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DERIVATIVESDESKBOOK

• Close-Out Netting• Risk Mitigation • Litigation

Second Edition

VOLUME 1

Sylvie A. Durham

Incorporating Release #3February 2019

#205880

Practising Law InstituteNew York City

#52756

This work is designed to provide practical and usefulinformation on the subject matter covered. However, it issold with the understanding that neither the publishernor the author is engaged in rendering legal, account-ing, or other professional services. If legal advice or otherexpert assistance is required, the services of a competentprofessional should be sought.

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Legal Editor: Kelliann Kavanagh

Copyright © 2009, 2010, 2011, 2014, 2015, 2016, 2019 by PractisingLaw Institute. All rights reserved.

First edition 2009.Second edition 2014.

Printed in the United States of America. No part of this publication maybe reproduced, stored in a retrieval system, or transmitted in any form byany means, electronic, mechanical, photocopying, recording, or other-wise, without the prior written permission of Practising Law Institute.

LCCN: 2009931769

ISBN: 978-1-4024-2165-5

About the Author

Sylvie A. Durham is a shareholder in the New York office of thelaw firm of Greenberg Traurig, LLP. Prior to Greenberg, she was aninvestment banker and Head of Structured Equity Products at BNPParibas and prior to BNP, she was a partner at the New York law firm ofWeil, Gotshal and Manges LLP. She started her career as an associateat Skadden, Arps, Slate, Meagher & Flom.

She has been involved as both a lawyer and investment banker inderivatives, structured derivatives and structured products for over20 years. She has represented major investment and commercialbanks, private funds, corporations, investors and other end-users in abroad array of derivative transactions in the United States, Europe,Asia and Latin America. She has written numerous articles and hasbeen a frequent speaker on topics relating to derivatives and derivativeproducts.

She received her legal degree from the University of Virginia andgraduated magna cum laude with a Bachelor of Science degree inFinance from Georgetown University.

vii(Durham, Rel. #3, 2/19)

Table of Chapters

Chapter 1 Introduction

Chapter 2 Events of Default and Termination Events

Chapter 3 Collateral and Security Arrangements

Chapter 4 Early Termination

Chapter 5 Early Termination Amounts

Chapter 6 Risk Mitigation and Close-Out Netting

Chapter 7 U.S. Bankruptcy Implications of Close-Out Netting

Chapter 8 Best Practices Recommendations

Chapter 9 Current Developments

(Durham, Rel. #3, 2/19) ix

(Durham, Rel. #3, 2/19)

Table of Contents

VOLUME 1

About the Author ............................................................................. vii

Table of Chapters ..............................................................................ix

Acknowledgments .......................................................................... xxv

Frequently Used Terms ................................................................ xxvii

Chapter 1 Introduction

§ 1:1 In General ........................................................................ 1-1§ 1:2 What Is a Derivative?....................................................... 1-4

§ 1:2.1 Interest Rate Swaps ................................................... 1-5Diagram 1-1 Interest Rate Swap................................................ 1-7

§ 1:2.2 Currency Swaps......................................................... 1-8Diagram 1-2 FX Fixed Currency Swap ...................................... 1-9

§ 1:2.3 Equity Swaps ........................................................... 1-10Diagram 1-3 Equity Swap ........................................................ 1-11Diagram 1-4 Equity Swap ........................................................ 1-13

§ 1:2.4 Commodity Swaps .................................................. 1-14Diagram 1-5 Equity Swap ........................................................ 1-15Diagram 1-6 Commodity Swap ............................................... 1-16

§ 1:2.5 Credit Default Swaps............................................... 1-17Diagram 1-7 Credit Default Swap ........................................... 1-18

§ 1:2.6 Other Derivatives .................................................... 1-19§ 1:3 Terminology.................................................................... 1-19§ 1:4 What Is the Purpose of Derivative Transactions?........... 1-21§ 1:5 Guide to Documentation of Derivative

Transactions ................................................................... 1-22§ 1:6 Overview of Close-Out Netting...................................... 1-26

Chapter 2 Events of Default and Termination Events

§ 2:1 Introduction ..................................................................... 2-2§ 2:2 1992 and 2002 Master Agreements Events of Default..... 2-3

§ 2:2.1 Failure to Pay or Deliver (Section 5(a)(i) ofMaster Agreements)................................................... 2-3

xi

§ 2:2.2 Breach of Agreement (Section 5(a)(ii) of MasterAgreements)............................................................... 2-4

§ 2:2.3 Credit Support Default (Section 5(a)(iii) ofMaster Agreements)................................................... 2-5

§ 2:2.4 Misrepresentation (Section 5(a)(iv) of MasterAgreements)............................................................... 2-6

§ 2:2.5 Default Under Specified Transaction(Section 5(a)(v) of Master Agreements)...................... 2-7

§ 2:2.6 Cross-Default (Section 5(a)(vi) of MasterAgreements)............................................................. 2-11

§ 2:2.7 Bankruptcy (Section 5(a)(vii) of MasterAgreements)............................................................. 2-13

§ 2:2.8 Merger Without Assumption (Section 5(a)(viii)of Master Agreements) ............................................ 2-16

§ 2:3 Termination Events ........................................................ 2-17§ 2:3.1 Illegality (Section 5(b)(i) of Master Agreements)...... 2-17§ 2:3.2 Tax Event (Section 5(b)(ii) of 1992 Master

Agreement and Section 5(b)(iii) of 2002Master Agreement) .................................................. 2-18

§ 2:3.3 Tax Event upon Merger (Section 5(b)(iii) of 1992Master Agreement and Section 5(b)(iv) of 2002Master Agreement) .................................................. 2-20

§ 2:3.4 Credit Event upon Merger (Section 5(b)(iv)of 1992 Master Agreement and Section 5(b)(v)of 2002 Master Agreement)..................................... 2-20

