International Swaps and Derivatives Association, Inc.

2005 ISDAB Regional Member Conference

Netting and Collateral Law

Status Update

Lawrence S. Brandman
Goldman. Sachs 8 Co.
September 28,2005

1. US Bankruptcy Law Amendments - Financial Contract

2. Netting and Collateral Issues in the Emerging Markets

 US Bankruptcy Law Amendments -
Financial Contract Provisions

Financial Contract Provisions

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General Purpose of Financial Contracts Legislation

Decrease systerntc r~sk
Increase global cornpettttveness of U S financial markets
Reduce uncertainty
 -
Financial-Contract-Provisions
- --" - (cont'd)
Deeper and Safer Safe Harbors
Broader range of protected products
m New class of protected counterparty
m Express recognit~onof cross-product nettlng
m Greater consistency wlth other U S federal ~nsolvencystatutes

Financial
. ,--
Contract Provisions
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(cont'd) .
*..
me

Amendments to Definitions of Protected Contracts in the

Bankruptcy Code
m "Securities Contract"
"Forward Contract"
"Commodity Contract"
"Repurchase Agreement"
'Swap Agreement"
 ents to "Securities Contract" Definition
Existing definition generally covers a 'contract for the purchase,
sale, or loan of a security"
Amended expressly to encompass margin loans and repurchase
agreements and reverse repurchase agreements on any securities
and on mortgage loans
Amended to include security agreements or arrangements or other
credit enhancements
Expressly excludes participations in commercial mortgage loans

cia1 Contract Provisions (cont'd)

"-'- " ,. +
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Amendments to "Forward Contract" Definition

Existing definition covers "a contract...for the purchase, sale or
transfer of a commodity...which is presently or in the future
becomes the subject of dealing in the forward contract trade...with a
maturity date more than two days after the date the contract is
entered into"
The phrase "or any other similar agreement" is added to the
definition and the definition is also expanded to expressly include
combinations, options, master agreements and security
arrangements (collectively, the 'Similar Agreement and other
Expanded Scope Provisions")
Amendments to "Commo
Existing definition generally covers exchange-traded futures, foreign
futures, leverage transactions and commodity options
The Similar Agreement and other Expanded Scope Provisions are
added to the definition

ial Contract Provisio

Amendments to "Repurchase Agreement" Definition
Existing definition generally limited to repos and reverse repos on
U.S. Treasuries; repurchase must be less than one year after
purchase dale or on demand
Types of eligible securities expanded to include mortgage-related
securities, mortgage loans, interests in mortgage-related securities
or mortgage loans and qualified foreign government securities
The Similar Agreement and other Expanded Scope Provisions are
added to the definition
Expressly excludes repurchase obligations in a commercial
mortgage loan participation
 Existing definition covers a short list of swaps, including rate swaps,
basis swaps, forward rate agreements. foreign exchange
agreements, commodity swaps, currency swaps and 'any other
similar agreement"
List of covered transactions expanded broadly to explicitly include
various equity swaps, debt swaps, total return and credit swaps,
weather swaps and others
Any other agreement that becomes the subject of "recurrent
dealings in the swaps markets..."
"Other similar agreement" language made clearer and definition is
also expanded to expressly include combinations, options, master
agreements and security arrangements

Financial Contract Provisions (cont'd)

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~ ~ ~. .. - .. -- .T-_.->

New Protected Counterparty: "Financial Participant"

Has protected transactions totaling $1 billion (notional or actual) on
any day in prior 15 months; or
Gross market-to-market positions of at least $100 million on any
day during prior 15 months

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New "Cross-Product" Netting and "Master

Provides for "cross-product" close-out, netting and set off across

protected contracts and by 'master netting agreement participants"
under "master netting agreements"

Provides that damages in connection with protected contracts will be measured as of

the eaflier date of (i) rejection of the contract and (ii) liquidation. termination or
accelerationof the wnbact

Ancillary Proceedings
New Chapter 15 replaces former Section 304 and deals with andllary proceedings to
foreign bankruptcy proceedings
New law makes clear that safe harbor provisions apply in cases under Chapter 15

Eligible Municipalities
Chapter 9 deals with bankruptcy proceedings in respect of municipalities
New law rnakes clear lhat safe harbor provisions apply in cases under Chapter 9

Fixing Other Insolvency Regimes

SIPA. FDICIA. FDlA and FCUA amended for consistency
 Netting and Collateral Issues
in the Emerging Markets

Countries of Primary Concern to ISDA members in Europe

and beyond (Middle East, Africa)

Providing technical legal assistance for initiatives in Central and Eastern Europe.
particularly in regards to the current implementationof the EU collateral directive in
accession countries as well as candidate countries
m ISDA proposal to European Commission to consider Netting Directive to harmonize
netting regimes in 'old' and 'new" EU member states (Feb 2004: July 2005)
European Commission report on status of EU Collateral Diredive opt-outs due
27 December 2006
Other countries in focus: Russia. Romania. Croatia. Kazakhstan. Israel. Pakistan
ISDA endorsed netting legislation in place in Hungary. Czech Republic plus Poland
and Slovakia
ISDA opinions commissioned on Iceland (netting) and Turkey (collateral)
m ISDA's Islamic Finance Law Group supporting the development of OTC derivatives
documentation, especially iSDA Master Agreement. that is compatible with Islamic

