Repurchase Agreement Bankruptcy Safe Harbor

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In the United States, when a counterparty goes bankrupt, an automatic stay of enforcement is applied, which would prevent a lender from mortgaging (i) the debtor`s ownership, (ii) terminating contracts with the debtor, (iii) taking or continuing certain enforcement actions against the debtor or its assets, and/or (iv) that are due under such agreements; In any event, unless an application has been filed and granted by B. in the context of the corresponding bankruptcy proceedings. In addition, provisions of credit agreements that allow for the termination or modification of a contract because of the insolvency or financial situation of the debtor (also known as “ipso facto clauses”) should not be applied. In homebanc, some Bear Stearns companies had entered into numerous alleged repo transactions with the debtor under two framework contracts. Ten of these transactions were the subject of litigation in the Homebanc case. Each of the transactions at issue was a confirmation which had a zero purchase price for the securities in question. In support of its argument that those transactions are not regarded as `retirement transactions` under the Bankruptcy Code, the Chapter 7 trustee argued that the Bankruptcy Code cannot give zero repo at purchase price, because the definition in the Bankruptcy Law requires that the securities in question be transferred `against the transfer of funds by the purchaser of such securities`. In addition, the trustee argued that the purchase price of zero indicated that the securities in question had not been transferred to Bear Stearns “against the transfer of funds”, but that they had been transferred for the purpose of being held for future credit transactions, such as future repo transactions. When Carey J. found that the transactions in question qualified as “pensions” under section 101(47)(A)(i) of the Bankruptcy Act, although the confirmations applicable to such transactions established a zero purchase price, Carey J. echoed the so-called “bucket” theory defended by Bear Stearns.

According to this “Bucket theory”, any repo transaction governed by the current Framework Agreement has been considered consideration for any other transaction under this Framework Agreement. As a result, each transaction, with a purchase price greater than zero, provided sufficient consideration to satisfy the bankruptcy law requirement of “money transfer” with respect to zero-priced securities. . . .

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