Jon Cunliffe: Central clearing and resolution - learning some of the lessons of Lehmans

Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, at the FIA International Derivatives Expo 2018, London, 5 June 2018.
Central bank speech  | 
06 June 2018

When Lehman Brothers failed in September 2008, the bank was a major player in the worldwide derivatives market. Its $35 trillion portfolio of both cleared and uncleared derivatives represented around five percent of the global derivatives market.

Following its collapse, Lehman’s uncleared derivative counterparties filed claims totalling $51billion in relation to its derivatives business. In the event, it was four years before the first payments were made to these uncleared derivative creditors, and claims against Lehman’s are still ongoing.

The contrast with Lehman’s cleared derivatives portfolio in CCPs is stark.

Lehman Brothers UK subsidiary had a $9 trillion cleared interest rate derivatives portfolio at LCH, comprising over 65,000 trades. In the period of extreme market turmoil following the firm’s collapse, it took three weeks, rather than four years, for LCH to hedge and close out the entire $9 trillion position. It used only around a third of the collateral margin Lehman had deposited at the clearing house.

LCH was only one example of the ability of CCPs to dampen the shock of a major credit counterparty failure. The firm had derivative portfolios at a number of CCPs across Europe, the US and Asia. All were auctioned, liquidated or transferred to other clearing participants by the CCPs in weeks, not years. And, with only one minor exception, this was achieved without exhausting the margin collateral the CCPs held.

I mention this aspect of the Lehman failure because it illustrates the drivers behind two of the key regulatory reforms we have made as a result of the financial crisis.

First, incentivising and where appropriate mandating the greater use