ISDA is in contact Mth Sharia scholars and discussing moperation with

international organizations dealing with the Islamic financial mar!iets
Jurisdictions of primary interest to ISDA members so far: UAE (Abu Dhabi. Dubai).
Bahrain. Saudi Arabia. Qatar. Kuwait plus Malaysia
Pakistan: ISDA comments on draft law on netting of financial contracts (2005)
submined in August 2005

ral and Eastern. Europe

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New Insolvency Law plus implementing l a m re collateral and winding-up directives
to become effective in January 2006
Shortlisted for ISDA netting opinion in 2006

Netting legislation in effect since October 1. 2003. ISDA nening opinion published
m Most restrictions due to Polish Language Act eliminated upon EU accession
EU Collateral Directive implemented. Some darifications still needed before ISDA
collateral opinion can be commissioned
 nd Eastern Europe

m ISDA endorsed language to amend previous netting provisions in force since

lSDA nening opinion on Czech Republic published in May 2005

ISDA monitoring current effom to implement EU wllaleral directive

m ISDA memo on status of implementationof EU Collateral Directive prior to EU

accession (2007-08)

Request lo ISDA to provide commenls on project to establish a regional financial

centre with a focus on derivatives and Islamic finance

First Cenhal and Eastern European jurisdiction to enact rmpehenSNe close-out

netting legislation. ISDA netting opinion published
EU Collateral Directive implemented. Shortlisted for ISDA wllateral opinion

ISDA netting opinion published. Shortlisted for wIlatfal opinion

ISDA netting opinion published on ISDA websile. ISDA wllatwal opinion lo be

published in autumn 2005

July 2005: ISDA wmments on draH law on financial agreements

Key Legal Issues in Russia
.- - - -. --a-

Legal enforceability. ISDA's m m e n t letlers outline amendmenls proposed by various

drafl proposals that mean to improve the legal certainty for derivatives transactions.
Form of the contract. Some draft proposals contain requirements for the form of a
derivatives contract. ISDA concerns raised to confirm the mpatibility of these
requirements with the form of the ISDA Master Agreement.
- . . ".
Close-out neltino. Some draft orooosals stioulate that doseout nettino omcedures rnav
~ ~~~

be set by law or regulation, which is counter to the contractual arrangements in the ISDA
Master Agreement. ISDA registered the wncem with this aspect of the legislation.
-
Collateral arranoements. Althouoh - the ISDA Master's collatwal arranoements
" can be a
significant risk mitigation tool. their usefulness depends upon the specific facts of a
transaction. The comment letters request that any draft proposal be amended sn that use
of collateral arrangements in derivatives transactions is optional, not mandatory.

Key Developments in China

Proposed Close-out Netting Rules for the PRC:
Following the full implementation of the 'Administrative Rules on
Financial Institutions Engaging in Derivatives Transactions" as published
China Banking Regulatory Commission ("CBRC"), ISDA is further
engaged in a dialogue with CBRC, the People's Bank of China and the
National People's Congress to discuss the possibilities of including the
concept of close-out netting in the new draft Bankruptcy Law. CBRC
invited ISDA to draft suitable "netting rules" for the PRC and on 8 Sep 05
ISDA submitted draft language to be progressed by CBRC.

n
 India's Finance Minister advocated a strengthening of the legal and
regulatory framework relating to OTC derivatives in his budget speech
earlier this year. ISDA provided a detailed submission in March 05 and
subsequently met with the Reserve Bank of India ("RBI") to discuss the
benefits of close-out netting legislation. The proposed RBI (Amendment)
Bill. 2005 now contains a suggested approach for close-out netting and
further dialogue with RBI is ongoing.

r Developments in Asia
" "*~.,.-

South Korea
In March, the National Assembly in South Korea passed a new bill on debt
reorganization and bankruptcy, combining existing bankruptcy laws. The new
insolvency law, which includes language on close-out netting will take effect

W In July, ISDA met with the Banking Bureau (previously the Bureau of
Monetaly Affairs) and Securities and Futures Bureau to discuss market
developments and possible support ISDA could lend to authorities and firms
active in Taipei.
ISDA Initiatives in the Americas

ISDA is following these developments and working dosely with local members:
Amendment of bankruptcy laws adopted.
ISDA netting opinion expected for late October 2005

There is broad acceptance of ISDA documentation and a wund legal opinion on netting
ISDA mllateral opinion published in July 2005

ISDA netting opinion on Barbados to be published in late October 2OQ5

ISDA submission to regulators in Anguilla requesting action re netting legislation
Investigating legal situation in Argentina