One of the lessons learned by investment managers that previously traded swaps with Lehman Brothers was the importance of having robust legal documentation in place to govern these trades. For example, the bankruptcy filing by Lehman Brothers Holdings Inc. (LBH) generally triggered an event of default by LBH in its swap contracts that were traded under the International Swaps and Derivatives Association Master Agreement (Master Agreement), entitling LBH’s counterparties to certain remedies. See “Lehman Sues J.P. Morgan Over Allegedly ‘Inflated’ Claims Under Derivative Contracts and Improper Setoffs
” (Oct. 25, 2012); and “The Lehman Bankruptcy and Swap Lessons Learned Negotiating an ISDA Master Agreement in Today’s Market
” (Mar. 4, 2009). In this second article of a three-part series, we review commonly negotiated events of default in the Master Agreement and additional termination events in the schedule to the Master Agreement, in addition to suggesting tactics fund managers can employ when negotiating certain key provisions. The first article
provided background on the various documents required to trade swaps and explained the impact the Dodd-Frank Act has had on trading these instruments. The third article
will analyze the key considerations for funds when negotiating the collateral arrangements – the delivery of margin to mitigate counterparty risk – between two parties.