The Lehman Brothers Bankruptcy F: Introduction to the ISDA Master Agreement

Yale Program on Financial Stability Case Study 2014-3F-V1

11 Pages Posted: 7 Apr 2015

See all articles by Christian McNamara

Christian McNamara

Yale University - Yale Program on Financial Stability

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: November 15, 2014

Abstract

When Lehman Brothers Holdings, Inc. (LBHI) sought Chapter 11 protection, the more than 6,000 counterparties with which its subsidiaries had entered into over 900,000 over-the-counter (OTC) derivatives transactions faced the question of how best to respond to protect their interests. The existence of standardized documentation developed by the International Swaps and Derivatives Association (ISDA) for entering into such transactions meant that the counterparties likely thought that they were dealing with a well defined and robust set of options in answering this question. Yet, in practice, the resolution of Lehman’s OTC derivatives portfolio ended up being less orderly than the existence of standardized documentation might have suggested it would be. This case explores: (1) whether the default provisions contained in the Master Agreement played any meaningful role in Lehman Brothers’ bankruptcy and its outcome, (2) whether changes should be made to the Master Agreement to reduce the systemic risk associated with derivatives transactions, and (3) how attempts to create global certainty through the use of standardized agreements can be thwarted by the operation of local laws. 

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28

Suggested Citation

McNamara, Christian and Metrick, Andrew, The Lehman Brothers Bankruptcy F: Introduction to the ISDA Master Agreement (November 15, 2014). Yale Program on Financial Stability Case Study 2014-3F-V1. Available at SSRN: https://ssrn.com/abstract=2588623 or http://dx.doi.org/10.2139/ssrn.2588623

Christian McNamara

Yale University - Yale Program on Financial Stability ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Andrew Metrick (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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