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Matt,
Thank you for your note. I understand that the reporting requirement (According to the Korean Foreign Exchange Transaction Regulations("FETR"), a prior report to the Bank of Korea is required for the Derivative Transaction whose underlying assets are not financial products, i.e., "Commodity Derivative" by our own definition.) is a legal issue to be clarified and handled carefully. However, speaking with the Bank of Korea and Hyundai Oil, I have the understanding that the Bank of Korea is willing to be flexible enough to accommodate instantaneous on-line derivative trading. We might need official confirmation of this from the Bank of Korea, but I think that, working with the Bank of Korea, we could find a solution to this legal issue. The following are some of the facts regarding the reporting requirement issue: Although the Bank of Korea has the legal discretion to reject any report made, when I spoke with them a month ago, they emphasized their intention that they would not reject any report unless the transaction falls under either of the two categories stipulated in the Article 7-61 of the FETR (1. option premium more than 20%, 2. illegal transaction). Early this week, I talked with the Bank of Korea and Hyundai Oil, and both of them confirmed that since Apr. last year total 17 reports (from Hyundai Oil) have been filed with the Bank of Korea regarding Oil derivative transactions. All 17 reports were submitted after the transactions had been made (ex post facto reporting), and many times Hyundai Oil put 2-3 transactions together in one package (one-page filled out form per transaction) for reporting. That's why Kim & Chang, the local law firm, got the information of 7-8 reports from the Bank of Korea. Both Hyundai Oil and the Bank of Korea said that the report is more like a notification and that the Bank of Korea just checks whether the transaction falls under either of the said 2 categories. As far as a transaction does not fall under either of the 2 categories, neither the Bank of Korea nor Hyundai Oil cares about the reporting. The Bank of Korea does not insist on reviewing the report prior to the transaction and does not care even if the report is made even 1 or 2 weeks later. That's why sometimes it takes a week for the Bank of Korea to return the report with its seal on it. The Bank of Korea said that normally it takes less than one hour to review and place its seal on a one-page report. Regarding the Weather Derivatives, there is an issue whether Weather Derivatives will be classified as a Commodity Derivative or a Financial Derivative since Korea has no experience with such a product. In the FETR, there is a general definition of the "Derivative Transaction". No separate definition of the "Commodity Derivatives" or "Financial Derivatives". However, the FETR treats the Derivative Transaction whose underlying products are commodity products like grains and metals differently from the Derivative Transaction whose underlying products are financial products like interest payments and foreign currencies. For convenience' sake, I would call the former the "Commodity Derivative" and the latter the "Financial Derivative". The FETR stipulates that a prior report to the Bank of Korea is required for the Derivative Transaction whose underlying assets are not financial products (i.e., Commodity Derivative by our own definition) and that a prior approval of the Bank of Korea is required for the Derivative Transaction whose underlying assets are financial products (Financial Derivative by our definition) "among non-banking residents or between non-banking resident and non-resident". No approval or report is required for the Financial Derivative Transaction if a banking institution is involved. When I talked to the Int'l Finance Dept. of the Bank of Korea, which is responsible for the prior report and approval, they informally indicated that the underlying asset of the Weather Derivatives doesn't seem to be a financial product. They said that they would need better understanding of the Weather Derivatives in order to determine that formally. I hope that Matt's note and the above information are useful for all of you to understand the legal situation better. Let's discuss and clarify these issues in our conference call. Thanks. Regards, Jae-Moo Matthias Lee@ECT 08/24/2000 08:22 PM To: Jae-Moo Lee/Corp/Enron@ENRON cc: Christopher B Hunt/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, Joseph P Hirl/AP/ENRON@ENRON, David Forster/Corp/Enron@Enron, John Ambler/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, Mike Dahlke/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, Bruce Lundstrom/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, Alan Aronowitz/HOU/ECT@ECT, Mike Brown/ENRON@Gateway@ENRON, Justin Timothy/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, Paul Quilkey/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, Raymond Yeow/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, John Viverito/Corp/Enron@Enron, Rousseau Anai/AP/Enron@Enron, John Chismar/SIN/ECT@ECT, Victor Santos/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, Li Yin Lim/SIN/ECT@ECT, Mark Taylor/HOU/ECT@ECT, David Minns/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, Jonathan Whitehead/AP/Enron@Enron, Michelle Lee/Corp/Enron@Enron, Ann Brown/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, Matthias Lee/SIN/ECT@ECT, Angeline Poon/SIN/ECT@ECT Subject: Re: EOL Korea Jae-Moo On the section of Regulatory/Legal Environment, it may be useful to note: 1. There is no official rule or regulation that ex post facto reporting for Commodity Derivatives are acceptable to the Bank of Korea, although your and Korean external lawyer's (Kim & Chang) informal verbal enquiries with the Bank of Korea have suggested they have accepted some 7 or 8 reports since April last year (all from Hyundai Oil). 2. The Bank of Korea take up to two weeks to review the reports and, as Kim & Chang has advised, there remains a possibility that the Bank of Korea may reject the report, although they were not able to advise the grounds on which a report may be rejected. 3. Although, a foreign counterparty need not file a report or seek approval, the Korean counterparty must still do so for the benefit and interest of the foreign counterparty. Kim & Chang advised that where reporting or approval is required but is not made or obtained, the Korean counterparty would not be able to remit its payments under the transaction. This would clearly impact on the settlement of the transaction, in particular shorter term deals since reporting and approval may take several weeks. 4. The Supreme Court of Korea has ruled that a foreign exchange authorization that was originally required should be obtained in order for a foreign party to execute any judgment against the Korean party and remit the proceeds. Regards Matt Jae-Moo Lee@ENRON 08/24/2000 04:58 PM To: Christopher B Hunt/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Joseph P Hirl/AP/ENRON@ENRON, David Forster/Corp/Enron@Enron, John Ambler/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Mike Dahlke/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Bruce Lundstrom/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Alan Aronowitz/HOU/ECT@ECT, Mike Brown/ENRON@Gateway, Justin Timothy/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Paul Quilkey/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Raymond Yeow/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, John Viverito/Corp/Enron@Enron, Rousseau Anai/AP/Enron@Enron, John Chismar/SIN/ECT@ECT, Victor Santos/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Li Yin Lim/SIN/ECT@ECT, Mark Taylor/HOU/ECT@ECT, Matthias Lee/SIN/ECT@ECT, David Minns/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Jonathan Whitehead/AP/Enron@Enron cc: Michelle Lee/Corp/Enron@Enron, Ann Brown/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT Subject: EOL Korea As many of you are aware, over the past few months we have been investigating whether or not it would make sense to seriously consider an EOL launch in Korea from a market, regulatory and legal perspective. The primary interest has been on reviewing whether or not we could launch existing products in Korea (e.g., products already handled by Singapore EOL) as well as new products (e.g., Seoul weather). This initial work was directed primarily by the Korea team working within the APACHI group. If a launch is to progress much further from this point, however, substantial attention by the EOL team would be required. To facilitate this, the attached presentation summarizes our primary findings to date and some of our thoughts. We would appreciate your taking a look at the attached document. We would like to arrange a conference call for next Thursday (Aug. 31st) at 6:00 pm by Houston time (Friday at 8:00 am by Tokyo time) to discuss the attached document and to solicit thoughts as to next steps. Please let me know whether you will be able to join this call or, if you have a conflict, an alternative time. Your participation will be greatly appreciated. Best regards, Jae-Moo
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