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Enron Mail |
FYI.
----- Forwarded by Alan Aronowitz/HOU/ECT on 07/10/2000 05:33 PM ----- John Viverito@ENRON 06/13/2000 10:23 AM To: David Minns/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT cc: Alan Aronowitz/HOU/ECT@ECT Subject: RE: ENRON Request for Further Advice David- I am also faxing you a copy of B&M's initial advice regarding the gambling issue, which I believe to contain a more concise explanation of the relevant issues and a better explanation as to what may be done to minimize our risks. Please give me a ring after you have had the opportunity to review B&M's advice. Cheers, John ----- Forwarded by John Viverito/Corp/Enron on 06/13/2000 09:56 AM ----- Anne.Hung@BAKERNET.com 06/13/2000 06:26 AM To: John.Viverito@enron.com cc: David.Minns@enron.com, Alan.Aronowitz@enron.com, Paul.TYO.Davis@BakerNet.com, Jeremy.Pitts@BAKERNET.com, Shinji.Toyohara@BAKERNET.com, Toshio.Sasaki@BAKERNET.com Subject: RE: ENRON Request for Further Advice Dear John, In relation to your specific questions, our answers are as follows: 1. We confirm that there are no regulatory approvals required to trade Japanese weather derivatives whether or not the Enron counterparty is or is not incorporated or resident of Japan. 2. No, except that trading weather derivatives online would make it more difficult for Enron to ascertain the suitability of the counterparty (see gambling issue below) as online transactions would probably allow very limited due diligence opportunities. 3. Enron will need to pay close attention to ensure that weather derivative products are not considered "gambling" activities. As discussed in our memorandum of January 14, 2000, all derivative transactions may potentially constitute gambling transactions. If the transaction does constitute gambling, Enron may be exposed to criminal sanctions (if the activity is conducted in Japan) and the contract may be declared void by a court and thus be unenforceable. Under Article 35 of the Criminal Code, there is a defense to any possible criminal action if the transaction is entered into for legitimate purposes. To determine whether the parties have a legitimate business purpose, a court would need to look at all relevant facts and circumstances including the nature of the derivative contract entered into and the underlying business of the counterparties. There are four possible combinations of parties to these contracts: Case 1: Enron Non Japan/Japanese Resident Case 2: Enron Japan/Japanese Resident Case 3: Enron Japan/Non Japanese Resident Case 4: Enron Non Japan/Non Japanese Resident In both cases 1 and 2, Enron needs to ensure that the Japanese counterparty has a legitimate business purpose to confirm that the transaction does not fall within Article 185 and 186 of the Criminal Code which would render the contract unenforceable. In cases 2 and 3, the need to comply with the law is also to ensure that Enron Japan (and its officers) do not unwittingly commit criminal offences under the Criminal Code. In cases 3 and 4, Enron would need to ensure that the counterparty is permitted to enter into the transaction with Enron or Enron Japan without breaching the law or regulation that might apply to derivatives in that country. Although we are not able to state conclusively that Enron will have no risk in entering into weather derivatives in Japan, we consider that this risk will be reduced if a. Enron entered into these transactions from offshore ; b. Enron Japan is not involved in the marketing of these transactions in any way; c. Enron obtains the representations below where the counterparties are Japanese residents. Please answer the following questions if you are a Japanese entity: To ensure that this transaction does not fall within Article 185 or 186 of the Japanese Criminal Code, please confirm that: a. you have read and fully understand the terms of the proposed transaction; b. you are entering into this transaction to hedge weather related risk that arises in the ordinary course of your business. If your answers are affirmative for both a and b above, Enron will rely on these representations and regard your company as having a "legitimate business purpose" to enter into this transaction as permitted under Article 35 of the Criminal Code. As we mentioned above, while obtaining these representations could reduce the risk of Enron from contracting with inappropriate parties, it obviously would not catch inappropriate counterparties that knowingly answer the questions falsely. Therefore, to the extent possible, Enron should also conduct its own due diligence with respect to the counterparty to confirm the suitability of the transaction and to confirm that the counterparty has a legitimate business purpose in entering into the transaction. 4. We confirm that there should be no transaction tax applicable to weather derivatives. 