Cuomo expected to sign bill closing threat to swaps.

New York Governor Mario Cuomo is expected within the next few days to sign a bill that will close a centuries-old loophole that could be invoked to invalidate many derivatives and foreign exchange transactions.

As it stands, the loophole allows a counterparty to legally withdraw from an unprofitable trade if it has not signed a confirmation. The law originates from the English Statute of Frauds, which was passed well before the Revolutionary War, in 1677, and has never been revised.

A spokeswoman for the Governor said the bill is on his desk awaiting his signature. She noted that he has until July 20 to either sign or veto the bill. If he takes no action, it will automatically become law, she said.

Practically No Opposition

The bill - introduced jointly by the New York State Senate and Assembly - passed both houses of the legislature in May with practically no opposition.

As the Statute of Frauds now stands, all orally conducted transactions that cannot be completed within one year need to be confirmed in writing. If there is no written confirmation, the transaction can be revoked. All derivatives and foreign exchange transactions fall into this category.

Since all foreign exchange contracts for more than $500 must be in writing, they too are covered under the statute.

'Telephone Trading

The revised law would consider recordings of telephone conversations or confirmations by facsimile, telex, or computer as valid.

Confirmations other than by telephone would be valid if the confirmation takes place within five working days of the trade. The customer has three days to lodge an objection.

"This is quite an important event in the foreign exchange market," said Denis M. Forster, an attorney with the New York firm of Baker & McKenzie, who represented the International Swaps and Derivatives Association and the New York State Bankers Association before the New York State Bar Association's banking law committee. "We're modernizing New York law. It doesn't make any sense in today's market."

Mr. Forster noted that while the bill amends only New York law, it has wider implications because more than 95% of all derivatives and foreign exchanage trades are governed by New York law.

He also said that many people were unaware that the loophole even existed. "If there were a major insolvency, this would be a glaring loophole," Mr. Forster said. "In a solvent environment, there is a less likely chance that it would be used. It's an escape hatch we want to close."

Dan Cunningham, a partner in the New York law firm of Cravath, Swaine and Moore and ISDA's general counsel, said the industry has been looking forward to doing away with the loophole for years. In fact, he said his firm has been trying to get the loophole closed for the past two years.

"People transact business on the telephone," said Mr. Cunningham. "Once they get an oral agreement they go out and act on that agreement. Aren't they better off knowing they have an enforceable contract? A lot of people were worried about it."

The revisions of the statute will take effect 60 days after the legislation is signed into law.

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