Table Of Contents:

List of Abbreviations xix
About the Authors xxiii
Foreword xxv

PART I Legal Fallout from the Credit Crunch 1(68)

The Credit Crunch 3(30)

Facts and Relevance 3(25)

Credit Crunch 3(1)

Credit Bubble 4(1)

Subprime Crisis 4(1)

Role of the Securitization Market 5(2)

Regulatory Environment 7(1)

Slice and Dice 8(1)

Spillover Effect 8(1)

Monolines 9(1)

Wrap 10(1)

Timing of Payment 11(1)

Disputes 12(1)

Wholesale Mortgage Banks 13(1)

Structured Investment Vehicles 13(1)

Banks and SIVs 14(1)

Structure 15(1)

SIV Litigation 16(1)

Orion Finance 16(2)

Cheyne Finance 18(1)

Whistlejacket Capital 19(1)

Credit Derivative Product Companies 20(1)

Lehman Brothers 21(2)

AIG 23(1)

CDOs 23(1)

Litigation 24(2)

Interbank Lending Breakdown 26(1)

Mainstream Banks 27(1)

Sovereigns 28(1)

Blame Game 28(5)

Blame Game 28(1)

Causes 29(1)

Securitization? 29(1)

Subprime Mortgage Crisis 29(1)

Lax Underwriting 30(1)

Complexity and (Lack of) Due Diligence 30(1)

Credit Derivatives? 31(2)

The Response 33(36)

Introduction 33(1)

The Effect on Structured Finance 33(4)

Introduction 33(1)

Securitization Generally 34(1)

Retained Transactions 34(1)

Example Retained Transaction 35(1)

CDOs 36(1)

Alternatives 37(1)

The Response 37(7)

Industry Response 37(2)

Regulators 39(1)

Liquidity 39(1)

Further ECB Action 40(1)

Capital Adequacy 41(1)

Transparency 42(1)

Government Support 43(1)

Rating Agencies 44(9)

Rating Agencies 44(1)

Systemic Risk 44(1)

Criticism of Rating Agencies 45(1)

Conflict of Interest 45(2)

Changes in Methodology 47(1)

Errors in Risk Models 48(1)

Lack of Transparency 49(1)

Regulatory Response 49(1)

Regulatory Action 50(1)

Rating Agency Response 51(1)

Rating Agency Liability 51(1)

Lawsuits 52(1)

Counterparty Risk 52(1)

Investors' Attempts to Recoup Losses 53(9)

Overview 53(1)

Misrepresentation 53(1)

Remedies 54(1)

Negligence 54(1)

Change of Circumstances 55(1)

KIKO 55(1)

Minibonds 56(1)

Health Warnings 57(1)

Torquay 58(2)

Advisory Duty of Care 60(1)

Pre-Action Disclosure 61(1)

Supervisory Liability 62(1)

Impact on Documentation 62(4)

Documentation 62(1)

Practical Considerations 63(1)

Simplicity 63(1)

Market Flex 64(1)

Material Adverse Change 64(1)

Market Disruption 65(1)

Yank-a-Bank 66(1)

Developments in Structured Finance 66(3)

Overview 66(1)

No Action Clauses 66(1)

Legal Opinions in Emerging Markets 67(2)

PART II Structured Finance Products 69(60)

Preparation and Due Diligence 71(6)

Preparation 71(1)

Originator Due Diligence 72(1)

Due Diligence Questionnaire 73(1)

Best Practices 74(1)

Structured Finance Products 75(2)

Securitization Products 77(40)

Overview 77(1)

Guarantee 78(1)

ABS 78(1)

Future Flow Securitization 79(9)

Future Flow 79(1)

DPR 79(1)

Assets 79(1)

Drivers 80(1)

General Risks 80(1)

Legal Risks 81(1)

Structure 82(2)

Differences 84(1)

DPRs in Detail 85(1)

Payment Order 85(1)

Depositary Bank 86(1)

Originator 86(1)

Due Diligence 87(1)

Opinions 87(1)

Securitization of Pools of NPLs and Single DAs 88(10)

Introduction 88(1)

What Are the So-Called NPLs? 88(1)

FAS 157 88(1)

Classification 89(1)

Distressed Assets 90(1)

Non-performing Loans 90(1)

Causes of NPLs 90(1)

Effects of NPLs 91(2)

NPL Resolution Methods 93(1)

Securitization of NPLs 94(1)

Advantages and Disadvantages 94(1)

Structure of an NPL Securitization Deal 95(1)

Existing Hurdles 96(1)

Some Examples of NPL Securitizations 97(1)

Perspectives 98(1)

Sovereign Securitization 98(5)

Sovereign Securitization 98(1)

Future Flow 98(1)

Tax Receivables 99(1)

Key Risk Factors 99(1)

Political Risk 100(1)

Structural Features 100(1)

