16 Sep 2008, Victoria Pennington, Operational Risk & Regulation
NEW YORK – In light of recent events, and with several newspapers predicting the end for derivatives, the International Swaps and Derivatives Association (Isda) has issued a statement reassuring the industry that the market is continuing to function well, and has a robust and resilient infrastructure.
In the statement, Robert Pickel, chief executive officer at Isda, said: “Over the past 25 years, Isda and the privately negotiated derivatives business have developed a robust, resilient industry framework and infrastructure. Our collective efforts to identify and reduce the sources of risk in our business during this period drove the creation of the Isda Master Agreement, supporting documentation architecture, netting agreements, collateral agreements and other risk-reduction and risk-mitigation tools. These tools enable and provide the legal certainty for counterparties to net down their exposures to a single economic position and to further manage that position through the use of collateral.”
Eraj Shirvani, Isda’s chairman and managing director, and head of European credit at Credit Suisse, said: “The current environment is obviously a difficult period for industry participants. Isda believes, however, that the industry’s progress in building a strong foundation for our business will enable it to successfully address current issues. The privately negotiated derivatives business – including the credit default swaps business – continues to function well in these times.”
In the release, Isda outlined the procedures market participants need to follow when closing out bilateral derivatives positions where Lehman Brothers Holdings is either a counterparty or reference entity.
Regardless of the underlying asset class (interest rate swap and including credit derivatives), participants are expected to refer to the master agreements and credit support (collateral) documentation they have in place covering over-the-counter derivatives transactions with 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 take bilateral action 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 might have been posted. Parties are expected to determine when and how to put these provisions into practice, working with their legal counsel as appropriate.
Where a Lehman group entity is the subject of a credit derivatives trade, that is, the reference entity, an auction will be held with respect to covered credit derivatives transactions that reference Lehman. Isda will perform its usual role in relation to the auction. This process will follow the usual timeline, involving market participants in all the stages that usually apply in effecting a protocol.
Interested parties were advised to continue to monitor the ISDA website for ongoing announcements in relation to market developments.