A spectacular event in August 1996, apart from the Olympics in Atlanta, was the closure of two derivative product companies. The first, Fisher King Derivative Products (Fishco), a termination vehicle, was wound up when its parent Fisher King & Co fell below BBB investment grade.
That forced the termination of over 500 interest rate and currency swaps, caps, floors and other structures, with more than 200 counterparties, totalling over $100 billion in notional principal amount.
The market was hit by a wall of demand for close-outs within the next 10 days, during the least liquid month of the year. The $800 million of collateral posted by Fisher King with Fishco to cope with just such an event, together with its core capital of $100 million, had been well above the mark-to-market value of Fishco's exposure to its clients.
But in the subsequent market disruption, spreads on over-the-counter derivatives widened so far that mid-market close-out values were highly unstable. Disputes about the mid-market price paralyzed the close-out beyond the 10 days prescribed by Fishco's wind-up schedule. Irate counterparties reached for their lawyers, and immediately reviewed their master agreements with all other triple-A derivative product companies (DPCs).
Within days the market received a second shock.