Many businesses use derivatives like currency or interest rate swaps or forward contracts for purchase of oil, gold, natural gas, wheat or other commodities to hedge exposure to unexpected rise or fall in values, interest rates or prices. The September 2008 collapse of Lehman Brothers, Inc. and its affiliates exposed global derivative trading and the use of such transactions in structured finance deals, sold to investors as safe and given triple A ratings.
Through bankruptcy court, the Bankruptcy Code prohibits a non-debtor counterparty in litigation from exercising any rights and remedies against the debtor or its property or from continuing litigation against the debtor.
Derivatives continue to be traded on public exchanges such as the New York Mercantile Exchange (NYMEX), but the majority of transactions are "over the counter" (OTC) trades negotiated directly between private parties that are exempt from regulation by the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC) or other governmental regulatory bodies.
With Lehman, because its bankruptcy disrupts the financial markets, the Bankruptcy Code safe harbor provisions permit counterparties to:
• terminate securities, commodities, forward, repurchase, and swap agreements; exercise contractual, exchange-specific or other rights to accelerate, liquidate, terminate or set-off under the parties' securities and derivatives contracts;
• exempt pre-bankruptcy petition settlement payments, margin payments and other transfers made in connection with securities and derivative contracts from avoidance as a preference or a constructive fraudulent conveyance when such payments are made to or through certain categories of persons.
