Calculating ISDA close out payments following early termination

Calculating ISDA close out payments following early termination

A recent decision by the Commercial Court in the Lehmans insolvency highlights the importance of following the termination provisions of International Swaps and Derivatives Association (ISDA) Master Agreements.

Original news

Lehman Brothers Finance S.A. (in liquidation) v Sal. Oppenheim jr. & cir. KGaA [2014] EWHC 2627 (Comm), [2014] All ER (D) 309 (Jul)

The claimant, Lehman Brothers, brought a claim for the balance of a sum which it contended was due from the defendant arising out of early termination of four option transactions governed by an ISDA Master Agreement, together with interest. The defendant had paid the claimant €1,849,968.99. The Commercial Court held, among other things, that the defendant had breached its contractual obligation to use the agreed market quotation formula to determine the sum due. Using that formula, a payment of €2,963,081.18 should have been made.

How did the issue arise?

Four transactions governed by an ISDA Master Agreement were automatically terminated following the entry into Chapter 11 proceedings of Lehman Brothers Holdings Inc (the claimant's parent company) in 2008. Oppenheim, the defendant, as non-defaulting party, calculated the close-out payment due (along with interest) based on the 'Market Quotation' method and made a payment of this amount to the claimant in July 2009. The claimant claimed

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