What are derivatives, and how are they treated in New York?

December 18, 2014 11:14 am Published by

Chapter 11 laws have been in the news recently, because it’s believed they need to be reformed. One thing that needs to be changed is the way derivatives are treated. In Chapter 11 bankruptcy, there are provisions that allow the derivativesto be excluded from the operations of the bankruptcy code. Instead of allowing the person going through the bankruptcy to make decisions about these derivatives on his or her own, the option instead goes to creditors; they may decide not to allow the contract with the debtor to continue even if it was left in decent standing.

Several new recommendations have moved on to the American Bankruptcy Institute’s Chapter 11 Reform Commission and aim to change the way derivatives are treated under the bankruptcy code. One is to narrow the scope of Section 546 (e), which protects settlement payments. It’s been requested to reduce the section’s applicability to leveraged buyouts. It’s been requested to narrow the scope of repo safe harbors, too, in several circumstances.

What all this means is that trying to protect a person or business’s right to derivatives has been an issue in the past that needs to be cleared up. If a debtor of any kind can make good on a derivative, then it’s been argued that in most cases, the debtor should have the right to choose to keep that derivative during bankruptcy.

As you know, bankruptcy is a complicated process, and derivatives are just one kind of asset you may be struggling with. If you need assistance during it or want to work out the best plan of action for your Chapter 11 bankruptcy, speaking with someone familiar with New York law can help.

Source: Dealbook, “How the Bankruptcy Code Should Treat All Derivatives” Stephen J. Lubben, Dec. 08, 2014

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