Tax Payer Protection 100(1)

Tax Secrecy 101(1)

Servicing 101(1)

Government Debt 102(1)

Pension Funds 102(1)

Emerging Economies 102(1)

Negative Equity Securitization 103(14)

Negative Equity 103(1)

Introduction 104(1)

Background 104(4)

Structure - Warehousing Phase 108(1)

Securitization Phase 109(2)

Commercial Factors 111(1)

Cash Flow 111(1)

Interest: Senior Certificate Holder Versus Junior Certificate Holders 112(1)

Interest: Subordinated Certificate Holder Versus Residual Certificate Holders 112(1)

Principal 113(2)

Loss 115(1)

Taxation Considerations 116(1)

Future Applications 116(1)

Alternative Products 117(12)

Covered Bonds 117(9)

Covered Bonds 117(1)

Effect of the Credit Crunch 118(1)

ECB Covered Bond Program 118(1)

Historical Context 119(1)

Benefits 119(1)

Similarities 120(1)

Differences 120(1)

Structural Features 121(1)

Structures 122(1)

Integrated Structure 123(1)

Segregated Structure 123(2)

Eligible Assets 125(1)

Derivatives 125(1)

Principal Assets 125(1)

Further Considerations 126(1)

ABCP 126(2)

Overview 126(1)

Structure 127(1)

Islamic Finance 128(1)

Overview 128(1)

PART III Derivative Products 129(176)

Derivatives Overview 131(6)

Introduction 131(1)

Perspective 131(1)

Definition 132(1)

Risks 132(1)

Legal Risk 132(1)

Re-characterization 133(1)

Suitability 134(1)

Operational Risk 134(1)

Regulatory Response 135(2)

ISDA Documentation 137(58)

The ISDA Master Agreement 137(37)

ISDA 137(2)

Master Agreement 139(1)

History 139(1)

Architecture 140(1)

Pillars 141(1)

Set-Up of Master Agreement 141(1)

Preamble and Interpretation 141(1)

Single Agreement 142(1)

General Conditions 142(1)

Payment Netting 142(1)

Withholding Tax 143(1)

Basic Representations 143(1)

Absence of Certain Events 144(1)

Absence of Litigation 144(1)

Accuracy of Specified Information 144(1)

Tax Representations 145(1)

No Agency 145(1)

Covenants 145(1)

Events of Default and Termination Events 145(1)

Failure to Pay 146(1)

Breach of Agreement 147(1)

Repudiation 148(1)

Credit Support Default 148(1)

Misrepresentation 149(1)

Default under Specified Transaction 149(2)

Cross-Default 151(1)

Bankruptcy 152(1)

Merger without Assumption 153(1)

Additional Events of Default 153(1)

Termination Events 153(1)

Illegality 154(1)

Force Majeure 155(1)

Hierarchy of Events 155(1)

Tax Event 156(1)

Tax Event upon Merger 156(1)

Credit Event upon Merger 156(1)

Additional Termination Events 157(1)

Deferral of Payments and Deliveries During Waiting Period 158(1)

Early Termination 158(1)

Automatic Early Termination 159(1)

Close-Out Amount 160(1)

Market Quotation versus Loss 160(2)

First Method versus Second Method 162(1)

Calculation of Close-Out Amount 163(2)

Close-Out Amount Protocol 165(1)

Set-Off 166(1)

Transfer 166(1)

Contractual Currency 166(1)

Non-reliance 167(1)

Representations of the Parties 167(1)

Counterparts and Confirmations 168(1)

Interest and Compensation 168(1)

Offices and Multibranch Parties 169(1)

Expenses 169(1)

Notices 169(1)

Governing Law and Jurisdiction 170(1)

Counterparty Defaults 170(1)

Protocols 171(1)

Schedule 172(1)

Confirmation 172(1)

Implied Terms 172(1)

Derivative Documentation in China 173(1)

Shariah-Compliant Master Agreement 173(1)

The ISDA Schedule in Structured Finance Transactions 174(7)

Finance-Linked 174(1)

ISDA-LMA Mismatch 174(1)

Debt Finance 174(1)

Swap Exposure 175(1)

Close-Out Amount 176(1)

Waterfall 176(1)

Sharing 177(1)

ISDA Schedule for Securitization 177(2)

Hedge Criteria 179(1)

Derivatives and Covered Bonds 180(1)

Covered Bond Schedule 180(1)

Registration 181(1)

Termination Rights 181(1)

The ISDA Credit Support Annex 181(14)

Introduction 181(1)

Collateral Arrangements 182(1)

Benefits 182(1)

Risks 183(1)

Documentation Structure 183(1)

Credit Support Impact on Financing 184(1)

EU Collateral Directive 184(1)

Paragraph 11 184(1)

Base and Eligible Currencies 185(1)

Credit Support Obligations 185(1)

Eligible Credit Support 186(1)

