Weather Derivatives: European Legal Due Diligence

FYI
---------------------- Forwarded by Mark - ECT Legal Taylor/HOU/ECT on
03/12/99 09:29 AM ---------------------------

Paul Simons
03/12/99 08:53 AM
To: ECT London European Trading
cc:
Subject: Weather Derivatives: European Legal Due Diligence

FYI - bon weekend!
---------------------- Forwarded by Paul Simons/LON/ECT on 03/12/99 02:54 PM
---------------------------

Paul Simons
03/12/99 12:08 PM
To: Nick Mooney/LON/ECT@ECT
cc:
Subject: Weather Derivatives: European Legal Due Diligence

As requested, a thumb-nail sketch of the above. As you will see, the sky is
generally blue , but follow up work will be required in one or two countries
before we can give the all-clear.

Executive Summary

Generally, only the Czech Republic, Poland, the Netherlands (options and
swaptions only) and Spain (options only) are countries/transaction types in
respect of which we cannot begin marketing and trading now.

In Germany, Hungary, Italy, Norway, Sweden and the UK, the marketing and
trading of ALL weather derivatives products can commence immediately.

In France, the marketing and trading of ALL weather products can begin when
we receive acceptance from SFA of our French passport application (in the
next few weeks).

The marketing of, and trading in, Dutch weather swaps and Spanish swaps and
swaptions can commence immediately.
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The following questions are addressed in the case of each country

1. are weather derivatives regulated ( eg marketing restrictions/
licence/capital requirements etc)?
2. could they be construed to be unauthorised insurance contracts?
3. could they be construed to be gaming contracts?

Czech Republic --- 1. Totally unregulated
2. Possibly, yes (especially
options) with criminal consequences if unauthorised
3. Unlikely if transacted for
commercial purpose

France --- 1. Regulated in the same way as commodity derivatives (ISD
passport available to EEFT)
2. Unlikely
3. No

Germany --- 1. Totally unregulated
2. Not insurance contracts
3. Carve out from gaming law possibly not
available, but no problem if in good faith believe c'party is hedging
(English law may improve analysis)

Hungary --- 1. Totally unregulated
2. Highly unlikely (if individually negotiated)
3. Highly unlikely

Italy --- 1. Totally unregulated
2. No
3. Probably not if transacted for commercial reason

Netherlands --- 1. Same as commodity derivatives, but capital requirements
may apply to options and swaptions (we are checking this)
2. Unlikely
3. Unlikely if transacted for a valid
commercial purpose (but we will clarify in light of possible criminal
sanctions)

Norway --- 1. Totally unregulated
2. Probably not insurance contracts, but may be
prudent to check with Banking Securities and Insurance Commission
3. No problem if in good faith believe c'party is
transacting for sound financial/commercial reason

Poland --- 1. No specific requirements now (eg under the Energy law)
2. Unlikely, but unclear: need to check with
Minister of Finance (English law would not help) - up to 2 yrs' imprisonment
for breaches
3. Unlikely if transacted for commercial reasons,
but need to check with Minister of Finance (risk of 3 yrs' imprisonment and
loss of power licence)

Spain --- 1. Totally unregulated if OTC
2. Swaps and swaptions, no. Options, unclear (risk
higher if a premium is payable and contract a hedge). Result: options may be
void
3. No problem if one party transacts for valid
commercial purpose

Sweden --- 1. Regulated in the same way as commodity derivatives
2. No
3. No

United Kingdom --- 1. Regulated by SFA (must be transacted through EEFT etc)
2. No
3. No, provided one part
transacts by way of business (Enron will).

Let's discuss this note before we distribute it more widely (including any
comments you may have).

Paul