Derivatives in Bankruptcy: Safe Harbors, Dodd-Frank, and the Orderly Liquidation Authority

Recording of a 90-minute CLE webinar with Q&A


Conducted on Wednesday, April 15, 2020

Recorded event now available

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Program Materials

This CLE webinar will discuss the treatment of derivatives in bankruptcy. The panel will discuss the exemptions historically afforded derivatives before the financial crisis, the ramifications of those exemptions as shown in the Lehman and MF Global bankruptcies, and the current framework which exists after Dodd-Frank to address insolvency risks in derivatives products.

Description

The Bankruptcy Code exempts financial derivatives and repurchase agreements from crucial provisions, such as the automatic stay. As a result, derivatives contracts historically could be liquidated even after the bankruptcy of one of the counterparties. The Lehman and other financial crisis era bankruptcies led to questions about whether these safe harbors might increase the vulnerability of the financial markets, particularly in the event of a large financial institution's bankruptcy and the resultant unwind of its financial contracts. Dodd-Frank attempted to address these vulnerabilities, in part, through the creation of the Orderly Liquidation Authority (OLA).

The OLA is intended to ameliorate systemic risk by resolving a systemically important financial institution (SIFI) under special, accelerated rules instead of bankruptcy. In addition to the OLA, the Dodd-Frank Act and related CFTC and SEC rules forced the restructure of the derivatives market in part to reduce the risks to the derivatives market of the failure of a large financial institution. Counsel advising clients who engage in derivatives products must carefully consider the impact of these structural and regulatory changes.

Listen as our authoritative panel of attorneys analyzes the current regulatory framework governing the treatment of derivatives contracts after a bankruptcy filing, including the interaction of the OLA with bankruptcy proceedings. The panel discussion will include the Lehman and other financial crisis era bankruptcies and whether Dodd-Frank and OLA have adequately addressed the insolvency risks associated with derivatives products.

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Outline

  1. Historical treatment of derivatives and systemic risk: Lehman and the financial crisis
  2. How Dodd-Frank addressed insolvency risks associated with derivatives
    1. Treatment of collateral under Dodd-Frank; segregation and mandatory margining
    2. Portability of positions and collateral
    3. Clearing requirements
    4. OLA's ability to take over and accelerate resolution SIFI assets
    5. Role of protocols
    6. Added risks from the Dodd-Frank structure

Benefits

The panel will review these and other key questions:

  • What are the special rights that the bankruptcy accords to parties to financial contracts?
  • What is the justification for the bankruptcy safe harbors afforded derivatives under the Bankruptcy Code?
  • Did these safe harbors contribute to systemic risk to the financial system during the Great Recession?
  • How does the current regulatory framework under Dodd-Frank impact the design and enforcement of derivatives contracts?
  • What special capabilities are granted to the OLA under Dodd-Frank, and what new risks are presented in the context of the bankruptcy of a counterparty?

Faculty

Kalbaugh, Gary
Gary E. Kalbaugh
Deputy General Counsel and Director
ING Financial Holdings

Mr. Kalbaugh’s practice areas include derivatives and banking law. Previously, he served as executive director,...  |  Read More

McLaughlin, Robert
Robert M. McLaughlin

Partner
Fried Frank Harris Shriver & Jacobson

Mr. McLaughlin is head of the firm's Derivatives Practice and a leading practitioner in derivative transactions of...  |  Read More

Rose, Jack
Jack J. Rose

Member
Rosenberg & Estis

Mr. Rose leads the firm’s Reorganization & Bankruptcy Department. He has three decades of experience in...  |  Read More

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