ERISA netting opinion
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A word about credit risk mitigation
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There are many kinds of netting opinion, all of them wretched, but one you will not see is the ERISA netting opinion. You know, a reasoned opinion that close-out netting would be effective in the administration of a defaulted ERISA plan.[1]
This is not because conceptually, reading (let alone writing) such a thing would exceed a single human’s capacity for prolixity, confusion and ennui — though surely it would — but because such a thing is a logical paradox that cannot exist in Euclid’s flawed space-time geometry.[2]
ERISA netting
Famously, ERISA plans tend to be set not to net, and for the unholiest of reasons, courtesy of the opinions committee of a leading U.S. law firm which prudence counsels it would be wiser not to name, but upon whom the whole market relies.
This firm cannot bring itself to rule out the risk that, when resolving an insolvent ERISA plan, a court would interpret ERISA as incorporating the US Bankruptcy Code as it stood in 1971 to the insolvency of the plan, rather than the Code as it stands at the time of insolvency. That’s a problem, because the “safe harbors” one relies upon for safely closing out swaps were only put into the Bankruptcy Code in the 1980s.[3] So, no netting against ERISA plans. Just in case.
Let me break that down:
- The Bankruptcy Code, today, contains a safe harbor allowing you to close out an ISDA Master Agreement without fearing for your netting, and has done for thirty odd years.
- The ERISA legislation, today, allows you to rely on available safe harbors in the Bankruptcy Code.
- Since ERISA was enacted in 1971, thought the very wisest eagle of the legal eagles, this might mean only the safe harbors that were there in 1971 count, even if they don’t exist today, and none of the safe harbors that have been enacted since, even if they still do exist, because when it refers to the Bankruptcy Code, ERISA doesn’t say “as amended from time to time”.
Seriously. That’s it.
It is a frankly fantastical fear: Not only is it hard to know, at this remove, what the US Bankruptcy Code said in 1971, much less how it might have been interpreted in those days, but many of the institutions and concepts it relies on may since have been abolished or materially changed. Who knows? perhaps some old safe harbors from the 1960s might apply to swaps. But then again, since there weren’t any swaps before 1981, it’s not exactly likely. It would be an imaginative legislator indeed who catered in 1971 for something no-one had even had the presence of mind to think up for another decade.
Originalism?
There is a school of thought in US constitutional law — “originalism” — that when construing a legal text one should extract the original understanding at its time of adoption, disregarding all subsequent changes in law, moral consensus or technology. This is popular with conservatives, the four Yorkshiremen, people who think they don’t make things like they used to, but who are in denial about how crappy things used to be, and indeed how impossible it is to know, over the years, what those who framed a text had in mind in the first place anyway. It is a, ostensibly, a device from preventing judicial activism in favour of express legislative and constitutional amendment, but is in its own way just as wilful an exercise in juicial imagination. Perhaps we should call it judicial passivism, or even judicial passive-aggressivism. It is also to assume that legislation — especially consitutional legislation — is easily amended. But the U.S. constitution has long since transcended mere legislation and as become some kind of sacred article of faith for the American people. No-one is amending that. All that is left is creative interpretation of what it means to suit the current social climate.
See also
References
- ↑ An ERISA plan is a US pension plan falling under the jurisdiction of the Employee Retirement Income Security Act of 1974 — a fearsome piece of legislation. That means most pension schemes in America, excluding those for state or federal employees.
- ↑ Euclid as a partner of a U.S. law firm. Now there’s a thought.
- ↑ Being WHEN SWAPS WERE INVENTED. See swap history.