The Depository Trust & Clearing Corporation (DTCC) announced that its Trade Information Warehouse (Warehouse) successfully completed the automated credit event processing and settlement of over-the-counter (OTC) credit default swap (CDS) contracts related to the Lehman Brothers Holdings Inc. (Lehman) credit event. This processing resulted in approximately US$5.2 billion in net funds transfers from net sellers of protection to net buyers of protection. The portion of this net funds settlement allocable to trades between major dealers was settled through the normal settlement procedures of CLS Bank (the world’s central settlement bank for foreign exchange, and the central settlement provider to the Warehouse) for Tuesday, October 21 without incident.
In November 2006, The Depository Trust and Clearing Corporation (DTCC) established its automated Trade Information Warehouse as the electronic central registry for credit default swaps. With a client base that includes virtually all global derivatives dealers and more than 1100 buy-side firms in 31 countries, the vast majority of credit default swaps traded have been registered in the Warehouse. In addition, all of the major global credit default swap dealers have registered in the Warehouse the vast majority all contracts executed among each other before the Warehouse’s November 2006 launch. At the time of the bankruptcy of Lehman Brothers Inc., approximately $72 billion in credit default swaps written on Lehman Brothers were registered in the Warehouse.
One of the many central servicing functions of the Trade Information Warehouse is to calculate payments due on registered contracts, including cash payments due upon the occurrence of the insolvency of any company on which the contracts are written. Calculated amounts are netted on a bilateral basis, and then, for firms electing to use the service, transmitted to CLS Bank where they are combined with foreign exchange settlement obligations and settled on a multi-lateral net basis. Currently all major global credit default swap dealers use CLS Bank to settle obligations under credit default swaps. It is expected that all major institutional players in the credit default swap market will use the same process for settlement by the end of 2009. For Lehman Brothers Holdings Inc. the calculated amounts netted in the Warehouse on a bilateral basis amounted to approximately $21 billion. The $5.2 billion net funds transfer represents the net of these nets.
DTCC Trade Information Warehouse Completes Credit Event Processing forLehman Brothers
Payment on Lehman CDS only around $5.2 bln
Lehman’s credit default swaps were valued at less than 9 percent of the insurance sold in an auction last week on Oct. 6, after the majority of the bank’s assets were sold to Barclays Bank after its bankruptcy, leaving little.
This led to concerns that protection sellers would need to accumulate $365 billion to pay for losses on the contracts.
Analysts said these concerns were misplaced, however, because large players in the market, such as dealers and some hedge funds, had both bought and sold protection, subsequently taking both gains and losses on Lehman’s default that offset each other.
Note: in my previous post, I mentioned a DTCC press release relating to another Lehman settlement relating to MBS forward open commitments, no relation to the CDS settlement.
Hi zgveritas,
Yes, they will add up. But they add up to zero. Bilateral derivatives only shift money that already existed between two parties. Here’s something that I think gives you a better idea of the overall process, specifically, how 300 billion can turn into 5 billion.
http://derivativedribble.wordpress.com/2008/10/24/netting-demystified/
I never really viewed the CDS problem as Lehman specific. But when you have company after company and Sovereign nation after nation defaulting then those 5.2 Billion dollar settlements start to add up.
The average investor thinks they actually own a security, but The DTCC actually retains registered ownership of all securities.
The following is a very good article on the DTCC…. http://www.bearmarketinvestments.com/money
Hi Randy,
Don’t forget AIG was not a swap dealer. It was a monoline. So it wasn’t risk neutral like most CDS dealers. If AIG got slammed, it was their own fault.
http://derivativedribble.wordpress.com/2008/10/21/the-regulatory-gong-show-new-york-struts-and-frets-its-hour-upon-the-stage/
Waxman is getting AIG’s records on Lehman related CDS, so we will eventually be able to find out if this clearance is as limited as presented. A lot of people think AIG alone paid a lot more than the amount listed above.
Hey,
Here’s another one I think you’ll like.
http://derivativedribble.wordpress.com/2008/10/23/systemic-counterparty-confusion-credit-default-swaps-demystified/
Since only “$72 billion in credit default swaps written on Lehman Brothers were registered in the Warehouse” and there were an estimated $400 billion in Lehman CDS, doesn’t this mean that the $21 billion/$5.2 billion amounts represent only a portion of total Lehman CDS payments?