At 1:45am on 15 September 2008, the unthinkable happened as the US’s fourth largest investment
bank, Lehman Brothers, filled for Chapter 11 bankruptcy.
Five years later, the financial world is still living in the
shadow of this landmark event. Since then, a flood of
regulations has touched all aspects of the industry,
from the most straightforward retail investment to
complex derivatives trading in investment banks.
As the world soon learned, the collapse of an
investment bank is not just of concern to its
shareholders, employees and clients, many though
these may number. From the moment Lehman failed,
the complex web of interdependencies across the
financial world began to unravel and panic reigned over
markets as banks, brokers and investors desperately
sought to establish their position, many unsure of
whether they were still solvent.
When the dust settled, it became clear that the financial
markets could not return to the way they previously
operated and international governmental and regulatory
co-operation was needed to re-write, re-build and
re-direct. A year after Lehman collapsed, the Group of
20 leading nations met in Pittsburgh to forge a new era
of financial regulation. Since then, national and
supranational regulators have been busily working to
reform many aspects of the market, not least of which is
the trading of OTC derivatives.
The OTC derivatives market was seen by regulators as
one of the primary causes of the chaos that followed
Lehman’s demise, as the contracts being dealt were
largely hidden away where regulators could not identify
risks in the system. Equally, archaic methods of
recording and dealing in derivatives led to widespread
panic in the aftermath as firms no longer knew if their
counterparties were insolvent.
While many steps have already been taken, and more
work is still to be done, can regulation really make
markets safer and prevent a future catastrophe?
To find out, The TRADE Derivatives asked five
experts to consider the question from their
Lehman’s long shadow
n The TRADE Derivatives forum
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