Orderly Unwinding of Lehman Derivatives
19 September 2008This quick note is on the effect that Lehman being in Chapter 11 is having on the Structured Product market in Hong Kong. Lehman’s were far more active in Hong Kong than the Australian market. The good news is that being in Ch11 does not necessarily mean the investor is seeing the value of their investment go to zero.
I understand there is a lot of activity in the market where banks are looking to take-over the derivatives and hedges that Lehman had entered into with counterparties providing the Structured Products. These transactions are subject to the exact structure and terms of the transaction. A bank would typically step-in and become the hedging counterparty in replacement of Lehman. Whether or not there is a loss to be taken by either the product issuer or end investor will depend upon the exact structure of the transactions.
The bottom line is that, the unwinding of the hedges and swaps in Hong Kong appear to be occurring in an orderly and responsible fashion. From an end investor standpoint, Lehman being in Ch11 does not necessarily mean he sees his investment value go to zero. It seems that it is possible to have the hedge restructured with only a minor loss to be taken by the investor or product issuer.
There is of course no guarantee that all transactions would be restructured, but bear in mind a client of Lehman is likely to be a client of several other banks and in this current environment the banks and finance industry understand the flow on effect and do whatever they can to assist.