§ 2:3.5 Additional Termination Event (Section 5(b)(v)of 1992 Master Agreement and Section 5(b)(vi)of 2002 Master Agreement)..................................... 2-21

§ 2:3.6 Force Majeure (Section 5(b)(ii) of MasterAgreements)............................................................. 2-22

§ 2:4 Termination at Election of Non-Defaulting orNon-Affected Party: Suspension of Obligation ............... 2-22

§ 2:5 Events of Default Chart ................................................. 2-26Chart 2-1 Events of Default..................................................... 2-27

Chapter 3 Collateral and Security Arrangements

§ 3:1 Introduction ..................................................................... 3-2§ 3:1.1 Variation Margin Regulations .................................... 3-3§ 3:1.2 Effect of VM Regulations........................................... 3-4§ 3:1.3 Initial Margin Regulations......................................... 3-5

§ 3:2 Types of Credit Support Annexes ..................................... 3-6§ 3:2.1 U.S. CSA ................................................................... 3-7§ 3:2.2 English Law CSA....................................................... 3-7§ 3:2.3 Japanese CSA ............................................................ 3-8

DERIVATIVES DESKBOOK

xii

§ 3:2.4 Main Terms of CSA .................................................. 3-8§ 3:2.5 Alternative Security Documentation ......................... 3-8

§ 3:3 Collateral Postings............................................................ 3-9§ 3:4 Rating Agency Downgrade Triggers in Rated

Transactions ..................................................................... 3-9§ 3:4.1 Downgrade Triggers ................................................. 3-11§ 3:4.2 Mitigating Actions................................................... 3-15§ 3:4.3 Failure to Take Necessary Mitigating Actions ......... 3-16§ 3:4.4 Other Considerations .............................................. 3-17

§ 3:5 Key Terms of CSA .......................................................... 3-19§ 3:5.1 Exposure .................................................................. 3-19§ 3:5.2 Other Key Provisions for Collateral Postings........... 3-22§ 3:5.3 Eligible Collateral and Valuation ............................. 3-25

§ 3:6 Dispute Resolution Mechanics....................................... 3-27§ 3:6.1 Business Day One: Valuation Date ......................... 3-28§ 3:6.2 Business Day Two: Dispute Notification................. 3-28§ 3:6.3 Business Day Two/Three: Resolution Attempt ........ 3-28§ 3:6.4 Business Day Three: Delivery of Undisputed

Amount ................................................................... 3-28§ 3:6.5 Business Day Three: Failure of Resolution

Attempt ................................................................... 3-28§ 3:6.6 Business Day Three: Dispute Resolution

Mechanics ............................................................... 3-28§ 3:6.7 Business Day Four: Notification to Counterparty .....3-29§ 3:6.8 Business Day Five: Delivery of Eligible Collateral .....3-29§ 3:6.9 Business Day Five: Failure to Deliver Collateral ..... 3-29§ 3:6.10 Business Day Seven/Eight: Event of Default............ 3-29§ 3:6.11 Occurrence of Another Valuation Date During

Dispute .................................................................... 3-30§ 3:6.12 Dispute Resolution Procedure ................................. 3-31

§ 3:7 Events of Default............................................................ 3-31§ 3:7.1 Failure to Pay or Deliver.......................................... 3-32§ 3:7.2 Breach of Agreement ............................................... 3-32§ 3:7.3 Failure to Comply.................................................... 3-32

§ 3:8 Termination Events ........................................................ 3-33§ 3:9 Other Security Agreements ............................................ 3-35

Chapter 4 Early Termination

§ 4:1 Events of Default and Termination Events AreTreated Differently............................................................ 4-1

§ 4:1.1 Non-Defaulting Party ’s Option to Terminate............ 4-2§ 4:2 Termination Relating to Events of Default....................... 4-4

§ 4:2.1 Automatic Early Termination .................................... 4-5

(Durham, Rel. #3, 2/19) xiii

Table of Contents

§ 4:3 Termination Events Under the Master Agreements ....... 4-10§ 4:3.1 Notification to Non-Affected Party .......................... 4-12§ 4:3.2 Transfer to Avoid Termination ................................ 4-12§ 4:3.3 Consent to Transfer................................................. 4-13§ 4:3.4 Two Affected Parties ................................................ 4-13§ 4:3.5 Examples ................................................................. 4-14

[A] Tax Event ................................................................. 4-14[B] Illegality ................................................................... 4-15

§ 4:3.6 2002 Master Agreement Illegality andForce Majeure .......................................................... 4-16

§ 4:4 Termination Events ........................................................ 4-18Chart 4-1 Termination Events ................................................. 4-19§ 4:5 Delivery of Notice of Occurrence of Event of

Default or Termination Event ........................................ 4-22

Chapter 5 Early Termination Amounts

§ 5:1 Overview........................................................................... 5-2§ 5:2 Valuation Statement ......................................................... 5-3§ 5:3 First Method and Second Method Under 1992

Master Agreement ............................................................ 5-5§ 5:3.1 Hypothetical Example of Early Termination

Amount Calculations ................................................ 5-5§ 5:4 Second Method, Market Quotation Under 1992

Master Agreement ............................................................ 5-6§ 5:5 Second Method and Loss................................................ 5-11

§ 5:5.1 Loss of Bargain ........................................................ 5-12§ 5:5.2 Cost of Funding....................................................... 5-14§ 5:5.3 Hedging Costs ......................................................... 5-15§ 5:5.4 Discretion of Non-Defaulting Party......................... 5-17

§ 5:6 Unpaid Amounts............................................................ 5-18§ 5:7 Out-of-Pocket Expenses .................................................. 5-20§ 5:8 Termination Currency .................................................... 5-21

§ 5:8.1 Foreign Exchange Agent .......................................... 5-21§ 5:8.2 Conversion Time..................................................... 5-22§ 5:8.3 Conversion Amount ................................................ 5-23

§ 5:9 Calculation of Early Termination AmountUnder 1992 Master Agreement...................................... 5-24

