OTC Derivative Contracts in Bankruptcy: The Lehman Experience - NY Business Law Journal, by GuyLaine Charles

Abstract: In this article, Ms. Charles discusses the “safe harbor provisions” of the U.S. Bankruptcy Code that exempt Over-the-Counter (“OTC”) derivative contracts from certain debtor-protective provisions.  The article explains the standardized documentation of OTC derivative transactions and summarizes the contractual terms that allow the non-defaulting party to terminate, liquidate, net and set-off obligations notwithstanding the bankruptcy of its counterparty.  Ms. Charles then illustrates how the bankruptcy of Lehman Brothers Holdings Inc. and related debtors has provided a dramatic test of the safe harbor provisions in the context of the failure of a major financial institution, and how OTC derivative counterparties have relied on those provisions to limit their exposure to the Lehman debtors.