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Safe Harbors and Exceptions to the Automatic Stay

Gardere Memo
02.01.09

In recent years, there have been an increasing number of bankruptcy cases involving entities which are issuers or counterparties to various financial or commodity contracts. These contracts may be traded on one or more exchanges, domestic or foreign, or they may be privately negotiated contracts which are not traded on an exchange.

In order to minimize disruption to financial and commodity trading markets, the bankruptcy code contains exceptions to the automatic stay provisions as well as those sections governing recovery by the estate of the debtor entity of transfers by the debtor (or by counterparties to contracts with the debtor) with respect to repurchase agreements, securities contracts, commodities contracts, swap agreements, and financial participation contracts.

This is significant because such transfers usually arise in the bankruptcy cases of companies utilizing sophisticated hedging transactions, often for large transactions. While once confined to insolvencies or bankruptcies of financial institutions and businesses involved in some capacity in commodity trading, the use of derivative instruments has spread to a wider array of organizations. The use of these financial instruments may involve anything from seeking to offset currency or interest rate fluctuations to protecting against sharp movements in fuel, energy, or agricultural products.

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