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Banking and Finance Law

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2015

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Liquidity, Systemic Risk, And The Bankruptcy Treatment Of Financial Contracts, Riz Mokal Dec 2014

Liquidity, Systemic Risk, And The Bankruptcy Treatment Of Financial Contracts, Riz Mokal

Riz Mokal

Parties to repos, and to swaps and other derivatives are accorded privileged treatment under the bankruptcy laws of several dozen countries. Several key international “best practice” standards urge legislators in other jurisdictions to provide likewise. The beneficiaries of these privileges are solvent counterparties enabled, unimpeded by bankruptcy moratoria, to implement close-out netting arrangements and to dispose of collateral. The purported rationale is mitigation of systemic risk.
Taking a broad international perspective, this Article explores the “domino” contagion view of distress that motivates the privileges. This view derives from the outdated “microprudential” understanding of systemic risk, and is theoretically flawed and ...