§ 5:9.1 Tables for Early Termination AmountCalculations............................................................. 5-24

Table 5-1 Early Termination Amount for TransactionsTerminated Due to Event of Default ....................... 5-25

Table 5-2 Early Termination Amount for TransactionsTerminated Due to Termination Event withOne Affected Party................................................... 5-26

DERIVATIVES DESKBOOK

xiv

Table 5-3 Early Termination Amount for TransactionsTerminated Due to Termination Event withTwo Affected Parties ................................................ 5-27

§ 5:9.2 Applicable Rate........................................................ 5-28§ 5:9.3 Interest Accrual Dates ............................................. 5-29§ 5:9.4 Payment Date of Early Termination Amount.......... 5-30

§ 5:10 Close-Out Amounts Under 2002 Master Agreement .... 5-31§ 5:10.1 Determining Party and Commercial

Reasonableness ........................................................ 5-32§ 5:10.2 Economic Equivalence ............................................. 5-35§ 5:10.3 Market Data and Information................................. 5-36§ 5:10.4 Unpaid Amounts..................................................... 5-38§ 5:10.5 Costs of Funding and Hedging Costs ...................... 5-38§ 5:10.6 Out-of-Pocket Expenses ........................................... 5-38§ 5:10.7 Termination Currency Equivalent ........................... 5-38§ 5:10.8 Calculation of Early Termination Amount

Under 2002 Master Agreement............................... 5-38§ 5:10.9 Tables for Early Termination Amount

Calculations............................................................. 5-39Table 5-4 Early Termination Amount for Transactions

Terminated Due to Event of Default ....................... 5-40Table 5-5 Early Termination Amount for Transactions

Terminated Due to Termination Event withOne Affected Party Other Than an Illegality orForce Majeure .......................................................... 5-41

Table 5-6 Early Termination Amount for TransactionsTerminated Due to Termination Event withTwo Affected Parties Other Than an Illegalityor Force Majeure...................................................... 5-42

Table 5-7 Early Termination Amount for TransactionsTerminated Due to Illegality or Force Majeurewith One Affected Party .......................................... 5-43

Table 5-8 Early Termination Amount for TransactionsTerminated Due to Illegality or Force Majeurewith Two Affected Parties ........................................ 5-44

§ 5:10.10 Applicable Rate........................................................ 5-45[A] Interest on Defaulted Amounts Prior to

Termination............................................................. 5-45[B] Interest on Unpaid Amounts .................................. 5-46[C] Interest on Deferred Payments or Deliveries

Due to Illegality or Force Majeure........................... 5-46[D] Interest on Deferred Payments or Deliveries

Due to Failure of Conditions Precedent .................. 5-48[E] Interest on Early Termination Amount ................... 5-49

(Durham, Rel. #3, 2/19)

Table of Contents

xv

§ 5:10.11 Payment Date of Early Termination Amount.......... 5-50§ 5:10.12 Payment of Early Termination Amount If

Force Majeure or Illegality ....................................... 5-51§ 5:11 Legal Enforceability of Termination Amount

Calculations ................................................................... 5-52§ 5:11.1 Liquidated Damages Under New York Law............. 5-53§ 5:11.2 When Can Use of Market Quotation or

Loss Be Unreasonable and Unenforceable? ............. 5-56

Chapter 6 Risk Mitigation and Close-Out Netting

§ 6:1 In General ........................................................................ 6-2§ 6:2 Payment Netting .............................................................. 6-3

§ 6:2.1 Single Transaction Netting ........................................ 6-3§ 6:2.2 Multiple Transaction Netting .................................... 6-4§ 6:2.3 Netting Elections ....................................................... 6-5§ 6:2.4 Netting After Early Termination Date....................... 6-6

§ 6:3 Escrow Arrangements....................................................... 6-6§ 6:4 Adequate Assurances Provisions....................................... 6-8§ 6:5 Suspension of Payments or Deliveries.............................. 6-9§ 6:6 Collateral Arrangements ................................................ 6-10

§ 6:6.1 Collateral Rights Under CSA Upon Occurrenceof Event of Default or Specified Condition.............. 6-13

[A] Rights of Secured Party............................................ 6-14[B] Rights of Pledgor...................................................... 6-15

§ 6:6.2 Uniform Commercial Code Considerations............ 6-16[A] Mandatory UCC Provisions .................................... 6-18[B] Purchase of Collateral by Secured Party or

Its Affiliates ............................................................. 6-22[C] Commercial Reasonableness ................................... 6-26

§ 6:7 Setoff Rights ................................................................... 6-27§ 6:7.1 Bilateral Setoffs........................................................ 6-28

[A] Examples of Bilateral Setoff Provisions.................... 6-29[B] Legal Enforceability of Bilateral Setoff Provisions ......6-32

§ 6:7.2 Triangular Setoffs..................................................... 6-37[A] Examples of Triangular Setoff Provisions ................ 6-37[B] Legal Enforceability of Triangular Setoff

Provisions ................................................................ 6-41§ 6:7.3 Cross-Product Netting and Master Netting

Agreement ............................................................... 6-47§ 6:8 Close-Out Netting.......................................................... 6-49§ 6:9 Lessons from the Lehman Brothers Bankruptcy ............ 6-50

DERIVATIVES DESKBOOK

xvi

Chapter 7 U.S. Bankruptcy Implications of Close-OutNetting

§ 7:1 In General ........................................................................ 7-2§ 7:2 General Provisions of the U.S. Bankruptcy Code............. 7-4

§ 7:2.1 The Automatic Stay—Bankruptcy CodeSection 362................................................................ 7-4

§ 7:2.2 Executory Contracts—Bankruptcy CodeSection 365................................................................ 7-5

§ 7:2.3 Avoidance Powers—Bankruptcy CodeSections 544, 547, and 548....................................... 7-7

§ 7:2.4 Property of Estate—Bankruptcy Code Section 541......7-10§ 7:3 Exercise of Contractual Rights for Derivatives ............... 7-11

