UPDATE 2-Fears about Lehman CDS deadline overstated

(Adds comment from ISDA in paragraphs 15-16)

By Karen Brettell

NEW YORK, Oct 21 (Reuters) - Tuesday's deadline to settle an estimated $400 billion in credit default swaps on Lehman Brothers failed to trigger feared havoc in the market, and derivatives analysts said the concerns had reflected misunderstandings about the process.

Tuesday is the final day that credit default swaps on Lehman's LEH.N(LEHMQ.PK) debt can be paid out.

"It seems like a non-event," said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California. "There's a couple of hedge fund rumors, but I am sure they are more general redemption issues than Lehman specific."

Speculation had mounted in recent sessions that banks, hedge funds and other sellers had been hoarding cash to pay out a massive 91 percent loss on the contracts.

But experts say the fears were exaggerated and in any case, losses may not be made public until companies post their next quarterly earnings in the months to come.

"There's been a lot of talk about this, but I don't think it's that material, there has been a lot of misunderstanding," said Sivan Mahadevan, head of credit derivative and structured credit research at Morgan Stanley in New York. "I think it's been overdone."

Credit default swaps are insurance-like securities that protect against the risk of a borrower defaulting on debt.

The $55 trillion market has created concerns that it may pose systemic risks as its private nature makes it impossible to know who holds what risk, and the size of any exposures.

Part of the worry about the Lehman swaps is the $400 billion in insurance outstanding, although the figure overstates the amount of money that will actually be transferred.

GOOD MARKS FROM ISDA

The Depository Trust and Clearing Corporation, which clears the vast majority of trades in the over-the-counter market, said this month only $6 billion may actually change hands.

This is because large players in the market, such as dealers and some hedge funds, have both bought and sold protection, subsequently taking both gains and losses on Lehman's default that will offset each other.

For companies with net exposure to pay out protection, much of the pain of settling the swaps has already been taken.

"If you were the seller of protection, you had to pay collateral and that collateral was changed on a daily basis, based on where Lehman's bonds were trading," Mahadevan said.