Sunday, September 14, 2008

CDS Traders Report To Work

With a Lehman bankruptcy looming, the International Swaps and Derivatives Association, a trade group whose members include many large dealers, issued a statement that said a "netting trading session" will take place between 2 p.m. and 4 p.m. on Sunday to allow Lehman's counterparties to offset their positions against each other.

Credit Default Swap "CDS" traders at many Wall Street firms were told to come to work immediately.

"The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy filing," it said, adding that trades conducted during this period "are contingent on a bankruptcy filing on or before 11.59 p.m. New York time" today. If no filing takes place, the trades will be canceled, ISDA said.

One person familiar with the matter said large dealers contemplated showing each other all of their credit default swap trades with Lehman. Disclosing their positions may enable dealers to find ways to offset their positions with each other wherever possible. Later in the day, some traders were told that Lehman -- with the help of Federal Reserve officials -- will try to figure out which of its counterparties have CDS trades that can be offset. Those counterparties would be informed of the offsetting positions, following which they can unwind their respective swaps with Lehman and concurrently enter into new swap contracts with each other. For example, if one dealer has bought a swap from Lehman and Lehman bought a similar swap from another bank, the two banks could agree to face each other directly.
-EPJ Newsdesk

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