Subject: Re: Credit GTC
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked]
Date: Fri, 18 Feb 2000 05:01:00 -0800 (PST)

David,

Thank you for your comments on the US GTC.

Taking each of your main points in turn:

Section 2(e)(i)(1) - This Section does not preclude us from doing business 
with banks or other financial institutions. 

As you anticipate, breach of warranty constitutes an Event of Default 
entitling termination.  

Section 1 - Your main concern appears to focus on the issue of sleeving.  As 
you will see, we have included in Section 1 of all GTCs a provision 
prohibiting transactions to be entered into by the reference entity itself or 
by any of its affiliates.  Any purported transaction of that sort is 
automatically void.  We considered carefully (both internally and with 
outside counsel) going further than this by including a provision stopping 
parties acting in concert with reference entity groups.  We concluded that 
such a provision would be inappropriate for two main reasons.  First, as a 
practical matter, it is almost impossible to police such a provision and 
detect cases of such collusion.  Secondly, if we were to find out about such 
collusion, we would be entitled to withhold payment (regardless of any 
contractual provision) on the basis that such collusion constitutes fraud. 

It is also worth pointing out in this context that sleeving is not an issue 
germaine only to credit derivatives trading online.  It is possible in the 
existing OTC credit derivatives markets for this kind of activity to be 
perpetrated.  You will not find any provisions in existing market 
documentation addressing this point - indeed, the new 1999 ISDA Credit 
Derivatives Definitions are consistent with this.

I only hope that reference entities do not follow the devious thought 
processes set out in your options (a)-(c) (and we will clearly have to keep 
an eye on you if you ever decide to pursue a different career!).

It is not "nasty" defining Enron as the "Determination Agent". This accords 
with the standard ISDA Master Agreement and, in fact, is less dramatic than 
the ISDA insofar as all Enron will be required to do as Determination Agent 
is to verify the validity of notices submitted under transactions (in the 
context of ISDA, all sorts of complex calculations and subjective evaluations 
fall to be made by the "Calculation Agent").

Thanks very much for thinking through the issues on the GTC and reviewing it.

Please let me know if you would like to discuss this further.

Best regards.

Paul Simons

David Forster
18/02/2000 03:14
To: Bryan Seyfried/LON/ECT@ECT, Mark Taylor/HOU/ECT@ECT, Edmund 
Cooper/LON/ECT@ECT, Paul Simons/LON/ECT@ECT
cc: Mark Dilworth/LON/ECT@ECT 

Subject: Credit GTC

All,

I have looked over the U.S. credit GTC and the long descriptions. I see we 
have decided to go with quarterly billing, rather than monthly. Will the 
payment/collections cycle cause any heartburn for the back office?

I didn't spot any problems with the long descriptions.

A few relatively minor comments on the GTC's - which you may or may not want 
to consider:

- Clause 2.(e) (i) (1) - Does this clause preclude us from doing business 
with banks or other financial institutions? Could we append: "with regard to 
the Transaction"?

- What happens if a Rep or Warranty is broken? Does that constitute 
sufficient breach to terminate the contract? I'm thinking specifically about 
sleeving, which is perhaps covered by Clause 2(e)(ii)(1)? I still think that 
sleeving is one of the most significant commercial risks faced by online 
trading of derivatives. If I were working for a third party, I'd immediately 
look for ways to set up a sleeving service to sell credit protection to the 
Reference Entities where the Reference Entity or its affiliate views its own 
risk differently from Enron. If I were the Reference Entity in question, I'd 
consider:
 a) Buying a load of protection via sleeving and then declaring bankruptcy - 
then do a Phoenix (in the UK at least)
 b) Buy a load of protection via sleeving, then take the Credit Derivatives 
to another third party financial institution and using the credit derivatives 
as collateral to increase my line of credit - I'm no expert, but I suspect 
there might be an interesting leverage effect here, which might actually 
cause a significant increase in Enron's risk exposure.
 c) Like (b), only the financial institution could buy the credit derivative 
with or without the need for sleeving - we probably need a restriction on 
this? (I know financial institutions are not our preferred counterparts up 
front, but if I were a financial insitution, I'd quickly find a way around 
this limitation - Affiliates or Sleevers.

-  Do you think it would beneficial to strengthen our protection against 
sleeving by adding something to Clause 2, like: "It is not entering into a 
Transaction for the purpose of concluding a similar transaction with the 
party (or any Affiliate of such party) which is the Reference Entity in the 
Transaction".

- Should Def'n of "Contract Currency" be "Contractual Currency"? 
("Contractual" is also used in the Long Descriptions)

- Def'n of "Credit Product" - after "Entity", should we insert "which is"?

- Are we being a bit too nasty by defining the Determination Agent as 
"Enron"? As the reference to Determination Agent in the contract is in a 
context similar to that of an arbitrator, it seems a bit cheeky to then 
define ourselves as the arbitrator - would this be enforceable if we were in 
court?

I'm assuming the other GTC's are very similar to the U.S. one and I have not 
read them.

Dave