Re: Credit Trading OnLine - Results of Legal Due Diligence and Risk ,
 Louise

I've spoken with Bryan - your understanding is correct - there will initial=
ly=20
be circa 250 products total spread across the product types (which are=20
defined by the country of incorporation of the reference credit).=20

He is hoping to grow this quickly.=20

M





Louise Kitchen
18/01/2000 16:57
To: Louise Kitchen/LON/ECT@ECT
cc: Paul Simons/LON/ECT@ECT, Bryan Seyfried/LON/ECT@ECT, John=20
Sherriff/LON/ECT@ECT, Jeffrey T Hodge/HOU/ECT@ECT, Julia Murray/HOU/ECT@ECT=
,=20
Mark Taylor/HOU/ECT@ECT, Michael R Brown/LON/ECT@ECT, Edmund=20
Cooper/LON/ECT@ECT, Justin Boyd/LON/ECT@ECT, Rod Sayers/LON/ECT@ECT, Janine=
=20
Juggins/LON/ECT@ECT, Steve W Young/LON/ECT@ECT, David Weekes/LON/ECT@ECT,=
=20
David Forster/LON/ECT@ECT, Elena Kapralova/LON/ECT@ECT, Mark=20
Dilworth/LON/ECT@ECT=20

Subject: Re: Credit Trading OnLine - Results of Legal Due Diligence and Ris=
k=20
Memo =20

Bryan=20

Mark told me that in the meeting (legal trading weekly conference call, Pau=
l=20
spoke of a different 250 products per country?  Is this right?  This has so=
me=20
serious implications.  Could you let us know as this hasn't come up before =
I=20
had assumed your 250 products were the same whatever the country.

Regards

Louise



Louise Kitchen
01/17/2000 07:07 PM
To: Paul Simons/LON/ECT@ECT, Bryan Seyfried/LON/ECT@ECT
cc: John Sherriff/LON/ECT@ECT, Bryan Seyfried/LON/ECT@ECT, Jeffrey T=20
Hodge/HOU/ECT@ECT, Julia Murray/HOU/ECT@ECT, Mark Taylor/HOU/ECT@ECT, Micha=
el=20
R Brown/LON/ECT@ECT, Edmund Cooper/LON/ECT@ECT, Justin Boyd/LON/ECT@ECT, Ro=
d=20
Sayers/LON/ECT@ECT, Janine Juggins/LON/ECT@ECT, Steve W Young/LON/ECT@ECT,=
=20
David Weekes/LON/ECT@ECT, David Forster/LON/ECT@ECT, Elena=20
Kapralova/LON/ECT@ECT, Mark Dilworth/LON/ECT@ECT=20

Subject: Re: Credit Trading OnLine - Results of Legal Due Diligence and Ris=
k=20
Memo =20

Thanks very much for your memo Paul it is very helpful.  I attach below for=
=20
completeness the To Do list put together by Elena in order to put Credit on=
=20
EnronOnline. =20
There are two remaining issues which require further thought:-

1.  How do we want to display Credit on a long term basis on EnronOnline. =
=20
For the short term, we can put credit out there but the number of updates=
=20
will be restricted.  Using Jay's best guess on a slow network connection th=
e=20
initialization process will take upto 4 minutes and on a normal connection=
=20
250 updates every 30 seconds would prevent people from trading.   So we do=
=20
have some scaling issues? Our model doesn't really function for simultaneou=
se=20
changing of hundreds of products so really we need to actually get a much=
=20
better specific on how many updates you envisage.   Do you really envisage=
=20
that many updates?  Also we haven't yet experienced fast updates which we=
=20
will do when FX joins the system.

2.  We have approximately 4000 guest id and passwords?  Can these see credi=
t=20
pricing from a due diligence perspective.

Elena will be leaving the EnronOnline group at the end of this week and Mar=
k=20
Dilworth will be our main point of contact in Dave's absence.  Any question=
s=20
please do not hesitate to call me (713 853 3488).

