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New York vis-a-vis Merrill Capital. When Kannex's indirect
interest in the LIBOR Notes held by the partnership changed
significantly as a result of the distribution of the BFCE Notes
to Southampton on December 13, 1989, the partial purchase of
Kannex's partnership interest on June 27, 1991, and the
redemption of its remaining interest on November 27, 1991, both
legs of the hedge swaps were adjusted proportionately. At these
times, the portion of the swap that was to be terminated would be
marked to market, and the counterparty that would otherwise have
benefitted from the change in market interest rates would receive
a compensatory termination payment. The back-to-back hedge swaps
satisfied complementary needs. Kannex was able to stabilize its
return on $28 million of its partnership investment. Likewise,
Merrill Capital was able partly to offset the interest rate
exposure that it incurred in connection with its hedge swaps with
BOT and BFCE.
The back-to-back hedge swaps relating to the LIBOR Notes
also served an additional function that can be understood only by
reference to the terms of the structured transactions in which
the LIBOR Notes were issued. According to the analysis of
petitioner's expert, the transaction spreads implied in Merrill's
pricing of the Citicorp Notes and LIBOR Notes for purposes of the
contingent payment sale could be expected to result in the
transfer of between $1.8 and $1.9 million of value from ACM to
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