This talk addresses the treatment of over-the-counter derivatives in bankruptcy or other failure resolution procedures. Currently, except in certain administrative failure resolution settings, OTC derivatives are exempt from bankruptcy rules. These and other “qualified financial contracts” such as repos and securities lending agreements can be contracted so as to terminate at bankruptcy, with offsets. Collateral can be liquidated to cover the net termination valued owed by counterparties. In this sense, swaps are permitted to take priority over ordinary senior unsecured creditors. There has been a policy debate concerning whether this is appropriate. This talk presents a theoretical treatment of the efficiency of this bankruptcy exemption.