WASHINGTON -- The International Swap Dealers Association yesterday released an outline of model legislation that would give state and local governments the power to participate in swap transactions.

Association officials said they hope municipal bond issuers, states, and other governmental entities will use the model to come up with legislation they can adopt for authority to engage in interest rate and other swaps.

"We expect this to be a useful contribution to the effort to obtain clear statutory authority [for swaps] in those cases where it is needed," said Mark Brickell, chairman of the swap dealers group and a vice president of Morgan Guaranty Trust & Co., a subsidiary of J.P. Morgan & Co.

"It's intended to serve as a framework for discussion" and "can be modified," to fit the particular needs of each state or other governmental entity, he said.

The model legislation, which was drafted for the association by lawyers at Cravath, Swaine & Moore in New York, is very broad. It would provide any governmental entity with authority to enter one or more swap agreements for interest-rate, forward, commodity, or currency swaps. Authority also would be provided for swap agreements for caps, floors, collars, interest rate options, and currency options.

It would cover swaps involving bonds, notes, bond anticipation notes, commercial paper, leases, installment purchase contracts, certificates of participation, and other kinds of indebtedness.

The model would allow a governmental entity to enter a swap agreement that is "necessary or desirable in connection with, or incidental to, the conduct of its activities," but only for the purpose of "managing an interest rate, currency, commodity price, investment, or other similar risk" that arises in connection with those activities. Authority also would be provided for credit enhancement or liquidity agreements in connection with swap transactions.

The legislation would place some responsibilities on a government or governmental authority in a swap transaction. It states, for example, that a governmental entity participating in a swap should give "due consideration of the creditworthiness" of the counter-party.

For foreign currency swaps, it states that the governmental entity "shall covenant to enter into additional agreements as may be necessary to cover the entire amount of the debt service payment obligation."

A swap counter-party, under the legislation, could rely on a governmental entity's representation that it had authority to enter into a swap "absent bad faith or knowledge to the contrary" and could force the governmental entity to honor the swap agreement.

The legislation would take precedence over other statutes and could be "liberally construed," according to its provisions.

Although the association's model legislation has not yet been reviewed by municipal bond industry officials, many of those officials have called for some kind of generic legislation that could be adopted by state and/or local issuers to provide clear authority for swap transactions.

The importance of clear authority for swaps was underscored earlier this year, after the United Kingdom's House of Lords invalidated billions of dollars of swap agreements by ruling that local governments did not have the authority to enter into them. Although the ruling was limited to local governments in the United Kingdom and involved swaps that were speculative, it also covered nonspeculative swaps and had ripple effects across the Atlantic.

Besides providing assurance that issuers would have the authorities they need to participate in swaps, generic legislation also would improve market liquidyt and save issuers money, municipal industry officials said. The savings would result because broker-dealers and their lawyers would no longer have to conduct extensive research on what authorities state and local issuers have to participate in swap transactions.

Although the municipal swap market has grown substantially during the past 18 months, less than half the nation's states currenlty have state or local authority to participate in swaps, according to the association, broker-dealers, and lawyers. And that authority varies widely.

Nevada, for example, adopted legislation earlier this year authorizing its municipalities to enter into swap agreements, but only in connection with municipal bond issues of $10 million or more.

Meanwhile, the Texas attorney general has determined that existing laws authorizing issuers in that state to enter credit agreements for commercial paper programs for variable-rate demand obligations are broad enough to cover interest rate swaps, but only if swap agreements are reached or contemplated at the time of bond issuance.

And in New York while some issuers -- like the Local Government Assistance Corp. and the Port Authority of New York and New Jersey -- have authority to participat ein interest rate swaps, others -- like New York City and the Metropolitan Transportation Authority -- have been unable to convince the state Legislature or the governor's counsel of the need for such authority.

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