The Bankruptcy-Law Safe Harbor for Derivatives: A Path-Dependence Analysis

27 Pages Posted: 8 Nov 2013 Last revised: 28 Dec 2014

See all articles by Steven L. Schwarcz

Steven L. Schwarcz

Duke University School of Law

Ori Sharon

Duke University School of Law

Date Written: December 16, 2013

Abstract

U.S. bankruptcy law grants special rights and immunities to creditors in derivatives transactions, including virtually unlimited enforcement rights. This article argues that these rights and immunities result from a form of path dependence, a sequence of industry-lobbied legislative steps, each incremental and in turn serving as apparent justification for the next step, without a rigorous and systematic vetting of the consequences. Because the resulting “safe harbor” has not been fully vetted, its significance and utility should not be taken for granted; and thus regulators, legislators, and other policymakers — whether in the United States or abroad — should not automatically assume, based on its existence, that the safe harbor necessarily reflects the most appropriate treatment of derivatives transactions under bankruptcy and insolvency law or the treatment most likely to minimize systemic risk.

Suggested Citation

Schwarcz, Steven L. and Sharon, Ori, The Bankruptcy-Law Safe Harbor for Derivatives: A Path-Dependence Analysis (December 16, 2013). Washington and Lee Law Review, Vol. 71, No. 3, 2014. Available at SSRN: https://ssrn.com/abstract=2351025 or http://dx.doi.org/10.2139/ssrn.2351025

Steven L. Schwarcz (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-7060 (Phone)
919-613-7231 (Fax)

Ori Sharon

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
9196053737 (Phone)

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