Emergency Trading Session ????

[pamela]

Could someone explain to me the Emergency Trading Session that took place Sunday? Here are a few paragraphs about this from a UK paper...


20.00

The Federal Reserve calls an emergency trading session to allow derivative traders to close open positions with Lehman. Wall Street dealers allowed to trade credit, equity, rates, foreign exchange and commodity derivatives for two hours, with the aim of reducing risk associated with a potential bankruptcy filing.

21.06

The International Swaps and Derivatives Association extends the special trading session by two hours to cut the risk caused by Lehman's impending bankruptcy. Traders rush to ensure Lehman's toxic assets do not flood the $455 trillion global derivatives market.

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/09/16/cntimeline116.xml



And from Bloomberg yesterday... http://www.bloomberg.com/apps/news?pid=20601087&sid=aNMh_8NRE6QM&refer=worldwide

Banks and brokers today held a session for netting derivatives transactions with Lehman, or canceling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight.

``The purpose of this session is to reduce risk associated with a potential Lehman'' bankruptcy, the International Swaps and Derivatives Association said in a statement today. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.

*****

I'll be the first to admit that I don't understand the workings of Wall Street. This sounds strange to me though, as if the Big Dogs were allowed to open up the store for a few hours yesterday to get their asses covered before the shit hit the fan today. How is that legal? Could someone explain this to me?

[TomClash]

1. Goldman handled some aspects of lehman's trades on Monday

You are correct. But these are Big Dog trades. Because Lehman was about to file for bankruptcy, contracts involving derivatives have to be redone, canceled or "netted out". That means someone either fulfills Lehman's obligations or someone else takes a loss/gain on futures, options or swaps - deals "derived" from the underlying stock or bond. These are complicated transactions - there are often several derivatives come from one pool of bonds/stocks with many institutional participants. If they don't unravel it in an orderly way, the whole derivatives market collapses.

I hope that helps.

[pamela]

2. Thank you, Tom

I was following all the financial stories and this aspect really stood out to me. I'm somewhat financially illiterate so I figured it was just something I didn't understand. It just sounded *hinky* to me, as if the Wall Street big wigs had their own private "cover your ass" session while the small, private investors had to wait until the Markets opened Monday and take their losses.

Your explanation helped clarify my confusion. Thank you for taking the time.

[Phoebe Loosinhouse]

3. I think the whole derivative market SHOULD collapse

smoke and mirrors.