§ 7:3.1 Contractual Rights Under Bankruptcy andValidity of Section 2(a)(iii) of Master Agreements......7-11

[A] Exercise of Contractual Rights in DerivativeTransactions ............................................................ 7-12

[B] Enforceability of Section 2(a)(iii) in InsolvencyProceedings .............................................................. 7-13

[C] Implications of Metavante Under the Code ............ 7-20§ 7:3.2 Definitions of Code Sections................................... 7-23§ 7:3.3 Waiver of Termination Right or Close-Out

Netting .................................................................... 7-31§ 7:4 Setoff Rights for Derivatives in Bankruptcy ................... 7-35

§ 7:4.1 Automatic Stay Exceptions ...................................... 7-36§ 7:4.2 Section 553 and the Concept of Mutuality in

Setoff Rights ............................................................ 7-38§ 7:4.3 Applicability of the Mutuality Requirement to

Derivative and Other Financial MarketAgreements.............................................................. 7-41

[A] State of New York.................................................... 7-41[B] Other U.S. Jurisdictions .......................................... 7-46

§ 7:4.4 Damages Arising from Liquidation ofDerivative and Other Financial MarketAgreements Fixed Post-Petition May BePre-Petition Debts.................................................... 7-48

§ 7:4.5 Escrowed Property ................................................... 7-49§ 7:5 Cross-Product Netting.................................................... 7-53§ 7:6 Ipso Facto Clauses and Swaps ........................................ 7-54

§ 7:6.1 Ballyrock ABS CDO 2007-1 and U.S.Synthetic CDOs ...................................................... 7-56

[A] Ballyrock .................................................................. 7-56[B] U.S. Synthetic CDOs .............................................. 7-60

(Durham, Rel. #3, 2/19)

Table of Contents

xvii

§ 7:6.2 Dante ABS CDO 2007-1 and U.K. SyntheticCDOs ...................................................................... 7-61

§ 7:7 Lehman Brothers’ Bankruptcy Proceedings andImpact on Close-Out Netting ........................................ 7-65

§ 7:7.1 Summary of Motion to Terminate OpenDerivative Contracts Proposed Assumptionand Assignment Procedures .................................... 7-65

§ 7:7.2 Termination and Settlement Procedures ................. 7-68[A] Summary of Motion to Force Alternative

Dispute Resolution for Derivatives.......................... 7-70[B] Summary of Lehman Brothers’ Proposed

Alternative Dispute Resolutions Procedures............ 7-71[B][1] Derivatives ADR Counterparties......................... 7-71[B][2] Derivatives ADR Disputes .................................. 7-71[B][3] Notice/Response Stage......................................... 7-72[B][4] Request for Initial Settlement Conference .......... 7-73[B][5] Mediation Stage .................................................. 7-74[B][6] Other Important Provisions ................................ 7-75

Chapter 8 Best Practices Recommendations

§ 8:1 Overview........................................................................... 8-1§ 8:2 Events of Default.............................................................. 8-3

§ 8:2.1 Default Under Specified Transactions ....................... 8-3§ 8:2.2 Cross-Default ............................................................ 8-5§ 8:2.3 Bankruptcy Event of Default ..................................... 8-6

§ 8:3 Termination Events .......................................................... 8-7§ 8:3.1 Credit Event upon Merger ......................................... 8-7§ 8:3.2 Force Majeure ............................................................ 8-8

§ 8:4 Collateral Arrangements .................................................. 8-9§ 8:4.1 Credit Support Annex ............................................... 8-9§ 8:4.2 Alternative Security Arrangements.......................... 8-12§ 8:4.3 UCC Filings and Search Reports ............................. 8-13

§ 8:5 Declaration of Early Termination Date .......................... 8-15§ 8:6 Foreclosure of Collateral................................................. 8-16§ 8:7 Bankruptcy Considerations ............................................ 8-17§ 8:8 Other Legal Risk Mitigation Provisions ......................... 8-19

Chapter 9 Current Developments

§ 9:1 General Review of Systemic Risk and RegulatoryDevelopments................................................................... 9-1

§ 9:2 Dodd-Frank Act and OTC Derivatives............................. 9-3§ 9:2.1 Regulator ................................................................... 9-4§ 9:2.2 Key Dodd-Frank Swap Definition.............................. 9-4

DERIVATIVES DESKBOOK

xviii

(Durham, Rel. #3, 2/19)

§ 9:2.3 Categorization of Swap Counterparties ....................9-10Table 9-1 Conversion Multiplier Table.....................................9-15Table 9-2 Calculation Table......................................................9-16

§ 9:2.4 Swap Repositories .....................................................9-16§ 9:2.5 Exempted Swaps Under Treasury Exemption...........9-17§ 9:2.6 Clearing of OTC Derivatives....................................9-17§ 9:2.7 CFTC External Business Conduct Rules/August

2012 Protocol ...........................................................9-19§ 9:2.8 LEI Numbers ............................................................9-20§ 9:2.9 Portfolio Reconciliation and Risk Disclosure/March

2013 Protocol............................................................. 9-21§ 9:2.10 Corporate End-User Exemption ...............................9-23§ 9:2.11 Inter-Affiliate Exemption ..........................................9-25

§ 9:3 Implications of the Dodd-Frank Act and EMIR ..............9-25§ 9:4 Conclusion ......................................................................9-28

Appendix A Early Termination Forms .............................App. A-1

Appendix A1 Form of Notice of Failure to Pay orDeliver .........................................................App. A1-1

Appendix A2 Form of Notice of Breach ofAgreement ..................................................App. A2-1

Appendix A3 Form of Notice of Failure to DeliverCollateral .....................................................App. A3-1

Appendix A4 Form of Notice of an Automatic EarlyTermination .................................................App. A4-1

Appendix A5 Form of Notice of Event ofDefault ........................................................App. A5-1

