Subject: Re: Enron OnLine/Credit Derivatives
From: [email-masked]
To: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Cc: [email-masked]
Date: Thu, 18 Nov 1999 02:53:00 -0800 (PST)

Louise - thanks for forwarding.  Preliminary response as follows (I will need 
to follow up with Sanjev at Slaughter and May who is co-ordinating the 
European side):

1.  Regulation

We agree with the analysis. Securities laws will not be relevant.  Insurance 
is likey to be the main issue.  If it emerges from our legal review of the 
relevant countries that we can avoid the insurance point by making our 
contracts look like derivatives (swaps/options) that will determine whether 
the CFTC (commodity) regulations will be relevant.  For this reason, it makes 
sense to complete the survey before drafting the confirms (which in any event 
will be fairly simple). Note, though, that we will not be using ISDA 
documentation, since it is unnecessarily complex for the product contemplated 
(described below) and using the GTCs approach will tie in more neatly with 
OnLine.  

Of course we will also need to look at local regulation in each target 
jurisdiction.  SFA, for example, are taking an increased interest in the 
internet and have recently released a detailed questionnaire which we may 
need to complete before launch.

2.  The Product

From my most recent discussions with Bryan, the product will be a simple 
Bankruptcy only, digital payout.  That is, if the reference entity goes 
bankrupt (probably as defined under the laws of its jurisdiction of 
incorporation - local counsel will need to draft in each case) the protection 
seller will pay the buyer a fixed, pre-agreed sum of money (not determined by 
reference to the value of a bond or anything else).

3.  Bankruptcy

Please see 2 above.  Also note that we are looking for a harder (more 
certain) definition of bankruptcy which will be relatively easy to ascertain 
in each case.  Early warning type events will probably be out and court based 
or other formal proceedings which are readily verifiable will be in. In 
practice, this will make it harder for the buyer to claim than under the ISDA 
definition (for example) which is a far softer and more sensitive trigger.

4.  Confidentiality

Ken also raised this important point when we spoke yesterday.  There are 
issues of confidentiality which will be relevant.  While as a matter of UK 
regulation, a Chinese Wall/Restricted List procedure will not be required 
(since no securities will be involved), contractual duties of confidentiality 
will need to be considered.

The issue is perhaps more a commercial one - We will need to think carefully 
about the impact our public betting on the bankruptcy of our counterparties 
will or might have on our business relationships with them.

I'll come back with a "legal game plan" once Bryan, Sanjev and I have got 
together.

Best regards

Paul

Louise Kitchen
11/17/99 10:27 PM
To: Paul Simons/LON/ECT@ECT, John Sherriff/LON/ECT@ECT, Bryan 
Seyfried/LON/ECT@ECT
cc: Mark Taylor/HOU/ECT@ECT 

Subject: Enron OnLine/Credit Derivatives

FYI
---------------------- Forwarded by Louise Kitchen/LON/ECT on 17/11/99 22:26 
---------------------------
   
	Enron Capital & Trade Resources Corp.
	
	From:  "David Gilberg" <[email-masked]>                           
17/11/99 20:06

To: Mark Taylor/HOU/ECT@ECT
cc: [email-masked], [email-masked] (bcc: Louise Kitchen/LON/ECT)

Subject: Enron OnLine/Credit Derivatives

Following up on our discussion yesterday, this is to summarize the issues and 
questions that we identified with respect to the trading of credit 
derivatives through Enron OnLine:

1.  The proposal needs to be analyzed more closely from the perspective of 
three principal regulatory schemes - securities, commodities and insurance.  
If the credit derivatives are not priced on the basis of or indexed to 
securities, there should not be any significant securities law issues.  With 
respect to the Commodity Exchange Act, if the derivatives are executed as 
swaps, they will need to satisfy the CFTC's swap exemption and, if executed 
as options, they will need to satisfy the trade option exemption.  With 
respect to insurance, there could be an issue as to whether the credit 
derivatives constitute insurance.  This determination as well will depend 
largely on how the derivatives are structured.  For example, how will payment 
amounts be determined and will payments be tied to losses actually 
experienced  by a counterparty?

2.  As a result of the foregoing, it will be necessary to obtain more details 
regarding the structure of the proposed transactions.  Will they be swaps or 
options?  What will the precise terms be (and are there any draft forms of 
confirms that can be reviewed)?

3.  It will also be necessary to determine how bankruptcy events will be 
defined.  This approach is clearly simpler than other forms of credit 
derivatives that include a variety of triggers (such as those based on 
defaults under loans, derivatives, securities or other instruments), because 
bankruptcy should generally be a public and objective event.  However, in 
many jurisdictions, it is  possible for third parties to cause an involuntary 
bankruptcy proceeding to be commenced and even frivolous proceedings can be 
commenced and maintained for some period.  Presumably the definition that is 
used will need to provide for some period in which the proceeding might be 
dismissed.  Also, the definition will need to take into account the 
possibility of non-US bankruptcy proceedings.

4.  We also should obtain more information on the manner in which the 
derivatives will be priced and the manner in which such prices will be 
published or disseminated to clients.  This goes to the issue of whether 
Enron could be found to have breached some duty to a third party or whether 
that party may have a claim against Enron on some other basis.

For example, it is possible that an entity whose "name" is included in the 
list of those on which derivatives are written will claim that Enron 
improperly used confidential information that it received about that party 
through a trading relationship in pricing derivatives on its credit.  In 
addition, such "name" might claim that Enron caused it injury by publishing a 
price for derivatives on its credit that reflected a weaker credit rating 
than was warranted.  That party might claim that, by publishing such price, 
Enron caused other parties to suspend trading with it, to declare defaults or 
to demand collateral.  This obviously is not generally a problem with credit 
derivatives because they are done privately on a one-to-one basis.

Please call us if you have any questions or would like to discuss these or 
other issues further.  Best regards.

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