Part II United Kingdom, 10 The English Law Treatment of Lehman’s Derivatives Positions

Subject(s):

Bank resolution and insolvency — Regulation of banks — Derivatives — Regulated activities — Liquidity — International Swaps and Derivatives Association (ISDA) — Close-out netting

The Lehman Brothers’ insolvencies were not the first to have been experienced in the derivatives market but the size of the outstanding positions was unprecedented. Moreover, the collapse of the group triggered a period of extreme market turbulence, in which the liquidity of many products dried up and their values collapsed. This was the background against which counterparties sought to close out their positions and extricate themselves from their relationships with various members of the group. The work involved in agreeing the resulting claims has been very complicated and has taken a great deal of time, often as a result of debates about the interpretation of standard agreements. The judgments that have been given are of considerable importance to the derivatives market as they have helped to clarify the meaning of standard documentation that remains in widespread use. From a vantage point of some eight years later, this chapter draws some conclusions about the operation of this documentation and presents a critique of the case law that has emerged from the insolvency proceedings.