Amending the Flaws in the Safe Harbors of the Bankruptcy Code: Guarding Against Systemic Risk in the Financial Markets and Adding Stability to the System

Certain provisions of derivative trading contracts get special exemptions under the Bankruptcy Code, referred to as \u27Safe Harbors,\u27 to prevent systemic risk. The Safe Harbors seek to accomplish this goal by permitting a party to a derivative trading contract to quickly terminate and liquidate its positions. The precise parameters of the Safe Harbors remain unclear. This lack of clarity adversely affects the ability of market participants to accurately perform credit risk analyses with respect to their derivative trading counterparties and may adversely impact the ability of market participants to prepare Living Wills, as required by the Dodd-Frank Act. Similarly, it adversely affects the ability of a party to reorganize under the Bankruptcy Code. This Article argues that Congress should amend the Safe Harbors to address these issues to mitigate risk