Re: Credit Derivatives Issue

I agree on the nature of our statement and that a prompt action could avoid
another source of dispute in the credit derivatives world.
----- Original Message -----
From: <genova_diane@jpmorgan.com<
To: <RPICKEL@isda.org<
Cc: <BOARD@isda.org<; <KSumme@isda.org<; <LMarshall@isda.org<
Sent: Wednesday, October 17, 2001 1:47 AM
Subject: Re: Credit Derivatives Issue

<
< I think we should issue a statement regarding the deliverability of the
< Railtrack convertible bonds. First, I do not think that plain vanilla
< converts are "contingent." and therefore should be deliverable.
Second,
< I think we need to have clarity and certainty here so that this issue does
< not become another cloud over the credit derivatives market. The
< statement should simply be ISDA's view as to the meaning and intent of its
< own document. We should probably wait until we have had the opportunity
< to see a draft of the opinion to be issued by Robin Potts (QC?) just to
< make sure that the statement and his opinion are in agreement.
<
<
<
<
< RPICKEL@isda.org on 10/15/2001 12:06:35 AM
<
<
<
< To: BOARD@isda.org
< cc: KSumme@isda.org, LMarshall@isda.org
< Subject: Credit Derivatives Issue
<
<
< You should be aware that an issue is currently under extensive debate in
< the
< credit derivative area resulting from the insolvency of Railtrack in the
< UK.
< ISDA has been asked by some participants in the market to make a statement
< regarding a provision of its Credit Derivatives Definitions. Others are
< either still considering their position or would prefer that ISDA not
issue
< a statement.
<
< Specifically, the discussion relates to the deliverability of convertible
< bonds of Railtrack. There is no dispute that a Credit Event occurred. What
< is in dispute is whether the bonds satisfy the definition of "Not
< Contingent" under the Definitions, which is a characteristic typically
< required of deliverable obligations. This characteristic requires that the
< payment or repayment of principal on the bonds not be subject to a
< contingency. The bonds are convertible into equity of Railtrack at the
< option of the holder or, in certain limited circumstances, at the option
of
< the trustee for the bondholder. The provision for the trustee to exercise
< the conversion (sometimes referred to as a "widows and orphans" clause) is
< a
< standard clause in bonds issued in England and is intended to protect
< bondholders who may have inadvertently failed to exercise their conversion
< right when it would be clearly beneficial economically for them to do so.
< In
< the case of Railtrack, conversion would not have been economically
< beneficial at any time recently, but nevertheless the right of the trustee
< to convert exists.
<
< A draft statement has been prepared for consideration by the Credit
< Derivatives Market Practice Committee, which I have attached for your
< review. The statement refers to two documents that are in draft form, the
< User's Guide to the Definitions (which is scheduled to be published in the
< next week or two) and a Supplement currently under consideration by the
< "group of six" subgroup of the Committee. In each of these documents, we
< suggest that "plain vanilla" convertible bonds should satisfy the "Not
< Contingent" characteristic and should, therefore, be deliverable. "Plain
< vanilla" convertible bonds for this purpose include bonds where conversion
< is at the option of the holder of the trustee.
<
< A meeting of a number of dealers based in London (not an ISDA meeting) is
< scheduled for Tuesday. It is not likely that we will publish anything
prior
< to that meeting.
<
< I would appreciate your views on whether we should issue any statement
< regarding this situation. We are continuing to poll members for their
views
< on whether this type of market statement would be appropriate. We are also
< discussing with Allen & Overy and with Clifford Chance and Linklaters how
< we
< might achieve a legal basis for making the statement. Please share your
< views with the other addressees of this email, as they are coordinating
the
< views of members.
<
< Bob
<
<
<
<
<
<
< This communication is for informational purposes only. It is not intended
as
< an offer or solicitation for the purchase or sale of any financial
instrument
< or as an official confirmation of any transaction. All market prices, data
< and other information are not warranted as to completeness or accuracy and
< are subject to change without notice. Any comments or statements made
herein
< do not necessarily reflect those of J.P. Morgan Chase & Co., its
< subsidiaries and affiliates.
<