The meeting this coming weekend to finalize an agreement among 18 major swap dealers to wait 48 hours before terminating swaps and demanding collateral from a bankrupt TBTF bank is being hailed as a good step in the right direction. However, some corporate and buy-side swap market participants feel the two-day delay will not be enough to identify and rationalize all the legal entities within TBTF banks that act as counterparties.
“After Lehman, it took ages to sort out who owed what to whom,” said one swapper who had exposure to the failed investment bank. “If they sorted that out in advance, you probably wouldn’t even need the two days – everything would be clear up front.”
The two day delay is meant to allow the failed bank to enter bankruptcy efficiently, without being torn to pieces and having all its remaining collateral suck away before it can arrange to have some of its businesses continue on.
However, as evidenced when the Federal Reserve rejected the 11 so-called first filer TBTF banks in August, these firms have not made any real progress on identifying, rationalizing and combining their internal legal entities. Until they do, that two-day reprieve may not provide enough breathing room to get the transactions unwound successfully.