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The Bankruptcy StrategistLJN NewslettersNewsSections

Financial Contract Amendments to Bankruptcy Code

By Jeffrey L. Schwartz
May 24, 2005

Esoteric and arcane, the financial contract provisions of the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 — those dealing with repurchase agreements, securities contracts, swap agreements, forward and commodity contracts — have been given short shrift by a mainstream media focused on the more “newsworthy” consumer provisions of that legislation. However, to bankruptcy practitioners focusing on larger commercial cases or involved in the capital markets, these amendments are important and deserve a close look.

Although generally described as simply adding netting provisions to the Bankruptcy Code, the amendments, which are set forth in Sections 901 through 911 of the legislation, do much more. They build upon and expand the network of safe-harbor protections previously granted in the Bankruptcy Code to qualifying parties in qualifying financial transactions from time to time since the Bankruptcy Code became law in 1978. Netting is one element of this expansion. Both the existing provisions and these new amendments are consistent with the long-espoused goals of financial regulators, such as the Federal Reserve and the SEC, to eliminate potential risks to the international financial system that would otherwise result from the collapse of a major market participant. The amendments update and expand existing law in recognition of the continued evolution of the capital markets since the last significant change to these safe harbors over 10 years ago.

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