Thresholds 187(2)

Valuation Agent 189(1)

Valuation Date 189(1)

Exchange 190(1)

Dispute Resolution 191(1)

Distributions and Interest Amounts 192(1)

Other Provisions 193(1)

Alignment with 2002 ISDA Master Agreement 193(1)

CSAs for SPVs 194(1)

Derivative Products 195(110)

Credit Derivatives 195(16)

Introduction 195(1)

Credit Crunch Fallout 195(1)

Systemic Risk 196(1)

Shorting Credit 197(1)

Leverage 197(1)

Liquidity 198(1)

Moral Hazard 198(1)

Developments 199(1)

Reclassification of Credit Derivatives 199(1)

Regulatory Recharacterization 200(1)

Case Law 200(1)

Transparency 201(1)

Counterparty Risk 202(1)

Dealer Perspective 203(1)

Operational Issues 204(1)

Settlement Developments 204(1)

Uniform CDS Settlement Agreement 205(1)

Protocol 206(1)

List of Obligations 207(1)

Auction Process 207(1)

Big Bang Protocol 208(1)

Determinations Committees 208(2)

Auction Settlement 210(1)

Look-Back 210(1)

CDS Indices 210(1)

Loan CDS 211(1)

Equity Derivatives 211(10)

Introduction 211(1)

Equity Swaps 212(1)

Hedging of Swap Exposure by the Counterparty 213(1)

Use of Cash-Settled Equity Swaps in Takeovers 214(1)

The Austral Coal Takeover 215(3)

Conclusion 218(3)

Impact of Proposals 221(1)

Fund-Linked Derivatives 221(12)

Introduction 221(1)

Drivers 222(1)

Risks 223(1)

Recharacterization Risk 223(1)

Products 224(1)

Documentation 224(1)

Termination Events 225(1)

Confirmations 225(4)

CFO Example 229(4)

Property Derivatives 233(20)

Introduction 233(1)

Rationale 233(1)

Exposure to Property 234(1)

Direct Investment 234(1)

MBS 234(1)

CRE CDO 234(1)

REITs 234(1)

Property Funds 235(1)

Comparison 235(1)

Drivers 236(2)

Risks 238(1)

Products 239(1)

Forwards 239(1)

Total Return Swaps 239(1)

Options 240(1)

Notes 240(2)

Documentation 242(1)

Property Definitions 242(1)

Index Reliability 243(1)

Delay in Publication 243(1)

Adjustments 244(1)

Rebasing 244(1)

Error in Publication 244(1)

Index Disruption 244(1)

Delayed Publication 245(1)

Index Discontinuance 245(1)

Methodology Event 245(1)

Consequences of an Index Disruption Event 246(1)

Additional Representation and Agreements 247(1)

Annex A 247(1)

Disclaimer 248(1)

Confirmations 248(1)

Form X and Form Y 249(1)

TRS Templates 249(3)

Forward Template 252(1)

ABS and MBS Index Derivatives 253(3)

Introduction 253(1)

ABS Index 253(1)

CMBS Indices 254(1)

Documentation 254(1)

Eligibility Criteria 254(2)

Rolling Process 256(1)

Inflation Definitions 256(3)

Documentation 256(1)

Inflation definitions 256(1)

Index Delay and Disruption 257(1)

Annex A 258(1)

Weather Derivatives 259(35)

Introduction 259(1)

Rationale 260(1)

Exposure to Weather 260(1)

Drivers 261(1)

Risks 261(1)

Legal Risk 262(1)

Basis Risk 263(1)

Moral Hazard 263(1)

Risk of Loss 264(1)

Index Reliability 264(1)

Products 264(2)

Building Blocks 266(2)

Confirmations 268(1)

Mechanics 269(1)

Payment Amount 269(1)

Availability of Index Data 269(2)

Data Correction 271(1)

Weather Index Swap Example 271(2)

Weather Index Option Example 273(1)

Natural Catastrophe Derivatives 274(1)

Structure 274(2)

Applicable Events 276(1)

Conditions to Settlement 276(1)

Covered Event 277(1)

Applicable Report 277(1)

Covered Event Notice 278(1)

Ongoing Event 278(1)

NatCat Swap Example 278(2)

Recharacterization 280(1)

Natural Catastrophe Bonds 281(1)

Swaps 281(2)

Covered Events 283(1)

Structural Features 284(1)

Weather Derivatives, an Australian Perspective 285(1)

Structure 286(1)

Weather Bonds 287(2)

Weather Derivatives, Weather Bonds and Insurance 289(4)

Conclusion 293(1)

Mortality Derivatives 294(11)

Introduction 294(2)

Mortality Derivatives 296(1)

Life Insurance Policies 297(3)

Repackaging Life Insurance Policies 300(2)

Insurable Interest Risk 302(1)

Conclusion 303(2)
Index 305