|The Jolly Contrarian’s Glossary |
The snippy guide to financial services lingo.™
My port in your heavy storm.
- The Bankruptcy Code, when closing out a derivative master agreements against a U.S. corporations (and — perhaps not — ERISA plans);
- The Investment Advisers Act of 1940, for broker/dealers wishing to bundle fees for research services into their commissions for equity brokerage;
- The onerous registration requirements of the Securities Act of 1933, to be found under Rule 144A of that spectacular statute when selling securities to qualifying institutional buyers, and under Regulation S for non-US persons.
There are doubtless many more.
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. 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 hippyish safe harbors from the 1960s that might apply to swaps. But then again, it’s not that likely — and it is just as harsh to blame US legislators for not enacting safe harbors for swaps before the 1980s — since there weren’t any swaps before 1981.
- Definitely not Cadwalader, obviously.
- Being WHEN SWAPS WERE INVENTED. See swap history.