US regulators, who have previously condemned the industry's crisis planning as inadequate, had demanded banks come up with a plan to stop their counterparties terminating derivatives contracts in the event of a crisis. The banks portrayed the success of the talks as a rare positive example of industry collaboration.
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Isda is due to announce the agreement to change its "protocols," which govern the $700tn market, in the next few days. They will take effect from January 1, 2015.
According to a report from the US Government Accountability Office, 80 per cent of Lehman's derivatives counterparties closed out their deals with the bank within five weeks of its bankruptcy filing.
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That, in theory, helped the companies mitigate their counterparty risk with the failed bank but it also meant that Lehman's estate had to spend years in court trying to claw back collateral from its partners.
"One of the problems with Lehman was when there was a failure of one subsidiary clients of derivatives trades took funding away and took business away, adding to market instability," said one bank negotiator.
This also made it harder to find buyers for the rump of Lehman. The current thinking among regulators is that the core of a failing institution should be preserved. Although shareholders would be likely to be wiped out, the operating company would be recapitalised or sold to mitigate the shock to the broader financial system.
"You have the financial sector absorb the losses but you have the company stay in business," said another industry negotiator. "Assuming it gets signed up, it's a very important step in ending 'too big to fail.'"
The concept of "too big to fail" has become hugely controversial since the financial crisis when AIG was bailed out by the US government because of fear of the consequences of its failure.