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Impact of the global financial crisis on OTC derivatives in structured debt transactions

Capital Markets Law Journal, Vol. 5, No. 2 Claude Brown and Timothy Cleary* Key points  The global financial crisis has resulted in a re-examination of the practical operation of OTC derivatives in the context of structured finance transactions, and particularly the workability of the remedial actions to be taken following the downgrade of swap counterparties.  The swaps supporting many structured finance transactions are usually tailored to the underlying assets and require in-depth knowledge of the pool and the structural features of the overall transaction, all of which makes these swaps difficult to price. This results in a lack of the liquidity essential for the effective calculation of collateral requirements or procuring replacement swap counterparties where required.  Replacement of swap counterparties once downgrade trigger levels have been reached has been problematic and impractical, largely due to problems with obtaining credible mark-to-market swap valuations.  Recent litigation arising from the collapse of Lehman Brothers has thrown the efficacy of commonly encountered provisions in structured finance transactions into doubt. This is particularly so for swap counterparties incorporated in the USA, and therefore subject to the US Bankruptcy Code.  Pending regulatory initiatives by the G20, the US Congress http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Capital Markets Law Journal Oxford University Press

Impact of the global financial crisis on OTC derivatives in structured debt transactions

Abstract

Capital Markets Law Journal, Vol. 5, No. 2 Claude Brown and Timothy Cleary* Key points  The global financial crisis has resulted in a re-examination of the practical operation of OTC derivatives in the context of structured finance transactions, and particularly the workability of the remedial actions to be taken following the downgrade of swap counterparties.  The swaps supporting many structured finance transactions are usually tailored to the underlying assets and require in-depth knowledge of the pool and the structural features of the overall transaction, all of which makes these swaps difficult to price. This results in a lack of the liquidity essential for the effective calculation of collateral requirements or procuring replacement swap counterparties where required.  Replacement of swap counterparties once downgrade trigger levels have been reached has been problematic and impractical, largely due to problems with obtaining credible mark-to-market swap valuations.  Recent litigation arising from the collapse of Lehman Brothers has thrown the efficacy of commonly encountered provisions in structured finance transactions into doubt. This is particularly so for swap counterparties incorporated in the USA, and therefore subject to the US Bankruptcy Code.  Pending regulatory initiatives by the G20, the US Congress
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