RBI directs banks to unwind transactions with Lehman

RBI directs banks to unwind transactions with Lehman

Mumbai: India’s central bank has directed banks to unwind their interest rate swap (IRS) transactions with Lehman Brothers, three bankers familiar with the development told Reuters on Friday.

The Reserve Bank of India (RBI) had talks with banks this week to ascertain Lehman’s exposure in the local IRS market, they said.

“Yes. It’s true. They have told us to do so," said one banker, when asked about the central bank’s directive.

Lehman, once the fourth-largest US investment bank, filed for bankruptcy protection this week, having collapsed under the weight of its exposure to the subprime mortgage-related securities.

A spokeswoman for the Reserve Bank of India said: “Primarily, it is a bilateral issue. As a market regulator, we are interested in the market functioning in a smooth and orderly manner. And, therefore, we are facilitating it."

The banker said the unwinding should conclude by next Monday or Tuesday.

“Settlement will be within a day or two. The value curve used will be Tuesday (Sept. 16)," he said, referring to the rates at which the transactions would be unwound.

Banks would unwind the IRS transaction by cancelling the position with Lehman and covering the transaction with a fresh counterparty, another banker said.

On Tuesday, the central bank directed Lehman’s Indian primary dealership not to undertake transactions in government securities as a primary dealer in the primary market.

It had also said Lehman Brothers Capital, a non-banking financial company, would need prior approval from the central bank before contracting any direct or indirect liability from any institution in India or abroad or making any foreign currency remittance.