5. We confirmed with MITI that they are setting up a committee to draw up new regulations for derivative transactions for industrial commodities (not for weather) but they envisage that such regulations will not be ready for another year. Regards, PAD/AH in consultation with JDP/ST/TS -----Original Message----- From: John.Viverito@enron.com [ mailto:John.Viverito@enron.com <mailto:John.Viverito@enron.com< ] Sent: Tuesday, June 06, 2000 7:28 AM To: Paul.TYO.Davis@BakerNet.com; Anne.Hung@Bakernet.com Cc: David.Minns@enron.com; Alan.Aronowitz@enron.com Subject: ENRON Request for Further Advice Paul/Anne- The scheduled date for the launch of EOL weather trading in Australia is June 23rd. We plan to trade Tokyo and Osaka in addition to Australian cities. Therefore, we need to have resolved all legal issues prior to this date. Below, we provide some background information and a basic operational description of Enron Online, for your review. We have also raised questions relating to this matter and look forward to your prompt response. As similar questions have been asked and answered previously, we would hope to receive your responses by the end of this week. Background 1. As you know, Enron Corp. has developed an online trading system using the internet for a number of physical products and financial derivatives which it or its subsidiaries trade. This system is called Enron Online. A preview of the system is available on the internet at www.enrononline.com 2. One category of product traded through EnronOnline is weather derivatives. Although there are differing types of weather derivatives they all have a floating price linked to meteorological readings (e.g. temperature, precipitation). 3. Enron proposes to offer weather derivatives linked to meteorological readings for Tokyo and Osaka (and potentially for other Japanese and foreign cities) to counterparties resident in Japan. Initially the Enron contracting entity will be a wholly owned subsidiary of Enron Corp. that is incorporated in a country other than Japan and that has no presence in Japan. Later, the Enron contracting entity may be a Japanese resident corporation (e.g. Enron Japan Corp.). 4. In your advice dated January 14, 2000 you generally indicated that there would be no legal impediment to Enron trading OTC weather derivatives in Japan. We would ask that you expand on that advice. Operation of EnronOnline 1. EnronOnline allows counterparties to may make on line offers to Enron in respect of one of the products listed on the screen. Enron may accept this offer through an on line response thereby forming a contract. 2. A potential counterparty wishing to trade through EnronOnline contacts Enron and fills out a registration form. Enron will make its credit assessment on the counterparty. If accepted the counterparty is required to sign a password agreement and is issued a password. 3. The first time a counterparty logs onto the system with its approved password it will be required to agree to an electronic trading Agreement (ETA) by clicking the "I Agree" Box after scrolling thought the ETA. 4. For each traded product there will be available online a set of contract terms known as "General Terms and Conditions" (GTC). The GTC is supplemented by a product description. A draft product description for a weather derivative for a Japanese city is enclosed. A sample GTC for an Australian weather derivative is also provided. The GTCs for a Japanese city weather derivative would be similar but would reference Japanese weather stations. 5. A counterparty transacts through EnronOnline by "clicking" and submitting an online offer to Enron. The offer may or may not be accepted by Enron. The counterparty will receive notification that either the trade was successful or that their offer was not accepted. The ETA specifies that acceptance occurs when the Enron message hits the server. Would you please advise on the following points. 1. Please reconfirm your previous advice that there are no regulatory approvals required to trade Japanese weather derivatives where the Enron counterparty is resident in Japan. Would you please consider both the circumstance (i) where the Enron contracting party to the weather derivative is neither incorporated nor resident in Japan and (ii) where the Enron contracting party to the weather derivative is incorporated or resident in Japan. 2. Do any of your conclusions in your previous advice that OTC weather derivatives can be offered legally in Japan, whether based on weather readings for Japanese locations or foreign locations, need to be modified if the OTC weather derivatives can be traded via Enron Online? 3. Any impact the legislation regulating gambling may have on these products. 4. Please reconfirm that there would not be any transaction taxes applying to weather derivatives. 5. Any other material legal issues that you advise are applicable to these types of products. We are also providing below, for your review, a sample swap product description and our General Terms and Conditions for Australia heating degree day swaps. Best regards, John (See attached file: HDD Swap Osaka 000529.doc)(See attached file: GTC HDD Aust 000530.doc)
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