Appendix A6 Form of Notice of Occurrence ofTermination Event ......................................App. A6-1

Appendix A7 Form of Notice Designating an EarlyTermination Date Following an Eventof Default.....................................................App. A7-1

Appendix A8 Form of Notice Designating an EarlyTermination Date Following a TerminationEvent............................................................App. A8-1

Appendix A9 Form of Short-Form Early TerminationValuation Statement Under the 1992Master Agreement .......................................App. A9-1

Appendix A10 Form of Early Termination ValuationStatement Under the 1992Master Agreement......................................App. A10-1

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xix

Appendix A11 Form of Letter to Reference Market-MakersUnder the 1992 Master Agreement .......... App. A11-1

Appendix A12 Form of Close-Out Amount StatementUnder the 2002 Master Agreement .......... App. A12-1

Appendix A13 Form of Demand of Collateral .................. App. A13-1

Appendix A14 Form of Notice of Suspension of PaymentObligations................................................ App. A14-1

Appendix B Documents in In re Lehman BrothersHoldings Inc..................................................App. B-1

Appendix B1 Alternative Dispute Resolution ProceduresOrder for Affirmative Claims of DebtorsUnder Derivatives Contracts, In re LehmanBrothers Holdings Inc., No. 08-13555(Bankr. S.D.N.Y. Sept. 17, 2009)..................App. B1-1

Appendix B2 Order Pursuant to Sections 105 and 365of the Bankruptcy Code to EstablishProcedures for the Settlement orAssumption and Assignment ofPrepetition Derivative Contracts,In re Lehman Brothers Holdings Inc.,No. 08-13555 (Bankr. S.D.N.Y.Dec. 16, 2008)...............................................App. B2-1

Appendix B3 Supplemental Order Pursuant to Sections 105and 365 of the Bankruptcy Code to EstablishProcedures for the Settlement or Assumptionand Assignment of Prepetition DerivativeContracts, In re Lehman BrothersHoldings Inc., No. 08-13555(Bankr. S.D.N.Y. Jan. 15, 2009) ...................App. B3-1

Appendix B4 Alternative Dispute Resolution Procedures forAffirmative Claims of the Debtors UnderDerivatives Transactions with Special PurposeCounterparties, In re Lehman BrothersHoldings Inc., No. 08-13555(Bankr. S.D.N.Y. Mar. 3, 2011) ....................App. B4-1

Appendix B5 Order pursuant to Sections 105(a),362 and 365 of the Bankruptcy Codeto Compel Performance of Contractand to Enforce the Automatic Stay,In re Lehman Brothers Holdings Inc.,No. 08-13555 (Bankr. S.D.N.Y.Sept. 17, 2009) ..............................................App. B5-1

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Appendix B6 Amended Order Providing for AlternativeDispute Resolution Procedures for AffirmativeClaims of the Debtors Under DerivativesTransactions with Special Purpose VehicleCounterparties, In re Lehman BrothersHoldings Inc., No. 08-13555(Bankr. S.D.N.Y. July 18, 2012).....................App. B6-1

Appendix B7 Transcript of Omnibus Hearing Held on09/15/09, In re Lehman BrothersHoldings Inc., No. 08-13555(Bankr. S.D.N.Y. Sept. 15, 2009) ...................App. B7-1

Appendix B8 Metavante Corporation’s Motion to Alter orAmend the Court’s Order Granting LehmanBrothers Special Financing Inc. and ItsAffiliated Debtors’ Motion to CompelPerformance and Enforce the Automatic Stay,In re Lehman Brothers Holdings Inc.,No. 08-13555 (Bankr. S.D.N.Y.Sept. 25, 2009) ..............................................App. B8-1

Appendix B9 Declaration of Daniel Ehrmann in Support ofDebtors’ Motion for Approval of a SettlementAgreement with Metavante Corporation(Bankr. S.D.N.Y. Mar. 24, 2010) ..................App. B9-1

VOLUME 2

Table of Chapters .............................................................................vii

Appendix C Key Legislation, Regulation andLitigation .........................................................App. C-1

Appendix C1 Wall Street Transparency and AccountabilityAct of 2010, Pub. L. No. 111-203,124 Stat. 1641 (2010).................................App. C1-1

Appendix C2 CFTC Swap Data Recordkeeping and ReportingRequirements, 17 CFR Part 45 (2011)......... App. C2-1

Appendix C3 CFTC Business Conduct Standards forSwap Dealers and Major Swap Participantswith Counterparties, 17 CFR Parts 4and 23 (2012)............................................... App. C3-1

(Durham, Rel. #3, 2/19)

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Appendix C4 CFTC Swap Dealer and Major Swap ParticipantRecordkeeping, Reporting, and Duties Rules;and Chief Compliance Officer Rules for SwapDealers, Major Swap Participants, andFutures Commission Merchants,17 CFR Parts 1, 3, and 23 (2012) ................. App. C4-1

Appendix C5 CFTC Swap Data Recordkeeping and ReportingRequirements: Pre-Enactment and TransitionSwaps, 17 CFR Part 46 (2012)..................... App. C5-1

Appendix C6 CFTC and SEC, Further Definition of “Swap,”“Security-Based Swap,” and “Security-Based SwapAgreement”; Mixed Swaps; Security-Based SwapAgreement Recordkeeping, 17 CFR Parts 230,240 and 241 (2012) ..................................... App. C6-1

Appendix C7 CFTC Confirmation, Portfolio Reconciliation,Portfolio Compression, and Swap TradingRelationship Documentation Requirements forSwap Dealers and Major Swap Participants,17 CFR Part 23 (2012) ...............................App. C7-1

Appendix C8 CFTC End-User Exception to the ClearingRequirement for Swaps, 17 CFRPart 39 (2012) .............................................. App. C8-1

Appendix C9 Regulation (EU) No 648/2012 of the EuropeanParliament and of the Council of the EuropeanUnion on OTC Derivatives, CentralCounterparties and Trade Repositories(4 July 2012) [hereinafter EMIR].................. App. C9-1

