Calculations on ISDA close-out: Lehman Brothers Finance SA (in liquidation) v Sal Oppenheim jr & cie KGAA

This case provides further guidance in relation to how payment on early termination of a 1992 ISDA Master Agreement should be calculated where automatic early termination applies, in particular as to the meaning of the provisions dealing with market quotations and whether they require parties to obtain live quotations or historic valuations.

The claimant (Lehman) and the defendant (Sal Oppenheim) entered into four option agreements under the umbrella of a 1992 ISDA Master Agreement, pursuant to which the sums payable between the parties were calculated by reference to the Nikkei 225 Stock Average Index. The parties elected for the automatic early termination provisions of the ISDA Master Agreement to apply, and consequently the ISDA Master Agreement terminated at 01:54 New York time on Monday 15 September 2008, when Lehman’s credit support provider (Lehman Brothers Holdings) filed for bankruptcy.

That was mid-afternoon in Japan, but, by coincidence, the Japanese exchanges were closed for a public holiday until 16 September 2008. Once they reopened, it was clear that there had been a substantial fall in the Nikkei from its closing position on the previous business day, Friday 12 September 2008. The effect of the fall on these specific transactions was that the value of the options in the hands of Sal Oppenheim had risen…

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