Jurisdiction; Procedure; Litigation
9/11/2009 11:45:26 AM EST
Financial Derivatives: Safe Harbors in a Bankruptcy
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The current financial crisis has highlighted the fact that the complexity of certain financing and financial instruments made it virtually impossible to determine the true extent of the risk faced by lenders and other financial companies. Since the collapse of Lehman Brothers and the bailout of major U.S. banks, terms such as “credit default swaps” have entered into the lexicon of everyday conversations, and lawyers are increasingly facing the intricate nature of twenty-first century finance. Indeed, the Lehman Brothers bankruptcy has showed how Byzantine financial instruments involving counterparties throughout the world can add an intricate layer to the resolution of a debtor's affairs.
Among the ubiquitous complex financial instruments are so-called “derivatives,” e.g., swaps, options or futures, which are risk-shifting agreements that derive their value from the value of an underlying asset. The widespread use of derivatives has meant that financial institutions have potentially enormous exposure should a counterparty file bankruptcy.
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