Credit Derivatives (CDs) in Sweden

FYI
---------------------- Forwarded by Mark - ECT Legal Taylor/HOU/ECT on
06/28/99 02:49 PM ---------------------------

Paul Simons
06/28/99 01:14 PM
To: John Sherriff/LON/ECT@ECT, Eklavya Sareen/LON/ECT@ECT, Soma
Ghosh/LON/ECT@ECT
cc: Scott Sefton/LON/ECT@ECT (bcc: Mark - ECT Legal Taylor/HOU/ECT)
Subject: Credit Derivatives (CDs) in Sweden

I have been through the advice received from Swedish counsel. The position of
CDs under Swedish law can be summarised as follows.

1. Regulation

CDs are regulated in Sweden in the same way as commodity derivatives. As
discussed we are currently working through these issues as they relate to
commodity derivatives with local counsel and I will be pressing them to take
a less cautious approach than they have taken to date (particularly in light
of our expanding presence in Sweden). As you know, our target is to avoid
Swedish licencing requirements and the accompanying regulatory capital
requirements. In the meantime, this uncertainty will not prevent us from
dealing in Norway with Swedish parties based in Norway.

2. Insurance

CDs are not analysed as contracts of insurance under Swedish law.

3. Guarantees

CDs are not analysed as contracts of guarantee under Swedish law.

4. Gaming

CDs are not analysed as gaming contracts under Swedish law and (unusually) we
do not even need to go so far as to satisfy ourselves that the contract is
being entered into by the counterparty for a valid commercial purpose (i e
hedging). However, it should be noted that several types of entity may not
enter derivatives at all for speculative purposes (e g municipalities,
insurance companies).

5. Confidentiality

This could be an issue for Enron even where we are selling the CD, where we
have good reason to believe there is breach of the purchaser's duty of
confidentiality owed to the reference credit (i e where we are not in good
faith). The position would of course be potentially more problematical where
we are purchasing the CD. That said, it would be difficult in either case
for the reference credit to establish loss (e g damage to reputation), so it
would be hard for them to launch a claim. Our exposure could be restricted
further by passing on no more information about underlying reference
contracts than is absolutely necesssary. I am pusuing this further with
Clifford Chance, in particular to find out what the practice is in the London
and New York credit derivative markets where the issue of confidentaility
arises and I will revert to you when I have more information. Perhaps
Merrills could shed some light on this?

6. Subrogation & Assignment

Since CDs are not guarantees there is no right of subrogation. It is
possible to take an assignment of the counterparty's rights against the
reference credit, but this will not work so as to allow Enron a right of set
off against the reference credit where Enron is aware of the reference
credit's insolvency at the time of the assignment (a reasonable bet) or where
the latter becomes bankrupt within three months of the assignment. In
effect, this will make it very difficult indeed to extract any value at all
(including by way of set off) from the reference credit.

Please feel free to call me on x 6566 to discuss this and to pass this note
on to other interested staff.

Best regards

Paul