By Dietmar Franzen

ISBN-10: 3540679340

ISBN-13: 9783540679349

ISBN-10: 3642569323

ISBN-13: 9783642569326

I first came upon the problem of derivatives documentation while writing my degree thesis on measuring the credits threat ofOTC derivatives whereas i used to be an economics scholar on the collage of Bonn. even though defense layout has been a space of study in economics for a few years and regardless of the frequent use of derivatives documentation in monetary perform, the duty of designing contracts for derivatives transactions has no longer been handled in monetary thought. the single factor that aroused my interest was once that events with frequently opposing pursuits, specifically banking supervisors and the banking industry's foyer, unanimously propose the use ofcertain provisions in standardized contracts known as grasp agreements. Do those provisions elevate the ex ante potency of contracts for all events concerned? i really begun my learn awaiting to discover aid for the generally held ideals concerning the potency or inefficiency of convinced provisions and was once sur­ prised to acquire effects that contradicted the normal knowledge. i'd strongly suggest opposed to utilizing those leads to any political debate on deriva­ tives documentation. They have been bought inside of a hugely stylized version with a few restrictive assumptions. This paintings may still otherwise be noticeable as an try to formalize the dialogue on derivatives documentation and to problem the idea that yes provisions are more often than not ex ante effective. it's also a call for participation to all these advocating using convinced provisions in grasp agreements to formalize their arguments and to give an explanation for the industrial ratio­ nale at the back of those provisions.

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A creditor's preference for either liquidation or reorganization is closely related to the seniority of his claims. Senior secured lenders will likely prefer to repossess and liquidate 61 62 63 Berkovitch & Israel (1999) offer a theoretical explanation why different economic systems (developed bank-based, developed market-based and underdeveloped systems) should have bankruptcy laws which differ in their degree of creditors' and debtors' rights protection. The application of these four rules is measured by four binary variables, which are equal to 1 if the relevant rule applies and equal to 0 otherwise.

See Basel Committee on Banking Supervision (1994), Annex 1. See Bank for International Settlements (1998), p. 21. 3 Legal Risk, Enforceability, and Insolvency Law 39 contracts later at higher costs. 137 Second, the legal implications of an early termination may be materially different if contracts are terminated prior to instead of after or upon insolvency. If contracts are terminated upon or after insolvency, claims may be subject to an automatic stay or other adverse provisions of insolvency law.

The standard 1987 ISDA master agreement only allows for limited twoway payment provisions. 34 This has been changed in the 1992 master agreement because limited two-way payment provisions have been criticized for imposing undue penalties on the defaulting party. 35 Undoubtedly, limited two-way payment provisions may deliver windfall profits to the non-defaulting party in the event of a default to the disadvantage of other creditors. These provisions also aggravate attempts to transfer portfolios of derivatives transactions from a defaulted party to other parties.

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Design of Master Agreements for OTC Derivatives by Dietmar Franzen

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