The credit default swap (“CDS”) has never been tested in bankruptcy proceedings on any significant scale, particularly under recent amendments to the Bankruptcy Code. In part, this is because the CDS market is a very recent phenomenon. CDS market participants also make considerable efforts to avoid holding a credit default swap where the counterparty has gone into bankruptcy.
On September 15, 2008, Lehman Brothers Holdings Inc. (“LBHI”) filed for protection under chapter 11 of the United States Bankruptcy Code in New York. The case bears the caption In re Lehman Brothers Holdings Inc., Case No. 08-13555, and has been assigned to Judge James M. Peck. Notably, the only Lehman entity thus far to file for chapter 11 protection is LBHI; neither the main “broker dealer” (Lehman Brothers, Inc.) nor other subsidiaries of Lehman filed for U.S. bankruptcy protection. However, Lehman Brothers Japan Inc. and Lehman Brothers Holdings Japan Inc.
In the very early hours on September 20, 2008, the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") entered an order (the "Sale Order") approving the sale of substantially all of the assets of Lehman Brothers Holdings, Inc. ("Lehman"), LB 745 LLC and Lehman Brothers, Inc. (collectively, the "Lehman Sellers") to Barclays Capital, Inc. free and clear of all liens claims, encumbrances and other interests.
In light of the recent Chapter 11 bankruptcy filing by Lehman Brothers Holdings Inc. and the subsequent determination of the Securities Investor Protection Corporation (SIPC) to commence a proceeding placing Lehman Brothers Inc.
September 21, 2008 Following a week of unprecedented market upheaval, players in financial contracts got some reassurance from the bankruptcy judge presiding over the liquidation of broker/dealer Lehman Brothers Inc. (“LBI”) and the sale of a portion of its assets to Barclays Capital Inc. (“BCI”).
Nothing is certain in today's financial crisis - except that the legal system will be sorting out the rights and obligations of financial market participants for years to come. This is especially true for participants in the over-the-counter derivatives markets.
In the biggest bank receivership in the history of the United States, the Office of Thrift Supervision seized Washington Mutual Bank on September 25 and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. While details are still emerging, it is at least clear that all deposits were transferred to JPMorgan, as were all loans and Qualified Financial Contracts, which include swaps, options, futures, forwards, repurchase agreements and any other Qualified Financial Contract as defined in 12 U.S.C. Section 1821(e)(8)(D).
Yesterday, the Depository Trust & Clearing Corporation (DTCC) announced that its Trade Information Warehouse (TIW) successfully completed on October 21st settlement of the over-the-counter credit default swaps (CDS) related to the credit event of Lehman Brothers Holdings Inc.
The United States Bankruptcy Court for the District of Delaware has ruled that a creditor cannot effect a “triangular” setoff of the amounts owed between it and three affiliated debtors, despite pre-petition contracts that expressly contemplated multiparty setoff. In re SemCrude, L.P., Case No. 08-11525 (BLS), 2009 WL 68873 (Bankr. D. Del. Jan. 9, 2009). The Court relied principally on the plain language of section 553(a) of the United States Bankruptcy Code, which limits setoff to mutual obligations between a debtor and a single nondebtor.
The collapse of Lehman Brothers was a major test of the procedures developed by market participants to address counterparty credit risk and has uncovered deficiencies in risk management policies and their application.