Auction results in Lehman credit default swap settlement of 8.625 cents on dollar

By Jennifer Lanning Drey

Portland, Ore., Oct. 10 - A Friday auction held to determine the settlement amount on credit default swaps related to Lehman Brothers Holdings Inc. resulted in a final price of 8.625 cents on the dollar, the International Swaps and Derivatives Association, Inc. announced Friday afternoon.

The auction was developed to facilitate cash settlements, and sellers will pay the difference between par and the 8.625 cents on the dollar, Robert Pickel, chief executive officer of ISDA, said during a Friday conference call held to discuss the auction results.

The auction followed a protocol developed by ISDA that was signed by 350 firms in recent weeks, he said.

"ISDA and our members have worked to ensure that the OTC derivatives transactions are designed to deal with the failure of any market participant, even a major dealer," Pickel said.

"Despite the defaults that we've seen in recent months, the credit default swap market has continued to function and remain liquid. This is true even while the cash credit markets have substantially frozen."

Defending CDS

During the call, Pickel defended the benefits of credit defaults, calling recent scrutiny of the CDS market "misplaced and ill conceived."

"CDS contracts did not cause any firm to fail and to our knowledge, no responsible policy maker has made this claim. The underlying cause of problems at effected firms is the risk they chose to take on," Pickel said.

He also noted that sellers of protection mark their positions to market every day, which he said means those firms have already marked down and, in most cases provided collateral against, their positions.

"As a result, there should be little or no unanticipated cost involved in the settlement of the Lehman credit default swaps," he said.

Pickel also said economic offsets within books mean that individual firms' net exposures are generally in the order of 2% of gross settlement flows.

"We've seen a lot of claims related to the magnitude of the Lehman settlements. These settlements are insignificant when put into the context of the trillions of dollars of payments that are made through settlement systems each and every day," he said.

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