Dispelling the three myths of Enron v TXU

Author: | Published: 1 May 2005

The 2003 ruling in Enron v TXU on the flawed-asset provision in the International Swaps and Derivatives Association (Isda) Master Agreement fuelled an unusual amount of controversy in the derivatives market. The decision to uphold the operation of the provision in standard derivatives documentation reinforced the rights to freeze outstanding payments on derivatives if a counterparty is insolvent.

The February 2005 affirmation of the ruling on appeal does not dispel the controversy, but some myths as to what the courts said (or more importantly, did not say) need to be clarified.

The decision

Enron v TXU concerned electricity swap transactions entered into between Enron Australia and TXU Electricity under an Isda Master Agreement governed by the laws of New South Wales, Australia. Enron Australia was placed into voluntary administration in December 2001. At this time there were 78 such transactions outstanding, some of which had a scheduled maturity date as...