Client Alert
Closing Out Derivative Trades with Lehman Brothers
September 18, 2008
On September 15, 2008, ISDA, the International Swaps and Derivatives Association, Inc., issued guidance in relation to the bankruptcy filing of Lehman Brothers.
Specifically, ISDA expects that where a market participant is facing a Lehman Group entity as counterparty to an OTC derivative trade, whatever the underlying asset class (e.g., interest rate swap and including credit derivatives), participants are expected to refer to the Master Agreements and Credit Support (collateral) documentation that they have in place covering OTC derivative transactions with one or more Lehman Group entities and take advice from legal counsel as appropriate. Where participants determine that an event of default has occurred with respect to their counterparty (and, depending on the terms of their agreements, other group entities), the terms of this documentation will allow participants to: (i) close out contracts; (ii) determine the net amount owing between them (by reference to the method applicable in their documentation, whether Close-out Amount, Market Quotation, or Loss); and (iii) take into account any collateral that may have been posted. Parties are expected to determine when and how to put these provisions into practice, working with their legal counsel.
Additionally, ISDA notes that where a Lehman Group entity is the subject of a credit derivative trade, i.e., it is the Reference Entity, ISDA intends to perform its usual role in relation to any auction settlement of credit derivatives trades that make reference to a Lehman entity. This process will follow the usual timeline, involving market participants in all the stages that normally apply in effecting a protocol. The first decision is whether to hold an auction. ISDA advises participants to look to recognized news and information sources in order to determine the current situation regarding Lehman Brothers. ISDA intends to perform its usual role in relation to any auction settlement of credit derivatives trades that make reference to a Lehman entity.
ISDA has prepared two frequently asked question flyers regarding the bankruptcy filing of Lehman Brothers Holdings, Inc. and closing out Lehman Brothers trades. Please find links to both ISDA publications below:
We will continue to monitor the situation regarding Lehman Brothers' bankruptcy filing as it develops and its implication to any derivative trades.
As always, if you have any questions about this or another banking matter, please contact a member of the Banking and Financial Institutions Team at Womble Carlyle Sandridge & Rice, PLLC. Readers are urged to consult with their regular contacts at Womble Carlyle or Steve Dunlevie at 404-888-7401, Betty Temple at 864-255-5415, Richard Hills at 404-888-7475, David Adams at 404-879-2492, or Robert Ralls at 404-879-2481.
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