“The imperfect hedge: bail-in risk and CDS contracts” by Julia Lu and John Clark published in Butterworths Journal of International Banking and Financial Law

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February 27, 2012

Richards Kibbe &  Orbe LLP attorneys Julia Lu and John A. Clark authored the article entitled “The imperfect hedge: bail-in risk and CDS contracts” published in Butterworths Journal of International Banking and Financial Law. Proposals to give European and UK regulators “bail-in” powers to write down failed financial institutions’ senior unsecured obligations are moving forward, but the new framework is not contemplated by standard credit default swaps (CDS) and could undermine their use as contractual hedges against default risk.

Due to ambiguities in the proposals and in standard CDS documentation, it is unclear whether the exercise of a bail-in of any obligations would qualify as a “Restructuring” credit event or whether the bail-in-eligible debt would qualify as “Deliverable Obligations.”  In the article, Ms. Lu and Mr. Clark explain that most ambiguity relating to the definitions of credit events and deliverable obligation characteristics may be resolved by modification to existing documentation.

Click here to read “The imperfect hedge: bail-in risk and CDS contracts.”