Repo and Derivatives Portfolios Between Insolvency Law and Regulation

In the general perception, financial institutions’ immense repo and derivatives portfolios are friends and foes alike: friends, because they provide for levels of market liquidity that would be unimaginable without them. Foes, because both types of transactions are somehow regarded as being unstable and volatile in their nature, potentially exacerbating and accelerating crisis situations. This tension is also reflected in the treatment of repos and derivatives in the event of a corporate crisis. Insolvency law and relevant regulation seem to support and protect repo and derivatives transactions, while at the same time imposing limits on them, trying to balance liquidity arguments with those relating to stability. This paper concludes that regulation is better placed than insolvency law to address systemic stability concerns, whereas relevant insolvency rules guarantee high levels of liquidity while they are ineffective in terms of stability. The paper will concentrate on EU and US law, complemented by international benchmarks. It expands on certain aspects first developed my earlier paper on insolvency safe harbours.