ETAPA: ENTREVISTAS:

1.2.5.1 General Issues and Insurance Law

Credit default swaps have so far received only limited attention in Finnish legal scholarship, but there are sufficient contributions to render them worthy of a discussion in the present study. The first Finnish contribution is by Miki

175 _{Huault and Rainelli-Le Montagner 2009: 564.} 176 _{Flanagan 2001.}

177 _{Partnoy 2003: 46–47, 142, 147–148, 150–154, 295. See also Partnoy 2002.} 178 _{Braithwaite 2012a; Braithwaite 2012b.}

179 _{Gelpern and Gulati 2012.} 180 _{Scott and Biggins 2012.}

181 _{Huault and Rainelli-Le Montagner 2009.} 182 _{Morgan 2010: 32–40.}

183 _{McKeen-Edwards and Porter 2013: 43–46.}

184 _{See Tett 2009. Tett is an editor of the Financial Times and has followed ISDA closely}

RESEARCH SITUATION

Kuusinen, dating from 2005, that is from the time before the financial crisis.185 _This

is an LLM thesis, entitled Luottoriskinvaihtosopimuksen sisältämästä sitoumuksesta erityisesti varallisuusoikeuden kannalta, in which Kuusinen studies CDSs from the viewpoint of general contract law and property law.

An entire chapter of Kuusinen’s study is dedicated to the broad description and discussion of CDSs.186 _{Most of the discussion remains at an abstract level}

without getting into legal specifics,187 _{but even at this level some interesting points}

are raised, for example that credit risk as such cannot be the precise object of contractual transfers; what can be transferred is specific legal rights such as those embodied in a loan contract, which of course is economically subject to risk.188

Thus the transfer of credit risk is the economic effect of the contract, but its specific legal content must be characterized differently. This is a worthy point that has hardly been mentioned anywhere else in the literature.189

Regarding the contractual characterization of CDSs, Kuusinen dedicates some attention to the similarities between CDSs and insurance.190 _{The discussion is only}

preliminary, and the author acknowledges that more research is needed.191 _{I will}

later return more specifically to what he proposes. The study in any case reveals that Finnish law presents many interesting legal-doctrinal questions for credit default swaps.

After the financial crisis, there have been some more studies, among which we can firstly note an article by Juho Kivi-Koskinen, who analyzes the securitization of sub-prime mortgages and their role in the financial crisis.192 _{However, the}

article only marginally touches upon credit default swaps, as it is more concerned with the economic-legal dynamics generally than with the implications in terms of Finnish law.

Of much greater interest is the LLM thesis of Lauri Ahokallio, entitled Luottoriskinvaihtosopimuksen oikeudellinen luonne erityisesti vakuutusoikeuden näkökulmasta.193 _{Ahokallio dedicates particular attention to the relationship}

between CDSs and insurance law, but he also touches upon several other points,

185 _{See Kuusinen 2005. He has later published an article on structured finance products}

and consumer protection: Kuusinen 2008. This includes also an overview of some issues related to credit derivatives, including CDSs and CDOs (see especially pp. 260–261). However, most of the attention is given to structured finance and its implications for consumer protection (pp. 262–265).

186 _{Kuusinen 2005: 38–61.} 187 _{See especially ibid. 38–47.} 188 _{Ibid. 44–45.}

189 _{One possible reason is that the Anglo-American financial law scholarship is}

characterized by an eminently practical, non-theoretical methodology.

190 _{Ibid. 57–61.} 191 _{Ibid. 61.}

192 _{See Kivi-Koskinen 2010.} 193 _{Ahokallio 2011.}

including the contractual nature (sopimusluonne) of CDSs,194 _{the differences}

between CDSs and loan agreements generally (velkakirja),195 _{the differences}

between CDSs and property securities (esinevakuudet)196 _{and what Finnish law}

calls personal securities (henkilövakuudet), such as third-party guarantees (takaus) and letters of credit (reimburssi).197 _{Another point of great interest is the difference}

between CDSs and financial securities (arvopaperi).198 _{The most important}

contribution, however, pertains to the insurance law question, which will be studied later in a critical dialogue with Ahokallio.199

1.2.5.2 Translating Credit Default Swaps

There is one practical question that both Kuusinen and Ahokallio raise: how should credit default swaps be called in Finnish? This term was translated as luottoriskinvaihtosopimus by the Finnish Financial Services Authority back in 2004, and this has stayed as the standard expression in Finnish.200 _{Kuusinen notes,}

however, that the word vaihto (i.e. exchange or swap) is descriptively ill-suited for this purpose, because CDSs economically transfer credit risk instead of exchanging or swapping them.201

Ahokallio shares this terminological critique, arguing that CDSs should be called credit risk transfer contracts, not swaps, because a swap implies an exchange of related interests (here, of credit risks), so that a credit risk swap properly speaking would be an exchange of two different credit risks.202 _{I entirely agree}

with both Kuusinen and Ahokallio. Perhaps we should adopt the expression

194 _{Ibid. 70.} 195 _{Ibid. 71–73.} 196 _{Ibid. 73.} 197 _{Ibid. 73–82.} 198 _{Ibid. 82–83.}

199 _{Ibid. 88–110. See below, chapter 3.3.} 200 _{Kuusinen 2008: 47.}

201 _{“Mielestäni termin vaihto käyttäminen on jossain määrin harhaanjohtavaa tai}

epätarkkaa tarkastelun alaisena olevan instrumentin yhteydessä. Varsinaisessa sopimusjärjestelyssä ei nimittäin vaihdeta mitään vaan luottoriski siirretään toiselle osapuolelle. Tästä syystä soveliaampi termi olisi luottoriskinsiirtosopimus. [...] Katsoisin esitetyn kaltaisen terminologisen detaljin uudelleenmäärittelyn olevan paikallaan ja myös perusteltua.” Ibid. 47–48. I would further sustain that it is grammatically incorrect to write

luottoriskinvaihtosopimus or luottoriskinsiirtosopimus without the space in Finnish.

202 _{Ahokallio 2011: 57 n.123: “todellinen ‘swap’ olisi pikemminkin sopimus, jossa velkoja}

B vaihtaa referenssientiteettiin liittyvän luottoriskin johonkin suojauksen myyjän C nimeämän viiteyrityksen luottoriskiin, jolloin voitaisiin todeta vaihdetun ‘yhtiöriski X yhtiöriski Y:hyn’.”

OBJECTIVES AND SCOPE

luottoriskin siirtosopimus (written separately, of course). I will later argue that CDSs should not be called swaps in English, either.203

There may be scope for further terminological precision, however. Ahokallio refers to CDSs as credit risk swaps, possibly as a consequence of retranslating back into English the original Finnish translation luottoriskinvaihtosopimus. This is inaccurate, because the original English expression refers to credit default (in Finnish, luottotappio), which is narrower than the generic concept of credit risk. Some examples of non-default credit risk are market risk (e.g. price changes in secondary credit markets, and asset liquidity risk) and legal risk (e.g. the risk that an agreement is deemed illegal or unenforceable). CDS contracts provide no protection against these risks; they are specifically triggered by default events specified in the agreement. Secondary price movements, of course, influence CDS markets, and the default payments under CDSs are normally determined according to post-default prices in secondary markets, but without a specific default event, there is no compensation whatsoever under CDSs. It follows that the best translation would seem to be luottotappioriskin siirtosopimus.