Subject: Re: Credit Trading OnLine - Results of Legal Due Diligence and Risk Memo
From: [email-masked]
To: [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Mon, 17 Jan 2000 11:07:00 -0800 (PST)

Thanks very much for your memo Paul it is very helpful.  I attach below for 
completeness the To Do list put together by Elena in order to put Credit on 
EnronOnline.  
There are two remaining issues which require further thought:-

1.  How do we want to display Credit on a long term basis on EnronOnline.  
For the short term, we can put credit out there but the number of updates 
will be restricted.  Using Jay's best guess on a slow network connection the 
initialization process will take upto 4 minutes and on a normal connection 
250 updates every 30 seconds would prevent people from trading.   So we do 
have some scaling issues? Our model doesn't really function for simultaneouse 
changing of hundreds of products so really we need to actually get a much 
better specific on how many updates you envisage.   Do you really envisage 
that many updates?  Also we haven't yet experienced fast updates which we 
will do when FX joins the system.

2.  We have approximately 4000 guest id and passwords?  Can these see credit 
pricing from a due diligence perspective.

Elena will be leaving the EnronOnline group at the end of this week and Mark 
Dilworth will be our main point of contact in Dave's absence.  Any questions 
please do not hesitate to call me (713 853 3488).

Louise
Outstanding Credit Derivatives Issues	Action	Status	Resolved by
1. Redraft Credit Derivatives GTCs 	Decide how many GTCs are needed ) 1, 2 or 
6 ) and prepare the draft(s) accordingly with following issues in 
consideration:
	? Change &Effective Date8 language to refer to the dates on the website.
	? Cofidentiality issue ) legal advice is to leave it out. Bryan Seyfried to 
make decision on commercial basis, whether not to include it at all, or 
include the softer clause, for ex. that counterparties cannot use Enron name 
when disclosing transactions, details. 
	? Include &bad faith8 provision to prevent sleeving.
	? Decide what entities should enter transactions on Enron side ) ECTRI for 
Europe and ENA for North America (?)
	? Get Tax sign-off		Paul Simons/Edmund Cooper/Slaughter&May
2. Translation of GTCs	Decide whether translations are needed and, if so, prepare 
them: 
	? Nordic GTC into Norwegian
	? Swiss GTC into German		Paul Simons/Edmund Cooper/Slaughter&May 
3.  Withholding Tax Issue	Do further research and take a view regarding US 
Withholding Tax issue, i.e. that US entity can only transact with another US 
entity.		Jannine Juggins/ Paul Simons
Legal Validation of Long Descriptions	Make sure that Long Descriptions are aligned with 
GTCs.		Edmund Cooper
4. Legal Review of Paper Confirmations	Modify language in the paper confirmations according 
to GTCs and Long Descriptions.		Edmund Cooper
5. Translation of Paper Confirmations	If necessary, prepare the following translations:
	? Nordic Conf. - into Norwegian
	? Swiss Conf - into German		Paul Simons/Edmund Cooper
6. Draft Consent Paragraph to be included in the Marketing Letter 	? Draft a 
consent paragraph to be added to the Marketing Letter that goes to Ref. 
Entities companies
	? Get PR approval		Paul Simons/Edmund Cooper
7. Confidentiality Lists	Identify counterparties in the Confidentiality Lists (all 
Enron entities) that will be used as underlying Reference Entities and get 
their written consent.		Paul Simons/Edmund Cooper/Mark Taylor
8. Confidentiality Procedures	Prepare Procedures and educate Enron traders that 
confidential information about Ref. Entities is not misused.		Paul Simons
9. Prepare Counterparty List	Prepare the Counterparty List and forward it to Legal 
(for capacity check) and Credit for approval.
	Note: List must contain exact entity name that will be entering Cr. Deriv. 
transactions		Bryan Seyfried 
11. Capacity Check on Counterparties	Check counterparties, constitutional documents to make 
sure that they have legal power and authority to trade Cr. Deriv.
	Note: Finish counterparties must be &professional investors8.		Paul Simons/Edmund 
Cooper/Mark Taylor
12. Get Counterparties List Approvals	Bryan to chase Credit/Legal/Traders to get there 
sign-off.		Bryan Seyfried
13. Complete Reference Entities List	? Add information on country of incorporation 
and abbreviation (up to 12 characters) to the existing Ref. Entities List. 
	? Get Traders, Legal, Credit and Tax (?) approval.		Bryan Seyfried/Raj Sharma
14. Attach Cr. Deriv. GTCs to all Cr. Deriv. transactions confirmations	Make sure that Back 
Office procedures are amended accordingly.		Bryan Seyfried/Barry Pierce
15. Investigate whether companies from Canada and Germany can be used as Ref. 
Entities	For time-being Canadian and German companies won,t be used neither as Ref. 
Entities nor they will be able to enter trades as counterparties. However, 
being Ref. Entities ) needs further investigation.		Paul Simons/Edmund Cooper/Mark Taylor
16. Legal Budget	Estimate approx. legal fees budget for Cr. Deriv.		Paul Simons
17. Short Descriptions	Change Short Descriptions:
	? Product Type should read: &US Credit Dflt8, i.e. not &US Cr Dflt Swap8
	? Upload Underlying Credits (Ref. Entities) abbreviation according to Raj,s 
List.		Elena Kapralova/Mark Dilworth
18. Online Test	Set up Cr. Derivatives in the Test environment and make test 
trades.		Bryan Seyfried and Cr. Deriv. traders
19. Set up New Database	If decision on placing Cr. Derivatives as a separate page is 
final, start working on coding a separate Cr. Derivatives Database.		Mark Dilworth to 
co-ordinate with IT
20. Sigma Factors	Set-up Sigma factors on the Product Type level.		Mark Dilworth to 
co-ordinate with Credit
21. Risk Calculation	Set-up methodology for risk calculation on underlying Ref. Entities.		Mark 
Dilworth to co-ordinate with RAC

