Jane,
- could you let me know what the Japanese lawyers think of John's argument
that this deal is to hedge weather risk arising in the ordinary course of our
Japanese business. Seems to me that we honestly believe this to be the case,
even though it is too early in the development of our Japanese business to
prove it today. Perhaps we should change "arising" to "which will arise"?
Does that help?
- if that is not a runner, all Mark Taylor's suggestions seemed eminently
sensible. Do those work? How about booking the deal from Australia? Tax
issues? Does where the deal is booked override the fact that the telephone
call was made within Japan?
- if none of these work, then cancelling the deal (even if the counterparty
is willing) must be the least attractive answer as it is effectively
acknowledging fundamental (possibly insuperable) regulatory issues with the
weather derivatives trading in Japan.
- the other things I would want to understand before reaching a decision
would be:
- how have other derivatives traders in Japan dealt with this issue? (I
presume this is not a problem unique to weather and must have been
addressed before in Japan as it has in most other jurisdictions)
- how grey an area is this? If we take a reasonable position in this grey
area, how real is the risk of both the grey area being resolved against us
and criminal sanctions then being invoked against us?
- following up on Mark's idea, could we not reduce the (hopefully already
minimal) risk of criminal sanctions by going after the event with clean
hands to the regulator for an answer. We have done exactly that on a similar
issue which arose in the Netherlands recently.
I hope that helps. Could we please discuss this on the phone before a
decision is made.
Thanks.
Mark
From: John Viverito@ENRON on 20/10/2000 11:18 CDT
To: Jane McBride/AP/Enron@Enron
cc: Alan Aronowitz/HOU/ECT@ECT,
Jeremy.Pitts@BAKERNET.com, Jonathan
Whitehead/AP/Enron@Enron, Joseph P Hirl/AP/ENRON@ENRON, Mark
Evans/Legal/LON/ECT@ECT, Mark Taylor/HOU/ECT@ECT, Morten E
Pettersen/AP/Enron@Enron,
Paul.TYO.Davis@BakerNet.com Subject: Re: ... Urgent Weather Derivative Advice ...
Jane-
Has Jeremy or any of his colleagues, specifically commented on Mr. Wani's
(ToaRe's attorney) comments regarding clause 5 c (ii), which were distributed
by you on 10/17?
By being in the business of trading weather derivatives, may we be considered
to be "entering into the deal to hedge weather related risks arising in the
ordinary course of business"? I seem to recall that when Alan and I
discussed the risks related to trading weather derivatives in Japan with Mr.
Wani, he believed that this may be a sufficient argument to legitimize the
transaction. We need to confirm with B&M.
Cheers,
John
Jane McBride
10/20/2000 03:57 AM
To: Alan Aronowitz/HOU/ECT@ECT, Mark Taylor/HOU/ECT@ECT
cc:
Jeremy.Pitts@BAKERNET.com, John Viverito/Corp/Enron@Enron, Jonathan
Whitehead/AP/Enron@Enron, Mark Evans/Legal/LON/ECT@ECT,
Paul.TYO.Davis@BakerNet.com, Morten E Pettersen/AP/Enron@Enron, Joseph P
Hirl/AP/ENRON@ENRON
Subject: ... Urgent Weather Derivative Advice ...
Dear Alan and Mark,
I am going to need you to help me make a risk decision. I welcome input from
Mark Evans but he may be more comfortable leaving this up to Alan and Mark
because Alan and Mark have been involved in this gambling issue from the
beginning.
Jeremy Pitts and I have had a brief conversation re my email to him below,
this afternoon, but he will not be able to get written comments signed off by
Japanese lawyers to me until Monday.
The situation relates to the Tokyo's office's first weather derivatives deal,
which is with a company called Toa Reinsurance. In a nutshell the situation
is that negotiations have come to a standstill because neither side can move
on their positions re the gambling warranties. The deal of course though has
already been done over the telephone several weeks ago.
In a nutshell then, based on discussions with Jeremy Pitts, but to be
clarified by Japanese lawyer on Monday, the situation is:
1. In terms of Enron Japan's ability to trade weather derivatives here, we
are operating in the grey even if we can get warranty 5©(ii) from them.
