OK, I did quite a bit of reading about the 2002 ISDA Master...

OK, I did quite a bit of reading about the 2002 ISDA Master Agreement last night, which was the basis for NGF and Lehman's hedge. It seems that it might require some payments (or deliveries) from NGF, after all.

The contract makes specific provision for what happens when one of the counter-parties goes into bankruptcy. It indicates that the non-defaulting party can choose to call for payment of the "close-out amount", which is essentially the net market value of the current position, plus damages for the cost of going off and finding alternative positions. That's where the non-defaulting party is "in-the-money".

In NGF's case, their position is "out-of-the-money" and is also executory, in the sense that it requires delivery of gold (or cash settlement of the net amount between the $A gold price and $875) over a period of time. It's not quite so clear what happens when you have such a forward contract, where the non-defaulting party is out-of-the-money. The problem with using the "close-out amount" procedure is that it would potentially bring forward and crystallize the entire loss on the contract, which might (or might not, depending on future gold price) be realized over a period of time.

The non-defaulting party does not appear to be compelled to call for close-out and, from what I can gather, the defaulting party cannot call for close-out. So, perhaps NGF is thinking that they can just offer to deliver into the forward contracts, based on the existing schedule, and if Lehman is finally wound-up, they won't have to deliver on the balance. I don't know. [I read a case about Enron, and apparently it took 3 years to wind-up that group.]

In any event, Lehman had asked for the right to assign its hedges and other derivatives to 3rd parties. NGF and about 100 other parties (including some very big names) have objected to the assignment. NGF says their contract prevents assignment without consent. That may well be enough, or the judge may require that NGF provide some other good reason why they should not be compelled to accept assignment. Unknown.

So, after all of that, I guess I'm now in the camp which says the hedge is in the Land of the Living Dead. Buried for the moment, but with the potential to rise from the grave at midnight. Hence, the continuing uncertainty in the sp, I guess.

I'll be interested to see if the quarterly can throw anymore light on things, but I doubt it. I think the next thing will be what happens in the action for NGF to resist assignment.