Louise
Outstanding Credit Derivatives Issues=09Action=09Status=09Resolved by
1. Redraft Credit Derivatives GTCs =09Decide how many GTCs are needed =01) =
1, 2 or=20
6 =01) and prepare the draft(s) accordingly with following issues in=20
consideration:
=09? Change =01&Effective Date=018 language to refer to the dates on the we=
bsite.
=09? Cofidentiality issue =01) legal advice is to leave it out. Bryan Seyfr=
ied to=20
make decision on commercial basis, whether not to include it at all, or=20
include the softer clause, for ex. that counterparties cannot use Enron nam=
e=20
when disclosing transactions=01, details.=20
=09? Include =01&bad faith=018 provision to prevent sleeving.
=09? Decide what entities should enter transactions on Enron side =01) ECTR=
I for=20
Europe and ENA for North America (?)
=09? Get Tax sign-off=09=09Paul Simons/Edmund Cooper/Slaughter&May
2. Translation of GTCs=09Decide whether translations are needed and, if so,=
 prepare=20
them:=20
=09? Nordic GTC into Norwegian
=09? Swiss GTC into German=09=09Paul Simons/Edmund Cooper/Slaughter&May=20
3.  Withholding Tax Issue=09Do further research and take a view regarding U=
S=20
Withholding Tax issue, i.e. that US entity can only transact with another U=
S=20
entity.=09=09Jannine Juggins/ Paul Simons
Legal Validation of Long Descriptions=09Make sure that Long Descriptions ar=
e aligned with=20
GTCs.=09=09Edmund Cooper
4. Legal Review of Paper Confirmations=09Modify language in the paper confi=
rmations according=20
to GTCs and Long Descriptions.=09=09Edmund Cooper
5. Translation of Paper Confirmations=09If necessary, prepare the following=
 translations:
=09? Nordic Conf. - into Norwegian
=09? Swiss Conf - into German=09=09Paul Simons/Edmund Cooper
6. Draft Consent Paragraph to be included in the Marketing Letter =09? Draf=
t a=20
consent paragraph to be added to the Marketing Letter that goes to Ref.=20
Entities companies
=09? Get PR approval=09=09Paul Simons/Edmund Cooper
7. Confidentiality Lists=09Identify counterparties in the Confidentiality L=
ists (all=20
Enron entities) that will be used as underlying Reference Entities and get=
=20
their written consent.=09=09Paul Simons/Edmund Cooper/Mark Taylor
8. Confidentiality Procedures=09Prepare Procedures and educate Enron trader=
s that=20
confidential information about Ref. Entities is not misused.=09=09Paul Simo=
ns
9. Prepare Counterparty List=09Prepare the Counterparty List and forward it=
 to Legal=20
(for capacity check) and Credit for approval.
=09Note: List must contain exact entity name that will be entering Cr. Deri=
v.=20
transactions=09=09Bryan Seyfried=20
11. Capacity Check on Counterparties=09Check counterparties=01, constitutio=
nal documents to make=20
sure that they have legal power and authority to trade Cr. Deriv.
=09Note: Finish counterparties must be =01&professional investors=018.=09=
=09Paul Simons/Edmund=20
Cooper/Mark Taylor
12. Get Counterparties List Approvals=09Bryan to chase Credit/Legal/Traders=
 to get there=20
sign-off.=09=09Bryan Seyfried
13. Complete Reference Entities List=09? Add information on country of inco=
rporation=20
and abbreviation (up to 12 characters) to the existing Ref. Entities List.=
=20
=09? Get Traders, Legal, Credit and Tax (?) approval.=09=09Bryan Seyfried/R=
aj Sharma
14. Attach Cr. Deriv. GTCs to all Cr. Deriv. transactions confirmations=09M=
ake sure that Back=20
Office procedures are amended accordingly.=09=09Bryan Seyfried/Barry Pierce
15. Investigate whether companies from Canada and Germany can be used as Re=
f.=20
Entities=09For time-being Canadian and German companies won=01,t be used ne=
ither as Ref.=20
Entities nor they will be able to enter trades as counterparties. However,=
=20
being Ref. Entities =01) needs further investigation.=09=09Paul Simons/Edmu=
nd Cooper/Mark Taylor
16. Legal Budget=09Estimate approx. legal fees budget for Cr. Deriv.=09=09P=
aul Simons
17. Short Descriptions=09Change Short Descriptions:
=09? Product Type should read: =01&US Credit Dflt=018, i.e. not =01&US Cr D=
flt Swap=018
=09? Upload Underlying Credits (Ref. Entities) abbreviation according to Ra=
j=01,s=20
List.=09=09Elena Kapralova/Mark Dilworth
18. Online Test=09Set up Cr. Derivatives in the Test environment and make t=
est=20
trades.=09=09Bryan Seyfried and Cr. Deriv. traders
19. Set up New Database=09If decision on placing Cr. Derivatives as a separ=
ate page is=20
final, start working on coding a separate Cr. Derivatives Database.=09=09Ma=
rk Dilworth to=20
co-ordinate with IT
20. Sigma Factors=09Set-up Sigma factors on the Product Type level.=09=09Ma=
rk Dilworth to=20
co-ordinate with Credit
21. Risk Calculation=09Set-up methodology for risk calculation on underlyin=
g Ref. Entities.=09=09Mark=20
Dilworth to co-ordinate with RAC