2. ToaRe will not give us the important warranty - 5©(ii) below, because
they say they can't. They say they are not actually "entering into the deal
to hedge weather related risks arising in the ordinary course of their
business" - which is what the subject warranty says. B&M have advised that
the obtaining of this warranty from a counter party helps keep us in the grey
and out of the red in terms of what we are doing and also gives us comfort
that the counter party can do the deal.
3. ToaRe is, in addition, separately asking us to give them the same
warranty.
Jane McBride analysis
Re 3 - Given that our legal situation is grey at best, I do not think we
should be giving the warranty they have requested. They say they will not
give us that warranty. The issue then is whether we can go ahead without
getting the warranty from them, bearing in mind that a binding telephone deal
has been done.
If you agree with me that we can't give the warranty, then we have to decide
whether we can go ahead without getting the warranty referred to in (2)
above, from them. I am not sure however that in practice we even have a
choice given that the trade has been done.
If we go ahead without giving and without getting the warranty, the risk to
us is that we are more likely to be in breach of the prohibition on gambling
in the Criminal Law. Are we willing to take this risk and who needs to give
me this answer?
Jane
Jane McBride
10/20/2000 02:06 PM
To:
Jeremy.Pitts@BAKERNET.com cc:
Paul.TYO.Davis@BakerNet.com, Alan Aronowitz/HOU/ECT@ECT, John
Viverito/Corp/Enron@Enron, Mark Evans/Legal/LON/ECT@ECT, Jonathan
Whitehead/AP/Enron@Enron, Mark Taylor/HOU/ECT@ECT
Subject: ... Urgent Weather Derivative Advice ...
Dear Jeremy,
I would like to refine the following instructions. There are two (only)
issues on which we need specific written advice and they both relate to
Warranty ©(ii) of the draft which says "XYZ is entering into a weather
derivative transaction to hedge weather related risks arising in the ordinary
course of its business".
1. (a) Can Enron Japan give the warranty at this stage in its growth? Have
we already had any written advice from you on whether Enron Japan can warrant
along these lines? If so, when? If not, the facts seem to be that:
Enron Japan plans to trade commodities which are energy related but because
we are still building up the business we are not trading these products yet.
As you know, we are getting into the power market. If we have done a weather
derivative, then we can of course offer better prices on the electricity
deals we are negotiating.
Other Enron companies are of course already trading many weather dependant
commodities and power.
It could be argued therefore that unless we can rely on the weather related
risks of other Enron companies to justify our weather derivative transacting
in these early days, that this is a speculative transaction constituting
gambling (depending on how the law on this works). It is understandable that
ToaRe would want us to warranty in effect that we are not gambling because we
are asking them to do so. I know we have had sign off from B&M re our
weather derivative trading but I wonder if anyone considered what the
situation would be before we ourselves had other transactions giving us
weather related risks.
(b) If not, how could it be amended so that we can give it?
© If still relevant in the context of your answers to (a) and (b) above,
they did offer previously to take out all warranties so that neither party
gives any warranties. The deal cannot be cancelled because it was done on
the telephone late Sept. Accordingly, what is the practical risk of us
proceeding without the benefit of any warranties from ToaRe (including the
warranty that they are under the Insurance Business Law - ie an insurance
company.)?
2. They are insisting they not give (ii) and that we be satisfied with (iii)
only for the purposes of the Gambling Law Pls confirm in writing whether you
think we can still go ahead on this basis.
Thanks.
Jane McBride
Senior Legal Counsel
Enron Japan Corp.
Otemachi 1st Square Bldg.
West 11th Floor
1-5-1 Otemachi, Chiyoda-ku
Tokyo 100-0004
Japan
Tel.: 81-3-5219-4500 (Main)
81-3-5219-4553 (Direct)
Fax: 81-3-5219-4510
Assistant (Maggy Yamanishi)
Tel.: 81-3-5219-4554
Email:
Yo.Yamanishi@enron.com Jane McBride
10/20/2000 10:57 AM
To:
Jeremy.Pitts@BAKERNET.com,
Paul.TYO.Davis@BakerNet.com cc:
Subject: RE: ToaRe documentation
