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Legal and regulatory compliance risk
The risk that a counterparty’s performance obligations will be unenforceable because:
1) the underlying transaction documentation is inadequate;
2) the counterparty lacks the requisite authority or is subject to legal transaction restrictions;
3) the underlying transaction is impermissible under applicable law or regulations; or
4) applicable bankruptcy or insolvency law or regulations limit or alter contractual remedies. It also is intended to cover the risk of mandated regulatory compliance.