7-64
- § 7:7.1 : Summary of Motion to Terminate Open Derivative Contracts Proposed Assumption and Assignment Procedures7-64
- § 7:7.2 : Termination and Settlement Procedures7-68
- [A] : Summary of Motion to Force Alternative Dispute Resolution for Derivatives7-70
- [B] : Summary of Lehman Brothers’ Proposed Alternative Dispute Resolutions Procedures7-70
- [B][1] : Derivatives ADR Counterparties7-71
- [B][2] : Derivatives ADR Disputes7-71
- [B][3] : Notice/Response Stage7-72
- [B][4] : Request for Initial Settlement Conference7-73
- [B][5] : Mediation Stage7-74
- [B][6] : Other Important Provisions7-75
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Chapter 8: |
Best Practices Recommendations |
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- § 8:1 : Overview8-1
- § 8:2 : Events of Default8-3
- § 8:2.1 : Default Under Specified Transactions8-3
- § 8:2.2 : Cross-Default8-5
- § 8:2.3 : Bankruptcy Event of Default8-6
- § 8:3 : Termination Events8-7
- § 8:3.1 : Credit Event Upon Merger8-7
- § 8:3.2 : Force Majeure8-8
- § 8:4 : Collateral Arrangements8-8
- § 8:4.1 : Credit Support Annex8-9
- § 8:4.2 : Alternative Security Arrangements8-10
- § 8:4.3 : UCC Filings and Search Reports8-12
- § 8:5 : Declaration of Early Termination Date8-13
- § 8:6 : Foreclosure of Collateral8-14
- § 8:7 : Bankruptcy Considerations8-15
- § 8:8 : Other Legal Risk Mitigation Provisions8-17
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Chapter 9: |
Current Developments |
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- § 9:1 : General Review of Systemic Risk9-1
- § 9:2 : Dodd-Frank Act and OTC Derivatives9-2
- § 9:3 : Implications of Dodd-Frank Act9-15
- § 9:4 : Conclusion9-18
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Chapter 10: |
Appendices A-A13 |
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Chapter 11: |
Appendices B-B12 |
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- Appendix B2 : Order pursuant to Sections 105 and 365 of the Bankruptcy Code to establish procedures for the Settlement or Assumption and Assignment of Prepetition Derivative Contracts, In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. Dec. 16, 2008)B2-1
- Appendix B3 : Supplemental Order pursuant to Sections 105 and 365 of the Bankruptcy Code to establish procedures for the Settlement or Assumption and Assignment of Prepetition Derivative Contracts, In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. Jan. 15, 2009)B3-1
- Appendix B4 : Debtors’ Motion for an Order pursuant to Sections 105 and 365 of the Bankruptcy Code to establish procedures for the Settlement or Assumption and Assignment of Prepetition Derivative Contracts, In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. Nov. 13, 2008)B4-1
- Appendix B5 : Order pursuant to Sections 105(a), 362 and 365 of the Bankruptcy Code to compel performance of Contract and to enforce the Automatic Stay, In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. Sept. 17, 2009)B5-1
- Appendix B6 : Transcript of Omnibus Hearing Held on 09/15/09, In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. Sept. 15, 2009). Transcript relating to Order set forth in Appendix D relating to Metavante Corporation’s motion begins on page 99B6-1
- Appendix B7 : Metavante Corporation’s Motion to Alter or Amend the Court’s Order Granting Lehman Brothers Special Financing Inc. and its Affiliated Debtors’ Motion to Compel Performance and Enforce the Automatic Stay, In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. Sept. 25, 2009)B7-1
- Appendix B8 : Third Supplemental Order pursuant to Sections 105 and 365 of the Bankruptcy Code to establish procedures for the Settlement or Assumption and Assignment of Prepetition Derivative Contracts, In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. Sept. 29, 2009)B8-1
- Appendix B9 : Fourth Supplemental Order pursuant to Sections 105 and 365 of the Bankruptcy Code to establish procedures for the Settlement or Assumption and Assignment of Prepetition Derivative Contracts, In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. Oct. 2, 2009)B9-1
- Appendix B10 : In re Lehman Brothers Holdings Inc. v. BNY Corporate Trustee Services Limited, 2010 WL 271161 (Bankr. S.D.N.Y. Jan. 25, 2010)B10-1
- Appendix B11 : Notice of Debtors’ Motion for Approval of a Settlement Agreement with Metavante Corporation, In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. Mar. 24, 2010)B11-1
- Appendix B12 : Declaration of Daniel Ehrmann in Support of Debtors’ Motion for Approval of a Settlement Agreement with Metavante Corporation (Bankr. S.D.N.Y. Mar. 24, 2010)B12-1
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Chapter 12: |
Appendix C: Wall Street Transparency and Accountability Act of 2010 (Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010)) |
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Chapter 16: |
Index to Terminating Derivative Transactions: Risk Mitigation and Close-Out Netting |
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