Abstract

http://ssrn.com/abstract=2023227
 
 

Citations (5)



 


 



Should Derivatives Be Privileged in Bankruptcy?


Patrick Bolton


Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Martin Oehmke


Columbia Business School - Finance and Economics

March 5, 2014

Journal of Finance, Forthcoming

Abstract:     
Derivatives enjoy special status in bankruptcy: They are exempt from the automatic stay and effectively senior to virtually all other claims. We propose a corporate finance model to assess the effect of these exemptions on a firm's cost of borrowing and its incentives to engage in efficient derivative transactions. While derivatives are value-enhancing risk management tools, seniority for derivatives can lead to inefficiencies: It transfers credit risk to debtholders, even though this risk is borne more efficiently in the derivative market. Seniority for derivatives is efficient only if it provides sufficient cross-netting benefits to derivative counterparties that provide hedging services.

Number of Pages in PDF File: 58

Keywords: Derivatives, Swaps, Automatic Stay, Chapter 11, QFCs, Safe Harbors

JEL Classification: G30, G33

Accepted Paper Series


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Date posted: March 16, 2012 ; Last revised: March 5, 2014

Suggested Citation

Bolton, Patrick and Oehmke, Martin, Should Derivatives Be Privileged in Bankruptcy? (March 5, 2014). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2023227 or http://dx.doi.org/10.2139/ssrn.2023227

Contact Information

Patrick Bolton
Columbia Business School - Department of Economics ( email )
420 West 118th Street
New York, NY 10027
United States
HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Martin Oehmke (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

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