Should derivatives be privileged in bankruptcy?
By: Patrick Bolton, Martin Oehmke
Contributors: Oehmke, Martin, 1979-; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17599; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17599.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "Derivative contracts, swaps, and repos enjoy "super-senior" status in bankruptcy: they are exempt from the automatic stay on debt and collateral collection that applies to virtually all other claims.  We propose a simple corporate finance model to assess the effect of this exemption on firms' cost of borrowing and incentives to engage in swaps and derivatives transactions.  Our model shows that while derivatives are value-enhancing risk management tools, super-seniority for derivatives can lead to inefficiencies: collateralization and effective seniority of derivatives shifts credit risk to the firm's creditors, even though this risk could be borne more efficiently by derivative counterparties.  In addition, because super-senior derivatives dilute existing creditors, they may lead firms to take on derivative positions that are too large from a social perspective.  Hence, derivatives markets may grow inefficiently large in equilibrium"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 1/17/2012.

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