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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (2133)	2/13/1998 3:44:00 PM
From: Bucky Katt	Read Replies (1) \| Respond to of 9980

BH--I think I would wait, 'cause here come the lawyers>> Korean lawsuit against J.P. Morgan raises worries Feb 12 - A legal dispute over derivatives transactions involving J.P. Morgan & Co (JPM - news) and two South Korean financial institutions has raised worries among U.S. bankers who do business in Korea. Banks that are major dealers in swaps and other derivatives said any wavering by Korea's courts over the enforceability of derivatives transactions will only aggravate credit concerns among bank lenders over transacting with Korean institutions. SK Securities (01510.KS), a Korean securities dealer, filed a lawsuit against Boram Bank (08890.KS) and J.P. Morgan on Friday seeking to stop payments on a currency swap. ''This would be a troubling precedent,'' said Kenneth Raisler, a partner at the New York-based law firm of Sullivan & Cromwell. The dispute involves two separate currency swaps, one between J.P. Morgan and Boram Bank and another between Boram Bank and SK Securities. SK Securities said in a statement Friday that it and two other Korean companies in early 1997 set up a 30 billion won offshore fund to invest in Southeast Asian currency derivatives. Some of those parties then entered into a $53 million one-year swap with J.P. Morgan. The so-called Diamond Fund suffered large losses from the Asian currency crisis, and SK Securities said it lost about $120 million in the deal. SK Securities filed the lawsuit Friday after winning a temporary injunction in court earlier in the week blocking Boram from making payments on a currency swap to Morgan. Morgan said through a spokesman that it would not comment on any aspect of the transaction. Officials familiar with Morgan said the U.S. investment bank had a currency swap with Boram, a highly rated Korean Bank. Boram turned around and contracted a mirror swap with SK Securities. The relationship between the two swaps will be the central point of the dispute, according to attorneys. Lawyers in New York say that despite any economic link between two contracts, the transactions are nevertheless independent legal contracts under New York law and British law. ''It is the objective of a hedging transaction to have an economic linkage. They are nonetheless entirely separate transactions,'' said Raisler of Sullivan & Cromwell. About 95 percent of derivatives deals are written under guidelines set by the International Swaps and Derivatives Association (ISDA), an industry organization, according to lawyers. The contracts generally provide for jurisdiction under New York law or British law, said Brian Fraser, attorney at Richards Spears Kibbe & Orbe. Most derivative contracts outside the U.S. provide for jurisdiction under British law, lawyers said. The lawsuit filed by SK Securities will test whether Korea's courts uphold the laws of those jurisdictions. The case will also be a headache for J.P. Morgan. Swaps dealers in New York said Morgan has been the largest dealer in both exotic and plain-vanilla currency swaps to Asian corporates. So its derivatives exposure is in all likelihood larger than any other bank's. In its fourth quarter earnings released last month, Morgan said it was making provisions for about $587 million in what potentially could be nonperforming swaps contracts mainly involving parties in Korea, Indonesia and Thailand. While Korean and international banks have worked out their loan obligations through debt restructuring talks held recently in New York, swaps deals have been left in the cold. U.S. bankers familiar with similar deals said the derivatives were most likely some sort of total-rate-of-return swap linked to the Indonesian rupiah and the Thai baht. The swap would pay a rate based on a basket of Southeast Asian currencies in return for receiving a flat rate such as the London Interbank Offered Rate. ''Many such deals were done for Asian banks in the past three years. With Southeast Asian currencies pegged to the dollar, people were betting that the currencies would stay in a range,'' said the head of global derivatives sales at a large U.S. bank. The distinguishing feature of the swap under dispute may be the degree of leverage, bankers said. A loss estimated at $120 million for a currency swap with under one-year maturity would point toward some degree of leverage, said bank officials outside Morgan. SK Securities claimed in the lawsuit that Morgan was supposed to keep it informed of any potential large losses. A U.S. banking regulator who declined to be named said that since the swaps were sold to sophisticated banks in Korea rather than less-savvy entities such as municipalities, both Morgan and Boram may be in the clear. Recent guidance from bank regulators such as the New York Federal Reserve stipulates that dealers are in the clear on derivatives transactions done between banks so long as all the details of the deals are clearly laid out in the contracts. The issue of the suitability of leveraged transactions arose after major losses from derivatives transactions at a number of corporations such as Procter & Gamble Co and government entities such as Orange County, California. Federal regulators point to recent lawsuits that have favored the dealers. Two cases involving Bankers Trust New York Corp [AMEX:BPB - news] -- one with Procter & Gamble and another with the Indonesian company PT Dharmala Sakti Sejahtera -- have favored the dealers. Courts in the United States and Britain have held that clients that they should know what they are buying.