Lehman's trade clean-up boosts business of structured products valuation provider, its president says

By Emma Trincal

New York, Sept. 25 - The unwinding of Lehman Brothers Holdings Inc.'s derivatives book, including structured products, has meant growth for Numerix, an independent trade valuation provider.

The firm announced earlier this month that it had been retained by Lehman's estate to provide independent trade valuation for one million outstanding derivative contracts linked to the failed investment bank, which filed for bankruptcy a year ago. The one million contract total includes both structured products and a huge variety of other transactions.

Numerix's president and chief operating officer, Steven O'Hanlon said that the assignment was "unquestionably the largest valuation deal in history," but declined to estimate the dollar value of the million contracts. Numerix is an independent provider of cross-asset analytics for the structuring, valuation and risk analysis of derivatives and structured products.

Cleaning the mess

Numerix was chosen by Lehman because it was best positioned to reconcile and value the trades, said O'Hanlon. The process of getting independent valuation was necessary to resolve derivatives claims, said Daniel Ehrmann, managing director of Alvarez & Marsal, the firm in charge of restructuring Lehman.

"What we've done in the last three months of last year was to convince Lehman that we had the capability of solving the problem," said O'Hanlon.

"It was a challenge. All trades terminated on the day of the bankruptcy. They had many different systems representing different asset classes and everything got shut down. All the employees who knew the structures were no longer there. We were selected because of our deep knowledge of each system. We were able to go in and get at the files and be able to determine all the different deals that were in there."

Exotic deals shrunk

About 700,000 contracts out of the one million total were vanilla structures also known as flow deals for their liquidity. The underlying assets for those were foreign exchange, credit, commodities, equities and interest rates, said O'Hanlon. Another 300,000 contracts were exotic deals across all asset classes, he added. "In the last six months, we've done half of the job."

"Business has been very robust for us," said O'Hanlon. He noted that while the market for exotic deals has "dried up", his firm had been able to grow from the unwinding of the Lehman's book of derivatives and structured products trades.

"While these exotic deals evaporate, business has continued to grow in this sector for us. So we haven't suffered as a result of the decline of exotic deals. In fact we're growing," he said.

He added that without independent trade valuation, unwinding these deals could take years.

"They need tools. They need to get independent pricing. It helped Numerix to grow dramatically in the last 12 months," he said.

Business is back

Looking at the market in general, O'Hanlon said that "now business is coming back." While the new growth is more visible with plain vanilla deals, there is an overall "pick up," he said, notably in Asia, pointing to Hong Kong, Taiwan, India or Singapore.

Numerix has 375 customers in 27 countries. The firm is about to open offices in Italy and Germany, said O'Hanlon.

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