October 10, 2008

In an auction held today for the bankrupt Lehman Brothers by the International Swaps and Derivatives Association, Markit and Creditex, $400 billion worth of Lehman-referencing credit default swaps were settled. The final price for the contracts was 8.625%, in other words, sellers of credit-default protection will have to pay holders 91.375 cents on the dollar. (The total amount of cash exchanged will net out to about 2% of that $400 billion notional amount because the participating firms have multiple contracts with each other.) The auction took place electronically on a Creditex trading platform.

At a press conference this afternoon, ISDA executive director and chief executive officer Robert Pickel spoke proudly of the event, saying the auction went smoothly and efficiently, following successful implementation of ISDA's CDS protocol. He noted that auctions for Fannie Mae and Freddie Mac related derivatives took place earlier this week and that upcoming auctions will settle derivatives referencing Washginton Mutual and three Iceland banks.

Pickel spoke glowingly of the CDS market in general. "Despite defaults in recent months, CDS markets remain strong," he said. "CDSs have come under scrutiny and criticism lately, but CDS contracts did not cause any firm to fail. The underlying problem affecting firms is the risks they chose to take on."