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Enron Mail |
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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: Mark Taylor X-To: Louise Kitchen X-cc: X-bcc: X-Folder: \Mark_Taylor _Dec_2000\Notes Folders\Sent X-Origin: Taylor-M X-FileName: mtaylor.nsf January __, 2000 Via Facsimile MEMORANDUM TO:=09Paul Simons=20 =09(Enron Europe Limited)=20 =09=20 =09Mark Taylor=20 =09(Enron North America Corp.) FROM:=09Kenneth M. Raisler=20 =09David J. Gilberg RE:=09Enron Online/Credit Product This memorandum summarizes the proposed procedures we discussed during our= =20 meeting on January 13, 2000 for use in connection with the credit derivativ= es=20 product (the =01&Product=018) to be offered by Enron Capital & Trade Resour= ces=20 International Corp. and its affiliates (collectively, =01&Enron=018) throug= h =01&Enron=20 Online=018. These procedures, which we will be assisting you in preparing,= are=20 designed to reduce Enron=01,s exposure to those entities on whose credit th= e=20 Product will be based (the =01&Reference Entities=018) as well as Enron=01,= s exposure=20 to other related types of liabilities. We have previously outlined these= =20 areas of exposure in our memoranda dated December 15, 1999 and December 22,= =20 1999. =20 1. Disclosure =01* All Reference Entities should be advised, by letter, of = the=20 fact that they will be included in the list of entities that will be the=20 subject of the Product. These disclosures will of course be separate from,= =20 although related to, the disclosures to be provided to counterparties to=20 transactions in the Product. ? This disclosure should inform the Reference Entity of the introduction of= =20 the Product, and describe the general nature of the Product and the manner = in=20 which it will be traded (e.g., through Enron Online). ? In general, however, Enron need not request that the Reference Entities= =20 consent to or acknowledge their inclusion in the list of the Reference=20 Entities, except as set forth below in paragraph 2.=20 2. Consent =01* Enron should, however, obtain the prior consent of certai= n=20 types of Reference Entities before including them in the list of Reference= =20 Entities. ? In particular, consent should be obtained from any Reference Entities wit= h=20 which Enron has a significant trading relationship that includes advice or= =20 other services that could result in Enron being considered a fiduciary of t= he=20 Reference Entity or that could otherwise give rise to common law duties tha= t=20 could be violated if the Reference Entity does not consent to the arrangeme= nt. ? Enron need not seek consent from those large and sophisticated=20 counterparties to which Enron merely provides prices and with which Enron= =20 trades on an exclusively arms=01, length basis with no advisory or similar= =20 services being provided and with no fiduciary obligations. ? Where consent is sought, Enron should include a request that the Referenc= e=20 Entity acknowledge its receipt of the letter and its consent to being=20 included in the list of Reference Entities. If a Reference Entity fails or= =20 refuses to execute the letter, Enron will need to make a determination, on = a=20 case-by-case basis, as to whether it is comfortable including that entity o= n=20 the list of Reference Entities. However, it should be recognized that, by= =20 requesting consent, Enron may be limiting its ability to treat an entity as= a=20 Reference Entity in the absence of consent. 3. Chinese Wall =01* We understand that it will not be feasible to construc= t a=20 complete =01&Chinese Wall=018 between the operations related to the Product= and=20 Enron=01,s other trading activities. This is due primarily to the fact tha= t=20 activities related to the Product will utilize the same credit function as= =20 Enron=01,s other trading activities. However, Enron should implement a mod= ified=20 Chinese Wall between the trading operations. This approach would enhance= =20 Enron=01,s ability to defend successfully against any claims of impropriety= or=20 breach of duty by facilitating Enron=01,s ability to demonstrate that=20 information had not been shared by other traders with those trading the=20 Product. This could be accomplished through a number of procedures. ? First, Enron should maintain the maximum possible degree of physical=20 separation between personnel responsible for pricing and trading the Produc= t,=20 on the one hand, and Enron=01,s other trading activities, on the other hand= . =20 Even if personnel involved in the Product are located on the same floor as= =20 other traders, it would be prudent to place them in a separate area of the= =20 floor set off by partitions or similar features. ? Second, procedures should be developed to prohibit the flow of informatio= n=20 between Product traders and other traders if such information is material t= o=20 the creditworthiness of trading counterparties and is not in the public=20 domain. In addition, all trading personnel should be instructed with respe= ct=20 to the procedures through training programs. ? Finally, senior supervisory officers of Enron should be assigned to monit= or=20 communications between the groups of traders and to review and make=20 determinations on requests by traders to communicate information that would= =20 otherwise be prohibited under the procedures. These procedures will be=20 similar to those that have been developed in connection with Enron=01,s equ= ity=20 trading activities. 4. Restricted List -- Enron should establish and maintain a =01&restricted = list=018=20 of those entities on which Products may not be traded. ? Initially, the list could be used to exclude those entities on which it i= s=20 not feasible for Enron to offer Products due to the nature of its=20 relationships with such entities; e.g., those entities with respect to whic= h=20 Enron might be considered a fiduciary and which have not consented to their= =20 inclusion and those entities about which Enron has or regularly receives=20 material, non-public information. In addition, those entities with which= =20 Enron has entered into confidentiality agreements will most likely need to = be=20 excluded, depending on the terms of such agreements. ? Enron should also establish procedures to monitor its receipt of=20 information regarding Reference Entities on which Products are listed. =20 Pursuant to these procedures, Enron should suspend the listing of quotation= s,=20 and therefore the issuance of new Products, with respect to a Reference=20 Entity, if Enron is in possession of material, non-public information=20 regarding such Entity of a type, or in situations, that render suspension= =20 necessary or advisable. This would include situations in which Enron is=20 considering an investment in or a joint venture with a Reference Entity. I= n=20 addition, the procedures should provide for Reference Entities to be exclud= ed=20 or deleted for reasons unrelated to Enron=01,s possession of information as= =20 well; e.g., where Enron has reached or exceeded its credit limits with=20 respect to such Entities.=20 ? The procedures should state that Enron may close out an open position for= a=20 Product held by a counterparty, if the counterparty specifically requests= =20 Enron to do so. The procedures should also address the pricing of the=20 closing transaction, however, and establish a mechanism for such pricing th= at=20 minimizes Enron=01,s potential exposure to liability as a result of its=20 effecting a transaction while in possession of material, non-public=20 information.=20 ? Enron should provide training to the appropriate personnel, which should= =20 include instructing such personnel not to furnish Product counterparties wi= th=20 any notification or explanation of a Reference Entity being placed on the= =20 restricted list.=20 As noted, we will be assisting you in developing these procedurew, which wi= ll=20 need to be integrated into Enron=01,s existing policies and procedures. In= =20 addition, as we have advised you in our prior memoranda, there are no=20 procedures that will fully insulate Enron from the potential liabilities=20 arising in connection with its offering of the Product. However, the=20 implementation of the types of procedures described above should assist Enr= on=20 in mitigating such risks and defending against claims that might be made by= =20 Reference Entities. Please call us if you have questions on these or other issues. =20 K.M.R.=20 D.J.G.
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