Metavante court ruling retains swap safe harbor-ISDA

NEW YORK, Sept 30 (Reuters) - The safe harbors attributed to derivatives in bankruptcy are not threatened by a recent, widely-watched decision in a New York-bankruptcy court, according to an internal memo by a trade association.

The decision by the U.S. Bankruptcy Court for the Southern District of New York earlier this month regarding payments on an interest-rate swap Metavante Technologies MV.N held with Lehman Brothers LEHMQ.PK is in line with existing derivatives documentation, the International Swaps and Derivatives Association (ISDA) said on Wednesday in the memo obtained by Reuters.

The ruling sparked some concern it would set a precedent that challenges the enforceability of existing derivatives agreements and override safe harbor provisions of the contracts in bankruptcy.

However, "the court in fact is saying that the Metavante agreement with Lehman is alive and well, and available to the parties' continuing rights in it, subject to the U.S. Bankruptcy Code," ISDA said in the memo.

The court found Metavante, a provider of banking and payment technology, must continue to make payments on the interest rate swap after it chose not to terminate the swap in the year following Lehman's failure.

Metavante had argued it should not be required to make payments on the contract because Lehman's default left it without an effective counterparty, and as the non-defaulting party it had the option to wait to terminate the trade until market conditions favored it. For details, see [ID:nN23391877]

Derivatives contracts have a provision that allows parties to suspend payments when their counterparty defaults.

"The case is one of a very small number of U.S. cases in which a court has decided that a party has delayed too long in using the safe harbors," ISDA said.

Derivatives, contracts that are based on the value of an underlying asset, benefit from safe harbors that allow trade counterparties to terminate the contracts in the event of a default, and collect collateral backing the trades.

The contracts don't typically specify a deadline for announcing an intention to terminate the trade. However, the agreement does not specify the right of a non-defaulting party "to stand still forever on these mechanisms," ISDA said.

(Reporting by Karen Brettell; Editing by Andrew Hay)