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Opinion

Marconi confusion spooks derivatives market

Marconi’s restructuring is troubling the derivatives market. The banks that have bought protection against the company are unsure whether its agreement with lenders counts as a credit event. Could banks find their credit swaps against other companies are similarly vague?

Credit derivatives are supposed to reduce risk not add to it. But the restructuring of UK electronics company Marconi is proving that the documentation of credit swaps is not as reliable as banks would hope.


Lawyers are unsure whether the company's $4 billion workout should trigger Marconi swaps. At issue is whether a non-binding agreement to restructure counts as a credit event under definitions written by the International Swaps&Derivatives Association that are used as the basis for most deals.


Patrick Clancy, a lawyer with Shearman&Sterling and ex-director of WestLB, says: "The aim of credit default swaps is that the protection buyer can get out when things go wrong. If it cannot, the market is not working. That has to be an error in the documentation."


If bankers cannot settle their contracts when a company agrees to a non-binding workout, they could find their credit protection expires before they cash in. Should they be forced to wait until the restructuring takes effect, they could even find the underlying company's bonds and loans are exchanged for securities that protection buyers cannot deliver under their swaps. "Then they really would be stuffed," says a UK lawyer.




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