RBI to discuss Lehman's interest rate swaps, primary dealer business

The Reserve Bank of India is in the process of holding parleys with banks and Fixed Income and Money Market Dealers’ Association (FIMMDA) to discuss the fate of Lehman Brothers' interest rate swaps and primary dealer business.
 
Lehman Brothers have filed for bankruptcy under Chapter 11 in the United States and its global subsidiaries are expected to follow soon. Lehman operates in India as an investment bank registered under Securities and Exchange Board of India and as a non-banking finance company and primary dealer registered under the RBI.

According to banking sources, the RBI will first assess the level of exposure of the banks in such derivatives – mainly interest rate swaps. Interest rate swaps are the structures under which the interest liability of a bank and or a party is changed from fixed rate to floating or vice versa depending on the interest rate cycle. Banking sources estimate the deal sizes across banks to be around Rs 2,000-3,000 crore.
 
Bankers close to the development said that these deals should ideally be netted (squared off) as on date of bankruptcy under the International Swap Dealers’ Agreement (ISDA). ISDA is the quasi-legal agreement which serves as the basis for all over-the-counter (not traded under approved exchange)  derivative deals.
 
However if Lehman continues with its Indian operations in some way either as a standalone business or by merging with some other entity, it could still be a counterparty to such deals or transfer the deals to the other counterparty. Sources close to the developments said that if the exposure is less, the RBI may also direct the banks to absorb the losses if any in the September quarter balance sheet of the banks since gains in such deals are notional.

The primary dealer business is likely to be merged with any other party while the NBFC license may be cancelled, said sources . However sources pointed out that  Lehman has huge exposure to real estate in India and thus the business may also be taken over by some other entity. The RBI is likely to take a decision soon.