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Sovereign market awaits court verdicts

In the wake of the Argentine crisis the sovereign credit derivatives market is preoccupied with legal disputes about what triggers a credit event. New definitions from ISDA must bring clarity, though even that might be insufficient to lure back investors.

Three recent high-profile cases involving JPMorgan, along with a post-Enron reluctance on the part of clients to enter into opaque off-balance-sheet transactions, might spell the beginning of the end for sovereign credit derivatives. These are not golden days, after all, for financial markets plagued with illiquidity and mistrust.

JPMorgan has issued one public statement maintaining a stout defence: "JP Morgan fully complied with the plain language and spirit of the contractual terms of the governing agreements." A study of the court documents relating to the three cases, and discussions with lawyers, reveals a dense and complex chain of arguments that has not yet been fully understood by many market participants.

The largest case pending against JPMorgan is a suit seeking more than $90 million in compensatory damages and more than $100 million in punitive damages filed by Daehan, a Korean investment trust. Daehan was sold $96 million of 10.20% Emerging Market Basket Notes in late 1996, for which it paid $40 million in cash and borrowed a further $56 million from JPMorgan, which also structured the deal. The notes expired on December 17 2001, and 80% of the basket was Argentine risk; Argentina declared a moratorium on its bonds one week later, on December 24.

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