Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

If I am a counterparty to a contract (swap, cds etc.) with an entity that went bankrupt and I am due some payment, how "senior" is my claim (amongst the other creditors where do I rank)?

I'm sorry if posted in the wrong place but I don't know where else to put it.

share|improve this question
1  
Was what you hold issued by the company in question? If this was a derivative as I understand them, the company isn't involved regardless. e.g. an exchanged traded option will be priced based on the company stock price, but the company itself isn't involved. –  JoeTaxpayer Jan 21 '13 at 1:04
    
Swaps, CDS are OTCs(en.wikipedia.org/wiki/Over-the-counter_%28finance%29). There is no legal body which enforces the counterparty to oblige. Other than a downgrade on default(which is a big deal) or taking one to court, you cannot legally make the counterparty do anything they don't like. –  DumbCoder Jan 21 '13 at 11:24
1  
@JoeTaxpayer I believe the OP is referring to the derivative counterparty. That is, the legal underwriter of the option/swap etc, not the issuer of the underlying asset. Exchange traded options will generally be underwritten by a central clearing house, but most derivative contracts are traded OTC and the holder has a direct exposure to the firm which issued the contract. Dodd Frank is aimed at moving much more business towards the central clearing model to reduce credit risk like this. –  thepassiveinvestor Jan 21 '13 at 13:41
    
DC - great article you linked to. So, OP is concerned about the couterparty, not the underlying asset. –  JoeTaxpayer Jan 21 '13 at 14:44
add comment

1 Answer 1

Derivatives are most "senior" because they have special protections from bankruptcy court. Actually, they're almost totally immune from bankruptcy protection.

They're immune from automatic stay, and can essentially be closed and forcibly collected immediately despite the contracts "unsecured" structure.

No derivative type is exempted.

share|improve this answer
add comment

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.