Legal Deliverables =01) Credit Derivatives


Deliverable =09Jurisdiction=09Delivery Date =09Status=09Delivered by
1. GTCs =09All =09=09=09Slaughter&May
2. Long Product Descriptions Validation=09All=09=09=09Edmund Cooper
3. Translation of Norwegian and Swiss GTCs into German and Norwegian if=20
necessary=09Norway, Switzerland=09=09=09Slaughter&May
4. Paper Confirmations=09All=09=09=09Edmund Cooper
5. Translation of Norwegian and Swiss confirmations into German and Norwegi=
an=20
if necessary=09Norway, Switzerland=09=09=09Slaughter&May
6. Consent Paragraph in the Marketing Letter=09All=09=09=09Paul Simons/ Edm=
und Cooper
7. Confidentiality Procedures=09N/A=09=09=09Paul Simons
8. Further info on Canadian and German companies as Ref. Entities=09Canada,=
 Germany=09=09=09Paul Simons/=20
Edmund Cooper



Credit Derivatives =01) Resolved Issues

Resolved Credit Derivatives Issues=09Action=09Status=09Resolved by
1. =09=09=09
2. =09=09=09
3. =09=09=09






Paul Simons
01/17/2000 02:01 PM
To: John Sherriff/LON/ECT@ECT, Louise Kitchen/LON/ECT@ECT
cc: Bryan Seyfried/LON/ECT@ECT, Jeffrey T Hodge/HOU/ECT@ECT, Julia=20
Murray/HOU/ECT@ECT, Mark Taylor/HOU/ECT@ECT, Michael R Brown/LON/ECT@ECT,=
=20
Jeffrey T Hodge/HOU/ECT@ECT, Edmund Cooper/LON/ECT@ECT, Justin=20
Boyd/LON/ECT@ECT, Rod Sayers/LON/ECT@ECT, Janine Juggins/LON/ECT@ECT, Mark=
=20
Frevert/LON/ECT@ECT, Rick Buy/HOU/ECT@ECT, Steve W Young/LON/ECT@ECT, Shirl=
ey=20
A Hudler/HOU/ECT@ECT, David Weekes/LON/ECT@ECT, David Forster/LON/ECT@ECT,=
=20
Elena Kapralova/LON/ECT@ECT=20

Subject: Credit Trading OnLine - Results of Legal Due Diligence and Risk Me=
mo

NOTE - GIVEN THE PROPOSED LAUNCH DATE OF 24 JANUARY 2000 FOR THIS PRODUCT,=
=20
THIS NOTE IS INTENDED TO SERVE BOTH AS A SUMMARY OF THE RESULTS OF OUR LEGA=
L=20
DUE DILIGENCE AND AS A RISK MEMO

As you know, we have carried out legal due diligence in the eight countries=
=20
where it was intended the credit product  would initially be traded via=20
EnronOnLine - namely, the UK, the US, Canada, Finland, Germany, Norway,=20
Sweden and Switzerland.  Under the terms of the credit product, on the=20
occurrence of  a bankruptcy with respect to a specified third party (the=20
Reference Entity) the Seller of the product (which could be either Enron or=
=20
its online counterparty) will pay a fixed, pre-agreed cash sum in an agreed=
=20
currency to the Buyer. (It should be borne in mind that this product differ=
s=20
in a number of ways from the more conventional credit derivatives traded in=
=20
the international markets. This means that a change in the nature or terms =
of=20
our product or the introduction of alternative credit products will likely=
=20
change the analysis below.)

Set out below is an overview of where we have come out on the more=20
significant legal issues.  I am also attaching a two page "Executive Summar=
y=20
of Legal Advice" prepared by outside counsel which highlights the significa=
nt=20
legal issues/risks in each country and which should be read in conjunction=
=20
with this note mail. As you will see, the Executive Summary does not focus =
on=20
issues we raised which are "all clear" from a legal perspective, so as to=
=20
keep the summary to a sensible length  (but there was plenty of good news=
=20
too!).  Where a legal issue has been identified, I have either set out belo=
w=20
what action is to be taken, or not addressed it further on the basis that, =
on=20
the advice of foreign counsel, the risk is not very substantial or unlikely=
=20
to materialise. Therefore, where no comment is made below in relation to a=
=20
risk highlighted in the attached summary, please assume that the legal risk=
=20
is one which, in our view, it is reasonable to take.

