Subject: Rehypothecation of securities
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked]
Date: Mon, 6 Nov 2000 03:14:00 -0800 (PST)

Sara,

I have already had a brief discussion with Tana on some of the points below & 
would appreciate your feedback and clarification on some specific issues.

We are currently looking at ability of Enron to rehypothecate securities 
(principally T-bills) received as collateral. 

Clearly the ability to rehypothecate securities that we hold can provide 
significant benefits. The free up of funds that are being used to post cash 
collateral to counterparties increases our B/S liquidity & reduces the total 
cost of borrowing associated with posting cash.

We are reviewing the use rehypothecation of all securities posting for all 
counterparties. Clement is in the process of executing a domestic custody 
agreement with Chase Manhatten Bank which will facilitate rehypothecation.

More specifically we are looking at the ability to rehypothecate collateral 
related to the most recent Mahonia pre-pay structure (very similar to Alberta 
pre-pay). 
The collateral arrangement within Mahonia provides for back to back transfer 
of collateral right through the structure. This results in a net zero cash 
position if all parties post cash. However if Enron receives securities (from 
Chase) that we cannot reassign (to Mahonia - an SPE), the cash collateral 
calls we are seeing are in the region of $600mm (approx. $42mm/yr in interest 
expense to Enron). 

In the past Chase have interchangeably used securities & cash. They are 
currently posting cash, however they intend to post securities going forward 
for this specific deal.

The most pressing issues going forward:  
Does the existing Chase ISDA permit rehypothecation of securities. We are 
looking at this. If it does not, then we will need to negotiate an amendment 
to the credit support annex. 
Accounting treatment - there are issues around the accounting treatment for 
rehypothecation under the Mahonia transaction, principally relating to the 
acceptability of the same securities posted by Chase being posted  to Mahonia 
SPE (Chase equity in SPE), thus linking all the swaps & potentially bringing 
the pre-pay back on B/S.
We need to justify that we can rehypothecate Chase securities posted within 
the structure. AA's key point is that linkage occurs as the securities posted 
are most likely to be registered to Chase &  these are then posted back to 
Mahonia SPE with Chase equity.

Our case to support the use of Chase securities within the Mahonia pre-pay 
structure relates to:
T-bills are highly liquid instruments & effectively cash equivalent
Securities posted by banks are typically registered to a street name ie a 
brokerage house (ie not registered to Chase), if there is no physical 
delivery. We are verifying that this is the case with the securities posted 
by Chase. 
Market standard contractual terms permit use of these posted securities 

Re the last point, I have looked at our the standard ISDA credit support 
annexe para. 6 (c) relating to Use of Posted Collateral, section (i). It 
appears to say that regardless of a default occurring, the Secured Party 
(Enron) has the right to "sell, pledge, rehypothecate, assign, invest, use, 
commingle or otherwise dipose of, or otherwise use in its business any Posted 
Collateral it holds............." Please confirm that that I have not 
misinterpreted this or missed out relevant exclusions 
- Cris, this standard ISDA language should further support our case to AA?.

In addition, I would like to clarify ownership & title to securities that are 
rehypothecated in the event of default if a) Enron receives securities that 
are then rehypothecated & Enron defaults b) the third party receiving 
rehypothecated securities defaults

We are aiming to have the Domestic Custody Agreement executed within the next 
10 days, & we would like to be in a position to assign securities posted to 
us shortly thereafter for the Mahonia deal.

Outside of the Mahonia transaction, there is currently an additional $65mm 
approx. in securities being posted to us by our counterparties. Going forward 
we will:
Establish who are the counterparties where we have existing collateral 
agreements that permit rehypotheaction of securities. 
If we are receiving securities from CP where we are not permitted to 
rehypothecate, we intend to amend the ISDA.

I would very much appreciate you response on use of posted collateral & 
ownership & title to securities in the event of default.

Many thanks,

Soma