Appendix C10 EMIR Implementing RegulationNo 1247/2012, Laying Down ImplementingTechnical Standards for the Format andFrequency of Trade Reports to TradeRepositories (2012) ................................... App. C10-1

Appendix C11 EMIR Implementing RegulationNo 1248/2012, Laying Down ImplementingTechnical Standards for the Format ofApplications for Registration of TradeRepositories (2012) .................................... App. C11-1

Appendix C12 EMIR Implementing RegulationNo 1249/2012, Laying Down ImplementingTechnical Standards for the Format ofthe Records to Be Maintained by CentralCounterparties (2012)................................ App. C12-1

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Appendix C13 EMIR Delegated Regulation No 148/2013Supplementing EMIR Regarding theRegulatory Technical Standards onthe Minimum Elements of the Datato Be Reported to TradeRepositories (2013) ................................... App. C13-1

Appendix C14 EMIR Delegated Regulation No 149/2013Supplementing EMIR in Relation to theRegulatory Technical Standards Relating toIndirect Clearing Arrangements, the ClearingObligation, the Public Register, Access toa Trading Venue, Non-Financial Counterpartiesand Risk Mitigation Techniques Applicable forOTC Derivative Contracts Not Cleared by aCentral Counterparty (2013) ..................... App. C14-1

Appendix C15 EMIR Delegated Regulation No 150/2013Supplementing EMIR in Relation to theRegulatory Technical Standards Specifyingthe Details of the Application for Registrationas a Trade Repository (2013)...................... App. C15-1

Appendix C16 EMIR Delegated Regulation No 151/2013Supplementing EMIR Regarding theRegulatory Technical Standards Specifying theData to Be Published and Made Available bythe Trade Repositories and Operational Rulesfor Aggregation Comparing and Accessingthe Data (2013) ........................................App. C16-1

Appendix C17 EMIR Delegated Regulation No 152/2013Supplementing EMIR in Relation to theRegulatory Technical Standards onCapital Requirements for CentralCounterparties (2013)...............................App. C17-1

Appendix C18 EMIR Delegated Regulation No 153/2013Supplementing EMIR in Relation to theRegulatory Technical Standards Relating tothe Requirements to Be Met by CentralCounterparties (2013)...............................App. C18-1

Appendix C19 In re Lehman Brothers Holdings Inc. v.BNY Corporate Trustee Services Limited,2010 WL 271161(Bankr. S.D.N.Y. Jan. 25, 2010)................ App. C19-1

(Durham, Rel. #3, 2/19)

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Appendix C20 Lehman Brothers Holdings Inc., et al. v.Ballyrock ABS CDO 2007-1 Limited, et al.,452 B.R. 31 (Bankr. S.D.N.Y. 2011) ......... App. C20-1

Appendix C21 Transcript of Peregrine Fixed IncomeLimited v. Robinson Department Store plc,Q.B. (Commercial Division)(18 May 2000) ........................................... App. C21-1

Appendix C22 Lomas (Together the Joint Administrators ofLehman Brothers International (Europe)) v.JFB Firth Rixson Inc. & Ors; Lehman BrothersSpecial Financing Inc. v. CarltonCommunications Ltd; Pioneer FreightFutures Company Limited (in liquidation) v.Cosco Bulk Carrier Company Ltd; BritanniaBulk Plc (in liquidation) v. Bulk TradingS.A. [2012] EWCA Civ 419(03 April 2012) .........................................App. C22-1

Appendix C23 Drexel Burnham Lambert Prods. Corp. v.MCorp, 1991 WL 165941(Del. Super. Ct. 1991)............................... App. C23-1

Appendix C24 Australia and New Zealand BankingGroup Ltd v. Société Genérale,[200] EWCA (Civ) 44 ............................... App. C24-1

Appendix C25 Enron Australia v. TXU Electricity [2003]NSWSC 1169 ...........................................App. C25-1

Appendix C26 Lehman Brothers Finance S.A.(In Liquidation) v. Sal. Oppenheimer Jr. &Cie. KGAA [2014] EWHC 2627............... App. C26-1

Appendix C27 Anthracite Rated Investments (Jersey) Limited v.Lehman Brothers Finance S.A. [2011]EWHC 1822 (Ch)...................................... App. C27-1

Appendix C28 Fondazione Enasarco v. LehmanBrothers Finance S.A. [2015]EWHC 1307 (Ch) .....................................App. C28-1

Table of Cases ................................................................................T-1

Index ................................................................................................. I-1

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Acknowledgments

This book represents a collaboration of many people who helpedmake it possible. In addition to the persons named in the book asco-authors of certain sections, I want to offer my extreme apprecia-tion and gratitude to Michael Dyckman, a research librarian atGreenberg Traurig, for his tireless dedication to tracking down allthe cases referenced in this book even when I did not have a citationto provide. I would also like to thank my law firm, GreenbergTraurig LLP, the CEO of the firm, Richard Rosenbaum, and theHead of the New York Corporate Department, Allen Annex, fortheir help in providing resources and support in writing this book.Special thanks are also due to Kelliann Kavanagh and Bill Cubberley,my editor and publisher, whose constant encouragement, good cheerand invaluable advice ensured the completion of this book.

Sylvie A. DurhamNew York

March 2014

(Durham, Rel. #3, 2/19) xxv

Frequently Used Terms

1992 ISDA Master Agreement means the pre-printed form ofprimary agreement documenting derivative transactions betweenthe parties, prepared by the International Swap Dealers Associa-tion, Inc. (ISDA), dated as of 1992. There is a multi-currency andsingle currency version of the 1992 Master Agreement.

2002 ISDA Master Agreement means the pre-printed form of pri-mary agreement documenting derivative transactions between theparties, prepared by the International Swaps and Derivatives Associa-tion, Inc. (ISDA), dated as of 2002.

