FICC's MBSD handled the liquidation of a gross position of $329 billion in par value of Lehman's book of "to be announced" mortgage-backed securities trades that were outstanding at the time of its bankruptcy. Working with all the dealers, banks and other firms with which Lehman had conducted trades, and acting as a "CCP for a day," FICC MBSD was able to net down and resolve almost 90% of the forward trades. Over the following few weeks, FICC gradually sold the remaining net obligations into the market with no losses assessed against MBSD members' clearing deposits and with no observed market impact.

Lehman's pending U.S. Government securities trades ran to $190 billion (gross positions) at the time of the bankruptcy. FICC's GSD guarantees the settlement of these trades once it accepts them for clearing. In order to make good on its guarantee, FICC had to close out the various positions, which ranged from repos to government bonds. FICC successfully closed out these positions without impact on customers.

Equities, Municipal and Corporate Bonds

NSCC, which is responsible for clearing and settlement of virtually all broker-to-broker trades in the U.S. in equities and corporate and municipal debt securities, faced total exposure of approximately $5.85 billion from Lehman Brothers at the time its accounts were closed.

NSCC's goal at this stage was to mitigate risk for its members and avoid significant disruption in the marketplace. This included processing and guaranteeing $3.8 billion in options exercises and assignments from The Options Clearing Corporation for the quarterly expiration on Friday, Sept. 19. The close out of these Lehman positions at NSCC is substantially complete. Most of these positions have been liquidated, and there are not expected to be any losses in excess of the Lehman clearing fund held, resulting in no losses to be allocated to other NSCC members.

A portion of Lehman's obligations at NSCC was successfully resolved when DTCC's subsidiary, The Depository Trust Company (DTC), took the lead in working with Lehman's pledgee bank to arrange for the release of $1.9 billion in securities, which were used to satisfy open trades at NSCC. As a result, NSCC did not need to go to the marketplace to purchase securities to complete these trades. In addition, DTC managed the net debit cap controls on Lehman's accounts throughout this period to limit any potential loss to the depository and its participants.

FICC and NSCC retained a third party adviser to assist in liquidating positions held by the clearing corporations. The third party adviser provided advice and helped determine the best strategy to hedge the portfolios, minimize risk and conduct an orderly liquidation without disrupting the markets.

EuroCCP

EuroCCP, a U.K.-based subsidiary of DTCC which is providing pan-European clearing and settlement services for multilateral trading facilities, also had to deal with closing out trading positions for Lehman Brothers International (Europe) just one month after its start of business and even before EuroCCP officially went into full production on Sept. 22.

EuroCCP suspended Lehman from new trade input on Sept. 15, but continued to settle as many of the open positions as possible with Lehman's agent banks so it could deliver the securities to other participants on the same day. Lehman had open trades in 12 markets and six currencies, totaling almost €21 million. About €5 million in trades were settled by Lehman's agents on Sept. 15.

The next day, EuroCCP ceased to act for Lehman once it became clear that Lehman's agent banks would no longer be settling the remaining positions. EuroCCP engaged a broker to close out the €16 million in remaining positions. EuroCCP settled with the broker on T+1, instead of the usual T+3 cycle, which accelerated the fulfillment of its obligations to participants who were awaiting delivery of securities. EuroCCP successfully completed its closeout of Lehman's open positions without the need to use EuroCCP's Guarantee Fund.

OTC Derivatives Trade Information Warehouse

DTCC also acted to minimize risk for its OTC derivatives customers from the Lehman bankruptcy. The actions included stopping the automated central settlement of credit default swap (CDS) payment obligations on Sept. 15 that were maintained in DTCC's Trade Information Warehouse (Warehouse) for counterparties of Lehman Brothers International (Europe) and Lehman Brothers Special Financing, Inc. DTCC also assisted counterparties in removing from the Warehouse more than 300,000 CDS contract positions that market participants held with Lehman.

On Oct. 21, DTCC also completed, without incident, the automated credit event processing of Lehman Brothers Holdings Inc. (LBHI) involving $72 billion of credit default swaps. DTCC calculated and bilaterally netted all amounts due on credit default swaps written on LBHI. This resulted in approximately US$5.2 billion owed from net sellers of protection on LBHI to net buyers of protection. The portion of this net funds settlement allocable to trades between major dealers was handled through the normal settlement procedures of CLS Bank International, DTCC's settlement partner for the Warehouse and the world's central settlement bank for foreign exchange.

DTCC's Comprehensive Risk Management and Strategy

With a 35-plus year history in clearance and settlement, DTCC was able to draw upon its proven experience in effectively managing and controlling risk associated with a financial firm failure. As part of its comprehensive risk process, DTCC regularly puts its risk and operating systems, as well as staff, through intensive testing that simulate the possibility of a crisis. These exercises involve simulating the steps DTCC would have to take to respond to a major financial firm failure. Even though it seemed like a far-fetched scenario at the time, on two occasions over the past 12 months, DTCC actually conducted tabletop exercises simulating the failure of a major investment bank. Members of DTCC's Board and representatives of various regulatory authorities participated in the second of these exercises as observers.

"Although we didn't really expect to have to put the experience we gained from those exercises to work any time soon, events proved otherwise," said Donahue. "They both provided highly useful practice runs for what DTCC and our market participants have been dealing with in recent months."