Unwind Lehman swaps: RBI directs banks

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The Reserve Bank of India (RBI) 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 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.