Additional termination events means the termination eventsthat are not listed in the applicable pre-printed master agreement,that are specified by the parties in the schedule or confirmation,and that the parties have uniquely negotiated to apply to their deriv-ative transactions.

Affected party means the party subject to a termination event undera master agreement.

Affected transactions means the transactions that are subject totermination as being affected by the occurrence of a termination eventunder the related master agreement.

Applicable close-out rate means the interest rate payable on certaintermination payments under the 2002 Master Agreement, equal to adefault rate, non-default rate or applicable deferral rate.

Applicable deferral rate means the interest rate payable on a deferredpayment or delivery under the 2002 Master Agreement.

Applicable rate means the interest rate payable on certain termina-tion payments under the 1992 Master Agreement, equal to a defaultrate, non-default rate or termination rate.

Automatic early termination means a termination of a derivativetransaction under a master agreement that is triggered automatically,without any election or action by the parties, and occurs immediatelyupon the occurrence of a bankruptcy event of default.

(Durham, Rel. #3, 2/19) xxvii

Bankruptcy event of default means an event of default relating to theinsolvency of one of the parties to a derivative transaction as setforth under Section 5(a)(vii) of the master agreements.

Breach of agreement means an event of default under Section 5(a)(ii)of the master agreements.

Burdened party is a term utilized in the 2002 Master Agreement inconnection with tax events. It refers to a party that must gross up itspayment obligations or suffer withholding on the delivery of paymentsdue to it because it is not an indemnifiable tax, and who has theright to terminate all derivative transactions impacted by the applica-ble tax event after attempts to transfer the derivative transactions toother jurisdictions has failed.

Business day means a day on which local commercial banks are openfor business.

Calculation agent means the party responsible for making calcula-tions under a derivative transaction.

Close-out netting means the process of termination of derivativetransactions prior to the applicable scheduled termination date dueto an event of default or termination event, the calculation of the gainsor losses to each party from this termination, the effecting of the set-off rights of each party from this termination and of the application ofthe collateral posted under the credit support annex or other securitydocument to make a party ’s payment obligation.

Closing out derivative positions means terminating derivative trans-actions prior to the applicable scheduled termination date.

Collateral means assets that are posted by a party to a derivative trans-action to secure its obligations under the transaction.

Confirmation means the agreement between the parties documentingand evidencing an individual derivative transaction between suchparties.

Counterparties means the parties to a derivative transaction.

Credit support amount means the total amount of collateral thatmust be delivered to the secured party under the CSA (taking intoaccount secured party ’s exposure, the independent amounts due toand/or from the secured party, and the applicable threshold amount).

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Credit support annex or CSA means the pre-printed form (asamended, supplemented and modified by paragraph 13 elections (orparagraph 11 elections for U.K. version of CSA)) of the securityagreement that outlines the collateral posting mechanisms requiredfor derivative transactions documented by the master agreement,schedule and confirmation.

Credit support default means an event of default under Section 5(a)(iii)of the master agreements relating to a default in the security arrange-ments securing a derivative transaction.

Credit support document means an agreement or instrument speci-fied under the schedule or confirmation as the security agreementbetween the parties related to their derivative transactions docu-mented by the master agreement, schedule and confirmation. Thecredit support annex constitutes a credit support document underthe master agreement between the parties.

Credit support provider means a guarantor of transactions under amaster agreement, specified in the schedule or confirmation, includ-ing, without limitation, a letter of credit provider or a surety provider.

Cross default means an event of default under Section 5(a)(vi) of themaster agreements arising from a default under specifiedindebtedness.

Default rate means the interest rate equal to the cost of funds incurredby a party receiving amounts of certain termination payments if itwere to borrow such amounts, plus 1.00% per annum.

Default under specified transaction means an event of default underSection 5(a)(v) of the master agreements relating to default undercertain specified unrelated transactions.

Defaulting party means the party with respect to which an event ofdefault has occurred under a master agreement.

Delivery amount means the amount of collateral that must bedelivered to the secured party under the CSA (and equal to the excessof the credit support amount over the value of collateral already heldby the secured party).

Determining party means the party determining amounts due andowing on the termination transactions under the 2002 MasterAgreement.

(Durham, Rel. #3, 2/19)

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Early termination amount is a term utilized in the 2002 MasterAgreement to reflect the total amounts due and owing in respect ofterminated transactions. This term has been utilized in this book toreflect the entire amounts due and owing in respect of terminatedtransactions.

Early termination date means the early termination date of a deriv-ative transaction prior to its scheduled termination date establishedby a party resulting from an event of default or termination event.

Effective date means the date on which a derivative transactionbecomes effective.

Eligible collateral means the collateral items that qualify as eligible forposting under the CSA, as agreed by the parties to the CSA (whichusually includes cash, Treasuries and other asset types agreed by theparties).

Events of default means the events of default pre-specified in themaster agreement that apply to all derivative transactions under suchmaster agreement.

Exchange-listed derivatives means derivatives that are traded onregulated exchanges.

Exposure means the amount calculated by the applicable calculationagent as being the amount due by one party to the other party if thederivative transaction between them terminated on that day.

Indemnifiable taxes means any taxes imposed on a payment underthe master agreement except for taxes imposed due to a connectionbetween the payment recipient and the taxing jurisdiction (excludingthose due to the mere entering into and performance under the masteragreement), and which taxes generally have to be grossed-up by theparty making such payment.

Independent amount means the amount in excess of exposure thateach party must post as collateral over and above the exposureamount.

ISDA close-out protocol means a pre-printed form of amendment tothe 1992 Master Agreement adhering to the calculation of the earlytermination amount identical to the procedures under the 2002Master Agreement.

Long-form confirmation means the confirmation documenting anindividual derivative transaction of the parties which is utilized in

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lieu of the master agreement and the schedule and incorporates theterms of the master agreement and elections in the schedule directlyinto the long-form confirmation.

