WASHINGTON (10/10/14)--Chief executives from 18 large banks from the United States, Europe and Japan are expected to agree to delay termination of derivatives contracts, according to a report in The Wall Street Journal.
The banks will likely agree in principle to wait up to 48 hours before terminating the contracts and collecting associated payments from a troubled financial institution at a meeting at the Federal Reserve Saturday.
"When Lehman filed for bankruptcy protection in September 2008, it had tens of thousands of individual derivatives positions. Trading partners sought immediately to close out swaps trades with the firm and in many cases demanded the return of collateral, a process that took years to unwind," reads The Wall Street Journal report. "Billions of dollars of swap-termination payments were made as a result of the firm's failure."
According to the report, a delay would give regulators time to transfer a failing institution's assets and obligations into a "bridge" company, which would remove the need to unwind derivatives contracts or undertake asset sales during difficult times.
The New York Times reports that banks and their representatives believe these changes could "go a long way toward ending the too-big-to-fail problem" by allowing a bank to wind down in an orderly fashion.
Derivatives contracts currently make up a $710 trillion market, and more than 90% of those contracts would be affected by the new protocols, should the bankers agree, according to The Financial Times. Institutional investors on the other side of the contracts have warned they cannot voluntarily give up the right to cut off business because of a fiduciary duty to protect their investors' interests.
Per The Wall Street Journal, the changes would not go into effect until 2015.
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