Legal Deliverables ) Credit Derivatives

Deliverable 	Jurisdiction	Delivery Date 	Status	Delivered by
1. GTCs 	All 			Slaughter&May
2. Long Product Descriptions Validation	All			Edmund Cooper
3. Translation of Norwegian and Swiss GTCs into German and Norwegian if 
necessary	Norway, Switzerland			Slaughter&May
4. Paper Confirmations	All			Edmund Cooper
5. Translation of Norwegian and Swiss confirmations into German and Norwegian 
if necessary	Norway, Switzerland			Slaughter&May
6. Consent Paragraph in the Marketing Letter	All			Paul Simons/ Edmund Cooper
7. Confidentiality Procedures	N/A			Paul Simons
8. Further info on Canadian and German companies as Ref. Entities	Canada, Germany			Paul Simons/ 
Edmund Cooper

Credit Derivatives ) Resolved Issues

Resolved Credit Derivatives Issues	Action	Status	Resolved by
1. 			
2. 			
3. 			

Paul Simons
01/17/2000 02:01 PM
To: John Sherriff/LON/ECT@ECT, Louise Kitchen/LON/ECT@ECT
cc: Bryan Seyfried/LON/ECT@ECT, Jeffrey T Hodge/HOU/ECT@ECT, Julia 
Murray/HOU/ECT@ECT, Mark Taylor/HOU/ECT@ECT, Michael R Brown/LON/ECT@ECT, 
Jeffrey T Hodge/HOU/ECT@ECT, Edmund Cooper/LON/ECT@ECT, Justin 
Boyd/LON/ECT@ECT, Rod Sayers/LON/ECT@ECT, Janine Juggins/LON/ECT@ECT, Mark 
Frevert/LON/ECT@ECT, Rick Buy/HOU/ECT@ECT, Steve W Young/LON/ECT@ECT, Shirley 
A Hudler/HOU/ECT@ECT, David Weekes/LON/ECT@ECT, David Forster/LON/ECT@ECT, 
Elena Kapralova/LON/ECT@ECT 

Subject: Credit Trading OnLine - Results of Legal Due Diligence and Risk Memo

NOTE - GIVEN THE PROPOSED LAUNCH DATE OF 24 JANUARY 2000 FOR THIS PRODUCT, 
THIS NOTE IS INTENDED TO SERVE BOTH AS A SUMMARY OF THE RESULTS OF OUR LEGAL 
DUE DILIGENCE AND AS A RISK MEMO

As you know, we have carried out legal due diligence in the eight countries 
where it was intended the credit product  would initially be traded via 
EnronOnLine - namely, the UK, the US, Canada, Finland, Germany, Norway, 
Sweden and Switzerland.  Under the terms of the credit product, on the 
occurrence of  a bankruptcy with respect to a specified third party (the 
Reference Entity) the Seller of the product (which could be either Enron or 
its online counterparty) will pay a fixed, pre-agreed cash sum in an agreed 
currency to the Buyer. (It should be borne in mind that this product differs 
in a number of ways from the more conventional credit derivatives traded in 
the international markets. This means that a change in the nature or terms of 
our product or the introduction of alternative credit products will likely 
change the analysis below.)

Set out below is an overview of where we have come out on the more 
significant legal issues.  I am also attaching a two page "Executive Summary 
of Legal Advice" prepared by outside counsel which highlights the significant 
legal issues/risks in each country and which should be read in conjunction 
with this note mail. As you will see, the Executive Summary does not focus on 
issues we raised which are "all clear" from a legal perspective, so as to 
keep the summary to a sensible length  (but there was plenty of good news 
too!).  Where a legal issue has been identified, I have either set out below 
what action is to be taken, or not addressed it further on the basis that, on 
the advice of foreign counsel, the risk is not very substantial or unlikely 
to materialise. Therefore, where no comment is made below in relation to a 
risk highlighted in the attached summary, please assume that the legal risk 
is one which, in our view, it is reasonable to take.

