The “safe harbor” provisions of the Bankruptcy Code protect firms that trade derivatives, and other participants in financial and commodity markets, from the rigidity that bankruptcy law imposes on most parties. Since their inception in 1982, the safe harbor statutes have gradually grown broader, to reflect a Congressional intent of protecting against secondary shocks reverberating through those markets after a major bankruptcy. The liberalizing of safe harbors traces–and may well be explained by–the rapidly expanding use of derivatives contracts generally.

Recent months, however, have revealed initiatives that could drastically narrow the scope of the safe harbor statutes. In June 2011, the American Bankruptcy Institute (the ABI) formed the Commission to Study the Reform of Chapter 11 (the Commission) to study various changes that may be needed in bankruptcy law, and it has heard testimony advocating limitations on the safe harbors. More concretely, legislation recently introduced by Senator Elizabeth Warren would fully repeal several of the safe harbor statutes.

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