The existence of standardized documentation developed by the International Swaps and Derivatives Association (ISDA) to enter into such transactions meant that the counterparties probably thought they were dealing with a well-defined and solid set of options to answer this question. Yet, in practice, Lehman's OTC resolution derivatives portfolio ended up being less orderly than the existence of the documentation might have suggested so. This case examines whether the default provisions contained in the framework contract played no significant role in the Lehman case. The brothers' bankruptcy and its outcome and whether any changes need to be made to the Master Agreement to reduce systemic risk associated with derivatives transactions.
When Lehman Brothers Holdings, Inc. (LBHI) filed for Chapter 11 protection on September 15, 2008 in the largest bankruptcy proceeding in United States history, more than 6,000 counterparties with whom its subsidiaries entered into more than 900,000 OTC (OTC) derivatives transactions faced with the question of how best to respond to the protection of their interests. The existence of standardized documentation developed by the International Swaps and Derivatives Association (ISDA) for such trades meant that counterparties likely thought they were dealing with a well-defined and reliable set of options for answering this question. Pursuant to the 1992 and 2002 versions of the ISDA Master Agreement (referred to herein, together with the attachments, documents and other supporting evidence that accompanies it, as the Master Agreement), Lehman's filing for bankruptcy resulted in an Event of Default.
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