The Lehman flip clause flap

The decision of a US bankruptcy court to void contractual provisions that shield investors from the credit risk of swap counterparties in structured finance deals has put the legal systems of England and the US on a collision course. It also has potential implications for existing and future structured credit transactions.

On January 25, the US Bankruptcy Court for the Southern District of New York reached a potentially significant decision touching upon the administration of Lehman Brothers. Judge James Peck deemed contractual provisions – known as flip clauses – in the documentation of a series of credit-linked notes arranged by Lehman were invalid ipso facto clauses. Voiding these provisions could have implications for legacy and future structured credit deals in which US dealers act as swap counterparties. But