A standard repurchase agreement, commonly referred to as a “repo,” typically consists of a two-part transaction.[i] The first part involves the transfer of specified securities by one party, the dealer, to another party, the purchaser, in exchange for cash. The second part consists of a contemporaneous agreement by the dealer to repurchase the securities at the original price, plus an agreed-upon additional amount on a specified future date.[ii] Generally, the “safe harbor” provisions of the Bankruptcy Code are designed to permit a nondebtor party to terminate and close out a repo (as well as other derivative contracts) notwithstanding the automatic stay.[iii] Without these special protections, or “safe harbors,” the bankruptcy of a counterparty to a repurchase agreement “would impair the liquidity of the repurchase agreement and possibly lead to the bankruptcy of the non-debtor counterparties.”[iv]
The amendments to the Bankruptcy Code implemented by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “2005 Amendments”), strengthened several of the safe harbor provisions. Notably, the 2005 Amendments significantly expanded the definition of “repurchase agreement” to include a much wider category of securities and derivative agreements, including “mortgage related securities, (as defined in section 3 of the Securities Exchange Act of 1934), mortgage loans, [and] interests in mortgage related securities or mortgage loans.”[v] The 2005 Amendments broadened Section 559 of the Bankruptcy Code (specifically addressing the liquidation of repos) by amending it to include the termination or acceleration of repos, and expanded the definition of “contractual right.” Similarly, the 2005 Amendments amended Section 555 of the
Bankruptcy Code (specifically addressing securities contracts) by broadening it to cover the termination or
acceleration of a securities contract, and expanding the definition of “contractual right”.
See article for more.
Firefox recommends the PDF Plugin for Mac OS X for viewing PDF documents in your browser.
We can also show you Legal Updates using the Google Viewer; however, you will need to be logged into Google Docs to view them.
Please choose one of the above to proceed!
LOADING PDF: If there are any problems, click here to download the file.