In September 2008, SwapClear successfully managed Lehman Brothers' $9 trillion interest rate swap default by implementing our unique default management process.
The default comprised more than 66,000 trades. Within three weeks, the default was fully resolved, well within the margin held and at no loss to other market participants.
LCH developed this process with its clearing members, who play an invaluable role in providing trade expertise and access to market liquidity during a default.
Stephen O’Connor, managing director at Morgan Stanley and chairman of ISDA, said: “The aim of the default management process is to manage the closeout of a member institution in an orderly fashion, with the minimum of disruption to the markets and without incurring credit losses at LCH or at other member firms. LCH and the bank members of the default management group executed on a well-tested plan in volatile markets and achieved these goals with distinction.”
The Bank of England noted that the ability of LCH to close out positions without using up all available margin “illustrates the ability of a clearing house to protect market participants from bilateral counterparty risk, even in the event of default of a major participant”. (The Bank of England’s Financial Stability Report, October 2008)