The unintended impact of swap stays on financial stability

In a world where swaps leverage is shrinking, bankruptcy stays could do more harm than good, says economist

Stays in over-the-counter derivatives markets have had a complicated evolution. Prior to the failure of Lehman Brothers, policymakers had long exempted derivatives from stays – which essentially rescind creditors’ contract termination rights and instead grant them to the debtor or resolution authorities – to reduce the risk of spillovers from a defaulting firm to its derivatives counterparties. Since then, they have changed their perspective, seeing creditor termination rights as potentially