DERIVATIVES - NETTING, INSOLVENCY, AND END-USERS

This article, targeted not to swap dealers, but to relatively unsophisticated end-users of derivatives and their counsel, is intended to provide a simple, ''plain English'' explanation of one very important but very technical aspect of the risk of using derivatives, that is, the ability to enforce a close-out netting agreement against a counterparty that defaults and becomes insolvent. The article also suggests a practical, step-by-step method for determining the degree to which such legal risk is involved with different types of counterparties and different types of derivative instruments.