The financial crisis has resulted in the termination of billions of dollars worth of derivatives between sophisticated market participants. When a defaulting party files for bankruptcy, the non-defaulting party is often left with a claim against the estate of its counterparty--and claims holders may seek to monetize them by selling to third parties. This Learning Curve will run through the considerations potential sellers should have in mind when negotiating and documenting a claim sale.
The Master Framework
Under Section 5(a)(vii) of the ISDA 2002 Master Agreement, the bankruptcy of a party, Credit Support Provider or applicable Specified Entity constitutes an Event of Default. Pursuant to Section 6 of the Master Agreement, upon an Event of Default, the non-defaulting party may designate an Early Termination Date in respect of all outstanding Transactions and must provide notice thereof to the defaulting party. A safe harbor provision in the Bankruptcy Code permits ....