Opinion ID: 613690
Heading Depth: 4
Heading Rank: 2

Heading: Step Two: Loan of the Securities

Text: The plan all along had been for Taxpayers to lend the Securities back to Refco after purchasing them. On or about October 11, 2001, six days before Taxpayers' purchase of the Securities, Taxpayers and Refco had entered into a Master Securities Loan Agreement and an Amendment to the Master Securities Loan Agreement (together, the Loan Agreement). The Loan Agreement was on a standard form for securities loan agreements. Taxpayers and Refco then entered into an Addendum to the Loan Agreement (the Addendum) on October 17, the same day that Taxpayers purchased the Securities. The Loan Agreement required Taxpayers, as lender, to transfer the Securities to Refco, as borrower. In return, Refco would transfer to Taxpayers collateral with a market value at least equal to that of the Securities. Taxpayers were required to pay Refco a fee (the Cash Collateral Fee) equal to an agreed-upon percentage of the amount of any such collateral in cash. Refco also was required to mark to market the collateral on a daily basis, meaning that if the market value of the Securities went up on any given day, Refco was required to transfer additional collateral to Taxpayers no later than the close of the next business day, so that the market value of the collateral remained equal to the market value of the Securities. The Loan Agreement also provided that Taxpayers could terminate the loan of the Securities at any time, in which event Refco would be required to return the Securities no later than the third business day following notice of termination. All of these terms are standard features of securities lending agreements. See Senate Report at 5-6, 1978 U.S.C.C.A.N. at 1291. The Addendum, however, was a customized document and overrode several of the terms in the Loan Agreement. The provision in the Loan Agreement permitting Taxpayers to terminate the loan and demand return of the Securities on three business days' notice was superseded by a section of the Addendum entitled Term of Specified Loan. This section provided that the loan would terminate on January 15, 2003 (approximately one month before the maturity date of the Securities), unless Taxpayers elected to terminate it on either July 1, 2002, or December 2, 2002. The Addendum also specified that, beginning on November 5, 2001, the Cash Collateral Fee would be set at one-month LIBOR plus ten basis points (the same rate as the interest rate under the Margin Loan) and would be re-calculated on the first Monday of each month. The Cash Collateral Fee would be deemed to be added to the Collateral held by Taxpayers and would be paid by Taxpayers to Refco when they returned the collateral to Refco at the end of the loan term, unless Taxpayers elected to pay the Cash Collateral Fee, in whole or in part, prior to termination of the loan. Finally, the Addendum provided that Taxpayers would retain a deposit of $21,250,000 (the same amount required to secure the Margin Loan) in an account with Refco and would grant Refco a security interest in those funds to secure the performance of Taxpayers' obligations under the Loan Agreement. On October 19, 2001, two days after they purchased the Securities, Taxpayers transferred the Securities to Refco as required by the Loan Agreement. At the same time, Refco provided Taxpayers with cash collateral of $1.643 billion (the value of the Securities), which Taxpayers then used to pay off the Margin Loan.