The Reserve Bank of India on Tuesday held discussions with banks and the Fixed Income and Money Market Dealers' Association on the fate of the interest rate swaps and primary dealer business of Lehman Brothers, the Wall Street bank that has succumbed to financial turbulence and has filed for the world's biggest-ever bankruptcy protection.
Prior to the meeting, the FIMMDA had already started working on the modalities to terminate the deals and square off the positions, sources said.
According to banking sources, the RBI will first assess the level of exposure of the banks to such derivatives, mainly interest rate swaps. Interest rate swaps are structures under which the interest liability of an entity is changed from fixed rate to floating rate or vice versa depending on the interest rate cycle. Banking sources estimate the size of the deal, across banks, to be in the region of Rs 2,000-3,000 crore.
Bankers close to the development said these deals should ideally be netted or squared-off on the date of the bankruptcy under the International Swap Dealers' Agreement. The ISDA is the quasi-legal agreement which serves as the basis for all over-the-counter 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 counter-party to such deals or transfer the deals to the other counter-party.
Sources close to the development said if the exposure was less, the RBI might also direct the banks to absorb the losses, if any, in the September quarter balance-sheet since the gains in such deals were notional.
The primary dealer business was likely to merge with any other party, while the NBFC licence might be cancelled, said sources. They, however, pointed out that Lehman had a large exposure to the real estate sector in India and this business might be taken over by some other entity. The RBI is expected to decide on the issue soon.