Too Much Protection for Derivatives in Bankruptcy

I have written before about my opinions regarding the “safe harbors” in the bankruptcy code.  These are the provisions that exempt derivatives and repo contracts from the automatic stay, the prohibition on termination of contracts with the debtor, the prohibition on constructively fraudulent transfers and the prohibition on obtaining preferential treatment on the eve of bankruptcy.

In general, I think the current safe harbors are too broad and amount to little more than a subsidy to the derivatives industry. Similar provisions protect “securities contracts,” and open up the argument that any transaction that occurs in the general vicinity of a broker-dealer is immune from the normal rules of bankruptcy.

Maybe Congress wants to subsidize the industry, but it probably should stop pretending that these provisions are vital to protect mom, apple pie and the American economy from systemic risk. You could do that with narrower provisions, as I have shown.

My latest concern with regard to the safe harbors is not so much the statutory provisions, but the role that courts have come to play in expanding the provisions beyond their already broad statutory language.

Read on.

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