Loss means a mechanism for determining the early terminationamount under terminated transactions under the 1992 Master Agree-ment, based on party ’s total losses and costs resulting fromthe establishment of an early termination date.

Marked-to-market means the periodic valuation of the value of thetransactions and the amount of collateral posted under the CSA.

Market quotation means a mechanism for determining the earlytermination amount under terminated transactions under the 1992Master Agreement, based on the cost of preserving each party ’s“economic equivalent” of the transactions.

Master agreement means the 1992 ISDA Master Agreement or the2002 ISDA Master Agreement.

Minimum transfer amount means the minimum amount of collateralfor any obligation to deliver or return the collateral to be triggeredunder the CSA, as agreed by the parties to the CSA.

Non-affected party means the counterparty to the affected party undera master agreement, although if there are two affected parties, theremay not be a non-affected party.

Non-default rate means the interest rate on amounts of certaintermination payments which is equal to the non-defaulting party ’sinternal cost of funds to fund such amounts.

Non-defaulting party means the counterparty to the defaulting partyunder a master agreement.

Notification time means the time when the parties have to be notifiedof the value and exposure calculations by the valuation agent.

Notional amount means the stated or nominal amount that is used tocalculate payments made on a derivative transaction as of the datewhen such transaction becomes effective.

Optional termination right means a right of a party to a derivativetransaction to terminate such transaction prior to its scheduledtermination date.

OTC derivatives means over-the-counter derivatives not listed on anyregulated exchange.

(Durham, Rel. #3, 2/19)

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Paragraph 11 elections means the provisions of the credit supportannex (under the U.K. version) between the parties to a derivativetransaction that supplement, modify and amend, and form a part of,the pre-printed form of the U.K. version of credit support annex.

Paragraph 13 elections means the provisions of the credit supportannex (under the U.S. version) between the parties to a derivativetransaction that supplement, modify and amend, and form a part of,the pre-printed form of the U.S. version of credit support annex.

Post means to deliver the collateral to the secured party under theCSA.

Reference market-makers means four leading dealers in the relevantmarket selected to provide quotations for the terminated transaction(s)to determine the settlement amount due under such transaction(s).

Resolution time means the time when a dispute between the partiesto the CSA as to the value and/or exposure calculations have to beresolved.

Return amount means the amount of collateral held by the securedparty that must be returned by the secured party under the CSAbecause of the change in the exposure (and equal to the excess of thevalue of collateral already held by the secured party over the thenapplicable credit support amount).

Schedule means the agreement between the parties to a derivativetransaction that supplements, modifies and amends the master agree-ment between such parties.

Scheduled termination date means the scheduled termination dateof a derivative transaction, as specified in the applicable confirmation.

Secured party means a party to a credit support annex when suchparty demands or is entitled to receive collateral under the CSA, orholds or is deemed to hold the posted collateral under the CSA.

Settlement amount is a term utilized in the 1992 Master Agreement.It means the value of the market quotations of the terminatedtransactions if market quotation is utilized or a party ’s loss onterminated transactions from early termination of the transactionsunder such master agreement.

Specified condition means the conditions specified in the CSA thatallows the secured party to liquidate the collateral and to enforce itsother rights and remedies under the CSA.

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Specified entity means any entity specified in the schedule or con-firmation as being relevant to the derivative transaction for thepurposes of any events of default, termination events or representa-tions and warranties of the parties.

Specified indebtedness means any obligation (whether present orfuture, contingent or otherwise, as principal or surety or otherwise)in respect of borrowed money unless otherwise negotiated by theparties in the schedule.

Swap transactions means the transactions where one party is swap-ping a stream of payments with its counterparty for another stream ofpayments (also synonymously referred to as derivative transactions).

Tax events means the occurrence of a tax event under Section 5(b)(iii)of a master agreement or a tax event upon merger under Section5(b)(iv) of a master agreement.

Terminated transactions means event of default or a terminationevent under the master agreement. In the case of an event of default,all derivative transactions must be terminated. In the case of atermination event, only affected transactions are terminated.

Termination currency means the currency in which terminationpayments are determined under a master agreement.

Termination date means the scheduled termination date of a derivativetransaction, as specified in the applicable schedule or confirmation.

Termination events means the termination events pre-specified inthe master agreement that apply to all derivative transactions undersuch master agreement.

Termination rate means the interest rate on amounts of certaintermination payments which is equal to the average of each party ’sinternal cost of funds to fund such amounts.

Threshold means the minimum amount of exposure for the collateralposting requirements to be triggered under the CSA, as agreed by theparties to the CSA.

Threshold amount means the minimum amount that must havedefaulted before the event of default or cross default is triggered.

Trade date means the date on which a derivative transaction isentered into.

(Durham, Rel. #3, 2/19)

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Transactions means a derivative transaction governed by the masteragreement and evidenced by the confirmation.

Underlying means an interest rate, exchange rate, equity, commodity,fixed income security, index or another asset or underlying subject ofthe derivative transaction, from which the derivative transactionderives its value.

Unpaid amounts means the amounts which were due to a party on aterminated transaction but remain unpaid on or prior to the earlytermination date.

Valuation agent means the entity chosen by the parties to the CSA tomake all calculations of value and exposure under the CSA.

Valuation date means each business day on which collateral arrange-ments and exposure are calculated, as agreed by the parties to the CSA.

Valuation time means the specific time on each valuation date whenthe collateral arrangements and exposure are calculated, as agreedby the parties to the CSA.

Value means the value assigned to collateral on any given valuationdate, and equal to: (i) for cash, the amount thereof; (ii) for securities,the bid price multiplied by a valuation percentage specified in the CSA;(iii) for ineligible collateral, zero; and (iv) for any other type ofcollateral, as agreed by the parties to the CSA.

Waiting period is a concept that exists in the 2002 Master Agreementrelating to force majeure and illegality termination events and meansthe period that has to lapse before the affected transactions can beterminated.

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