The ISDA Master Agreement1 serves as the basis for the vast majority of overthe- counter derivatives transactions. Two fundamental principles of the ISDA Master Agreement are: (1) upon the default of one party to a swap, the nondefaulting counterparty may terminate the swap, calculate its loss and claim damages; and (2) the obligation of each party to a swap to make payments to the other is subject to the satisfaction of the conditions precedent that no default has occurred with respect to the other party.
The CFTC has confirmed that its Division of Enforcement is investigating MF Global, Inc. for possible violations of the Commodity Exchange Act, or CEA and/or CFTC regulations. Scott D. O’Malia, a CFTC Commissioner, stated certain Dodd-Frank rules should be reexamined in light of the MF Global bankruptcy.
The enforcement of triangular setoffs in bankruptcy, where affiliates set off their claims against the debtor, received another setback in a recent decision in the Lehman bankruptcy cases. See In re Lehman Brothers Inc., No. 08-01420 (JMP) (SIPA), 2011 WL 4553015 (Bankr. S.D.N.Y. Oct.
The United States Bankruptcy Court for the Southern District of New York (the Court), has held that section 553(a) of the Bankruptcy Code prohibits a swap counterparty from setting off amounts owed to the debtor against amounts owed by the debtor to affiliates of the counterparty, notwithstanding the safe harbor provision in section 561 of the Bankruptcy Code and language in the ISDA Master Agreement permitting the swap counterparty to effect “triangular” setoffs. In re Lehman Brothers Inc., Case No. 08-01420 (JMP)(SIPA) (Bankr. S.D.N.Y. October 4, 2011).
On October 4, 2011, the United States Bankruptcy Court for the Southern District of New York ruled that a contractual right of a triangular (non-mutual) setoff was unenforceable in bankruptcy, even though the contract was safe harbored. In re Lehman Brothers, Inc., No. 08-01420 (JMP), 2011 WL 4553015 (Bankr. S.D.N.Y. Oct. 4, 2011).
The Bankruptcy Court for the Southern District of New York has held that a cross-affiliate netting provision in an ISDA swap agreement is unenforceable in bankruptcy. In the SIPA proceedings of Lehman Brothers Inc. (LBI), UBS AG (UBS) sought to offset UBS’s obligation to return excess collateral to LBI against claims purportedly owed by LBI to UBS subsidiaries, UBS Securities and UBS Financial Services.
Lehman Brothers Special Financing, Inc. v. Ballyrock ABS-CDO 2007-1 Limited (In re Lehman Brothers Holdings, Inc.) No. 09-01032 (JMP) (Bankr. S.D.N.Y. May 12, 2011)
CASE SNAPSHOT
Several states have recently added provisions to their insurance rehabilitation and liquidation acts which address the rights of parties to certain derivatives transactions with an insurance company in the event that an order of rehabilitation or liquidation is entered against the insurer. In short, these laws allow parties to exercise certain early termination and close-out netting provisions without regard to the applicable stay mechanism under state insurance insolvency law.
On 26 June 2015, Vietnam loosened foreign ownership limits (FOL) in public companies by the adoption of Decree 60/2015 (Decree 60).
Following the rule that swap agreements should be netted after contract termination, a New York bankruptcy court has held that such agreements also should be netted following rejection in bankruptcy.
“Although rejection of an agreement does not equal termination,” Bankruptcy Judge Arthur J. Gonzalez acknowledged in In re Enron Corp., 349 B.R. 96 (Bankr. S.D.N.Y. Aug. 2, 2006), “this does not affect the determination of…rejection damages. Termination of swap agreements generally requires that the parties’ positions be netted.”
“Rejection leads to a similar result,” he stated.