A.  Countries in which the credit product can be traded in January 2000

 Finland, Norway, Sweden, Switzerland, UK, US

B.  Countries in which launch of the product via EnronOnline will need to b=
e=20
delayed

 Canada, Germany (reasons set out below)

C.  General Issues (applicable in all countries)

The credit product is fundamentally different from the usual energy and=20
related products we trade and so gives rise to new or increased legal risks=
=20
of a general nature:

(i)  Capacity - We will not be able to assume generally that our=20
counterparties will have the legal power and authority necessary to trade t=
he=20
product and so will need to check each counterparty's constitutional=20
documents before allowing them to trade the product online.  This applies t=
o=20
almost all entities (eg corporates, municipalities, insurance companies) in=
=20
all countries.  Some entities may lack the power to trade under the general=
=20
law (in which case we will not be able to deal with them at all) or under=
=20
their constitutional documents (in which case they will need to amend their=
=20
constitutional documents if they wish to trade). =20

The check need only be made once at the beginning of the credit trading=20
relationship and so can be added to our procedures.  It is not a particular=
ly=20
onerous job and will increase the cost of this business only incrementally.

(ii)  Confidentiality - We will need to put in place procedures to ensure=
=20
that we are not misusing confidential information about our business=20
counterparties on whom we are offering credit protection.  Misuse can occur=
=20
both in pricing the product and trading it.  The procedures will not includ=
e=20
formal Chinese Walls separating the credit traders from our other traders o=
r=20
the credit department (a point we have managed to agree with both UK and US=
=20
counsel following very detailed discussions).  The procedures will include=
=20
(a) the use of a Restricted List in both the US and Europe (similar to the=
=20
procedure currently used in Houston); and (b) practical steps to ensure tha=
t=20
confidential information derived from other areas of our business and which=
=20
we are not entitled to use (eg because it is the subject of a confidentiali=
ty=20
agreement) is not imparted to the credit traders.  In addition, where Enron=
=20
has an especially close relationship with a prospective reference entity, o=
r=20
otherwise has confidential information relating to such an entity, we will=
=20
need its written consent before offering protection on that entity.  Withou=
t=20
such consent, there will be an unjustifiably high risk of being sued by tha=
t=20
entity for breach of confidence.

D.  Country Specific Issues

(i)  Canada - There is a substantial risk that the product will constitute=
=20
insurance business, constituting an offence and rendering contracts in the=
=20
product unenforceable against our counterparties.  We should try to resolve=
=20
this issue with the Canadian authorities before launching the product in=20
Canada.  Timeframe for clearance is highly uncertain since it is not clear=
=20
which Canadian authority would take jurisdiction of the matter.

(ii)  Germany -  Again the issue is insurance.  The risk is higher than in=
=20
Canada and so Germany should be excluded initially.

(iii)  Norway - There is a material risk that the credit product could be=
=20
regarded as gaming in Norway, in which case trades would be void and=20
unenforceable.  The normal way to mitigate this risk in Norway is by using =
a=20
"substantial professional effort" to satisfy ourselves that a trade is bein=
g=20
entered into for valid commercial purposes (normally hedging) by our=20
counterparty. Clearly, it will not be possible to take such steps on a trad=
e=20
by trade basis in the context of EnronOnline.  At a minimum, we should=20
therefore ensure at the outset of the online trading relationship in this=
=20
product with each Norwegian counterparty that there is a commercial logic=
=20
behind its trading this product type.

(iv)  Switzerland -  If the credit product is the main purpose of our tradi=
ng=20
relationship with a counterparty, we should check with the Swiss supervisor=
y=20
authority whether the product constitutes insurance (the position being=20
unclear).  If a trade is insurance, it can be terminated by the counterpart=
y=20
(which is obviously of greater concern if Enron is the Buyer) and an offenc=
e=20
will be committed since Enron is not authorised as a Swiss insurer.  Howeve=
r,=20
I understand that the initial group of counterparties will be existing=20
business relationships, in which case we can parallel path this issue.

(v)  US (New York Law)=20

(a) CFTC regulation - by structuring the product either as a swap or an=20
option (and meeting certain other conditions) we can rely on exemptions und=
er=20
the US Commodities Exchange Act.=20

(b)  US securities laws - there is a small chance that the credit product=
=20
constitutes a "security" under US securities laws (please see attached=20
Executive Summary).  However, SEC regulations allow the public offering of=
=20
securities to "accredited investors" which will allow us to deal with=20
investors having at least US$5 million in assets.  Since most of our=20
counterparties will be fairly large, sophisticated players, this test shoul=
d=20
not impede the business.

(c)  Insider trading - US counsel have advised that the risk of insider=20
trading occurring as a result of the product being characterised as securit=
y=20
(see (b) above) is relatively remote.

---------------------------------------------------------------------------=
---
--------------------
Please feel free to call me on x36566 if you would like to discuss this=20
project further.

Best regards

Paul
louise.kitchen@enron.com