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Enron Mail |
David,
Thank you for your comments on the US GTC. Taking each of your main points in turn: Section 2(e)(i)(1) - This Section does not preclude us from doing business with banks or other financial institutions. As you anticipate, breach of warranty constitutes an Event of Default entitling termination. Section 1 - Your main concern appears to focus on the issue of sleeving. As you will see, we have included in Section 1 of all GTCs a provision prohibiting transactions to be entered into by the reference entity itself or by any of its affiliates. Any purported transaction of that sort is automatically void. We considered carefully (both internally and with outside counsel) going further than this by including a provision stopping parties acting in concert with reference entity groups. We concluded that such a provision would be inappropriate for two main reasons. First, as a practical matter, it is almost impossible to police such a provision and detect cases of such collusion. Secondly, if we were to find out about such collusion, we would be entitled to withhold payment (regardless of any contractual provision) on the basis that such collusion constitutes fraud. It is also worth pointing out in this context that sleeving is not an issue germaine only to credit derivatives trading online. It is possible in the existing OTC credit derivatives markets for this kind of activity to be perpetrated. You will not find any provisions in existing market documentation addressing this point - indeed, the new 1999 ISDA Credit Derivatives Definitions are consistent with this. I only hope that reference entities do not follow the devious thought processes set out in your options (a)-© (and we will clearly have to keep an eye on you if you ever decide to pursue a different career!). It is not "nasty" defining Enron as the "Determination Agent". This accords with the standard ISDA Master Agreement and, in fact, is less dramatic than the ISDA insofar as all Enron will be required to do as Determination Agent is to verify the validity of notices submitted under transactions (in the context of ISDA, all sorts of complex calculations and subjective evaluations fall to be made by the "Calculation Agent"). Thanks very much for thinking through the issues on the GTC and reviewing it. Please let me know if you would like to discuss this further. Best regards. Paul Simons David Forster 18/02/2000 03:14 To: Bryan Seyfried/LON/ECT@ECT, Mark Taylor/HOU/ECT@ECT, Edmund Cooper/LON/ECT@ECT, Paul Simons/LON/ECT@ECT cc: Mark Dilworth/LON/ECT@ECT Subject: Credit GTC All, I have looked over the U.S. credit GTC and the long descriptions. I see we have decided to go with quarterly billing, rather than monthly. Will the payment/collections cycle cause any heartburn for the back office? I didn't spot any problems with the long descriptions. A few relatively minor comments on the GTC's - which you may or may not want to consider: - Clause 2.(e) (i) (1) - Does this clause preclude us from doing business with banks or other financial institutions? Could we append: "with regard to the Transaction"? - What happens if a Rep or Warranty is broken? Does that constitute sufficient breach to terminate the contract? I'm thinking specifically about sleeving, which is perhaps covered by Clause 2(e)(ii)(1)? I still think that sleeving is one of the most significant commercial risks faced by online trading of derivatives. If I were working for a third party, I'd immediately look for ways to set up a sleeving service to sell credit protection to the Reference Entities where the Reference Entity or its affiliate views its own risk differently from Enron. If I were the Reference Entity in question, I'd consider: a) Buying a load of protection via sleeving and then declaring bankruptcy - then do a Phoenix (in the UK at least) b) Buy a load of protection via sleeving, then take the Credit Derivatives to another third party financial institution and using the credit derivatives as collateral to increase my line of credit - I'm no expert, but I suspect there might be an interesting leverage effect here, which might actually cause a significant increase in Enron's risk exposure. c) Like (b), only the financial institution could buy the credit derivative with or without the need for sleeving - we probably need a restriction on this? (I know financial institutions are not our preferred counterparts up front, but if I were a financial insitution, I'd quickly find a way around this limitation - Affiliates or Sleevers. - Do you think it would beneficial to strengthen our protection against sleeving by adding something to Clause 2, like: "It is not entering into a Transaction for the purpose of concluding a similar transaction with the party (or any Affiliate of such party) which is the Reference Entity in the Transaction". - Should Def'n of "Contract Currency" be "Contractual Currency"? ("Contractual" is also used in the Long Descriptions) - Def'n of "Credit Product" - after "Entity", should we insert "which is"? - Are we being a bit too nasty by defining the Determination Agent as "Enron"? As the reference to Determination Agent in the contract is in a context similar to that of an arbitrator, it seems a bit cheeky to then define ourselves as the arbitrator - would this be enforceable if we were in court? I'm assuming the other GTC's are very similar to the U.S. one and I have not read them. Dave
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