Lehman Brothers
Rolling Back the Repo Safe Harbors
Edward R. Morrison, Mark J. Roe, and Christopher S. Sontchi, 69(4): 1015-1048 (August 2014)
Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code’s normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could prove illiquid or unable to fetch their expected long-run value in a panic. The exemptions from baseline bankruptcy rules facilitate this kind of panic selling and, according to many expert observers, characterized and exacerbated the financial crisis of 2007–2009. The exemptions from normal bankruptcy rules should be limited to United States Treasury and similar liquid securities, as they once were. The more recent expansion of these exemptions to mortgage-backed securities should be reversed.
In Defense of the Bankruptcy Code's Safe Harbors
Mark D. Sherrill, 70(4): 1007-1038 (Fall 2015)
Since its enactment in 1978, the U.S. Bankruptcy Code has seen gradual but dramatic enlargement of rights for non-debtor counterparties to derivatives contracts. That enlargement of rights has generally tracked the rapid expansion of the use of derivatives in the United States. In light of the recent financial crisis, many have criticized the scope of the Bankruptcy Code's safe-harbor provisions and called for them to be narrowed or eliminated. This article rejects several proposals to narrow the safe harbors and argues that the provisions reflect Congress's effort to balance competing national policies. In contrast to many recent pieces, this article contends that the Bankruptcy Code's safe harbors provide a net benefit to the United States and its financial stability.
The Treatment of Derivatives Under the SEC’s Net Capital Rule
Michael P. Jamroz, 76(1): 183-210 (Winter 2020-2021)
Every broker or dealer conducting a general securities business registered with the Securities and Exchange Commission (Commission) must comply with SEC Rule 15c3-1, the Net Capital Rule. The Net Capital Rule is designed to ensure that broker-dealers will have adequate liquid assets to meet their obligations to investors and liabilities to other creditors. The rule is complex and specifically addresses the liquidity, market, and counterparty credit risks associated with the proprietary positions of the broker-dealer.