A.  Countries in which the credit product can be traded in January 2000

 Finland, Norway, Sweden, Switzerland, UK, US

B.  Countries in which launch of the product via EnronOnline will need to be 
delayed

 Canada, Germany (reasons set out below)

C.  General Issues (applicable in all countries)

The credit product is fundamentally different from the usual energy and 
related products we trade and so gives rise to new or increased legal risks 
of a general nature:

(i)  Capacity - We will not be able to assume generally that our 
counterparties will have the legal power and authority necessary to trade the 
product and so will need to check each counterparty's constitutional 
documents before allowing them to trade the product online.  This applies to 
almost all entities (eg corporates, municipalities, insurance companies) in 
all countries.  Some entities may lack the power to trade under the general 
law (in which case we will not be able to deal with them at all) or under 
their constitutional documents (in which case they will need to amend their 
constitutional documents if they wish to trade).  

The check need only be made once at the beginning of the credit trading 
relationship and so can be added to our procedures.  It is not a particularly 
onerous job and will increase the cost of this business only incrementally.

(ii)  Confidentiality - We will need to put in place procedures to ensure 
that we are not misusing confidential information about our business 
counterparties on whom we are offering credit protection.  Misuse can occur 
both in pricing the product and trading it.  The procedures will not include 
formal Chinese Walls separating the credit traders from our other traders or 
the credit department (a point we have managed to agree with both UK and US 
counsel following very detailed discussions).  The procedures will include 
(a) the use of a Restricted List in both the US and Europe (similar to the 
procedure currently used in Houston); and (b) practical steps to ensure that 
confidential information derived from other areas of our business and which 
we are not entitled to use (eg because it is the subject of a confidentiality 
agreement) is not imparted to the credit traders.  In addition, where Enron 
has an especially close relationship with a prospective reference entity, or 
otherwise has confidential information relating to such an entity, we will 
need its written consent before offering protection on that entity.  Without 
such consent, there will be an unjustifiably high risk of being sued by that 
entity for breach of confidence.

D.  Country Specific Issues

(i)  Canada - There is a substantial risk that the product will constitute 
insurance business, constituting an offence and rendering contracts in the 
product unenforceable against our counterparties.  We should try to resolve 
this issue with the Canadian authorities before launching the product in 
Canada.  Timeframe for clearance is highly uncertain since it is not clear 
which Canadian authority would take jurisdiction of the matter.

(ii)  Germany -  Again the issue is insurance.  The risk is higher than in 
Canada and so Germany should be excluded initially.

(iii)  Norway - There is a material risk that the credit product could be 
regarded as gaming in Norway, in which case trades would be void and 
unenforceable.  The normal way to mitigate this risk in Norway is by using a 
"substantial professional effort" to satisfy ourselves that a trade is being 
entered into for valid commercial purposes (normally hedging) by our 
counterparty. Clearly, it will not be possible to take such steps on a trade 
by trade basis in the context of EnronOnline.  At a minimum, we should 
therefore ensure at the outset of the online trading relationship in this 
product with each Norwegian counterparty that there is a commercial logic 
behind its trading this product type.

(iv)  Switzerland -  If the credit product is the main purpose of our trading 
relationship with a counterparty, we should check with the Swiss supervisory 
authority whether the product constitutes insurance (the position being 
unclear).  If a trade is insurance, it can be terminated by the counterparty 
(which is obviously of greater concern if Enron is the Buyer) and an offence 
will be committed since Enron is not authorised as a Swiss insurer.  However, 
I understand that the initial group of counterparties will be existing 
business relationships, in which case we can parallel path this issue.

(v)  US (New York Law) 

(a) CFTC regulation - by structuring the product either as a swap or an 
option (and meeting certain other conditions) we can rely on exemptions under 
the US Commodities Exchange Act. 

(b)  US securities laws - there is a small chance that the credit product 
constitutes a "security" under US securities laws (please see attached 
Executive Summary).  However, SEC regulations allow the public offering of 
securities to "accredited investors" which will allow us to deal with 
investors having at least US$5 million in assets.  Since most of our 
counterparties will be fairly large, sophisticated players, this test should 
not impede the business.

(c)  Insider trading - US counsel have advised that the risk of insider 
trading occurring as a result of the product being characterised as security 
(see (b) above) is relatively remote.

------------------------------------------------------------------------------
--------------------
Please feel free to call me on x36566 if you would like to discuss this 
project further.

Best regards

Paul