Message-ID: <21092843.1075844475520.JavaMail.evans@thyme> Date: Mon, 6 Nov 2000 03:14:00 -0800 (PST) From: soma.ghosh@enron.com To: sara.shackleton@enron.com Subject: Rehypothecation of securities Cc: tana.jones@enron.com, cris.sherman@enron.com, clement.abrams@enron.com, tim.proffitt@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: tana.jones@enron.com, cris.sherman@enron.com, clement.abrams@enron.com, tim.proffitt@enron.com X-From: Soma Ghosh X-To: Sara Shackleton X-cc: Tana Jones, Cris Sherman, Clement Abrams, Tim Proffitt X-bcc: X-Folder: \Sara_Shackleton_Dec2000_June2001_1\Notes Folders\Notes inbox X-Origin: SHACKLETON-S X-FileName: sshackle.nsf 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