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By Dietmar Franzen

I first stumbled on the difficulty of derivatives documentation whilst writing my degree thesis on measuring the credits threat ofOTC derivatives whereas i used to be an economics pupil on the college of Bonn. even though safety layout has been a space of analysis in economics for a few years and regardless of the frequent use of derivatives documentation in monetary perform, the duty of designing contracts for derivatives transactions has now not been handled in monetary concept. the single factor that aroused my interest used to be that events with frequently opposing pursuits, particularly banking supervisors and the banking industry's foyer, unanimously suggest the use ofcertain provisions in standardized contracts referred to as grasp agreements. Do those provisions bring up the ex ante potency of contracts for all events concerned? i really all started my study anticipating to discover help for the commonly held ideals concerning the potency or inefficiency of definite provisions and was once sur­ prised to procure effects that contradicted the normal knowledge. i'd strongly recommend opposed to utilizing those leads to any political debate on deriva­ tives documentation. They have been acquired inside a hugely stylized version with a few restrictive assumptions. This paintings may still otherwise be noticeable as an try and formalize the dialogue on derivatives documentation and to problem the inspiration that sure provisions are commonly ex ante effective. it's also a call for participation to all these advocating using convinced provisions in grasp agreements to formalize their arguments and to give an explanation for the industrial ratio­ nale at the back of those provisions.

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There seems to be consensus among scholars that no existing bankruptcy code fulfills all these criteria. However, countries have adopted different approaches to deal with the imperfections of existing legal rules. While comparative studies show that the UK code and also the old German code emphasize the protection of secured creditors, the US code encourages the reorganization of firms and is inclined towards the preservation of firms. 64 Especially the uniquely creditor-oriented provisions of Chapter 11 of the US Bankruptcy Code have stirred a controversial debate among economic and legal scholars.

60 Enforcement becomes an important issue when it is uncertain whether privately negotiated contracts will be upheld if challenged in court. If there is a positive probability that certain clauses and provisions might not be enforceable ex post, that is, after the parties have entered into the contract, the parties are exposed to legal risk. All contracts depend at least in part on the legal rules and the enforcement of these rules in the relevant jurisdictions. Legal risk is particularly important for parties who enter into cross-border transactions involving several jurisdictions.

Since the debtor-in-possession retains control of the assets, the firm's management and the shareholders it represents can exert considerable pressure on creditors to renegotiate contracts and make concessions. 75 Thus, deviations from the absolute priority rule are common in Chapter 11 reorganizations. A deviation from the absolute priority rule occurs if junior claimants obtain payments or claims in the reorganized firm before more senior claims have been satisfied in full. Weiss (1990) finds that the strict priority of claims is violated in more than three out of four cases.

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