Transaction Consistency and the New Finance in Bankruptcy

By: David A. Skeel, Jr. & Thomas H. Jackson

 

Neither scholars nor the derivatives industry have fully explored the question of how the treatment of derivatives and repos in bankruptcy would change if their exemption from a number of bankruptcy’s core provisions was removed. This Essay tries to fill the gap, and to develop a more general theory about the importance of “transaction consistency”—that is, equivalent treatment of similar transactions—in bankruptcy. The effect of transaction consistency on repos would be limited, because repos would automatically be terminated as of the bankruptcy filing and thus could not be reinstated by the debtor. Derivatives have more at stake, but the nondebtor’s right of setoff would reduce many of the adverse effects. The special treatment should not simply be removed, however. Given the distinctive attributes of these contracts, the Essay argues that repo lenders should be able to immediately sell some kinds of collateral, and that the automatic stay should be limited to three days for derivatives. The Essay also explains how transaction consistency can be integrated with the Dodd-Frank Act, and might make Dodd-Frank’s resolution rules unnecessary in most cases.

 

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