The UK Investment Management Association (IMA) has written to the Financial Services Authority (FSA), urging the regulator to address the weaknesses in London’s cash equity market exposed by the collapse of Lehman Brothers.
The IMA said Lehman’s bankruptcy resulted in a very large number of failed trades submitted to the firm by investment managers, and that the complexity of resolving managers’ and clients’ positions in London far exceeds that in other financial centres. There are more than 140,000 failed trades across global markets involving Lehman Brothers International Europe (LBIE), according to PricewaterhouseCoopers, the unit’s administrator.
The weaknesses highlighted by the IMA include Lehman’s use of a non-segregated account for exchange trades, preventing clients from benefiting from clearing house default rules, and the freezing of trades within Crest, the UK’s equity settlement system, for up to nine weeks.
Euroclear UK and Ireland, which operates Crest, has insisted that Lehman-related trades were not frozen for up to nine weeks. Although trades were frozen on 15 September, to prevent a "serious market impact" caused by very large numbers of ‘incorrect’ settlements, Euroclear directed Lehman counterparties to remove all settlement instructions from the system on 8 October, following agreement by the FSA. Euroclear added that information had been made available regularly to all customers and other interested parties "on the steps being taken to help them through the Lehman crisis".
The IMA also called for the establishment of business terms between brokers and clients that clearly outline both parties’ needs, and procedures to take control of client funds promptly following a broker default.
“The Lehman default has resulted in a state of chaos for managers – operationally, legally and from a risk perspective,” said Richard Saunders, CEO of the IMA, in a statement. “As things stand, if another broker were to default, the same problems would arise again. Reforms are needed to ensure that defaults within the UK equity market can be dealt with swiftly and authoritatively, and that investors obtain early certainty about their trades and associated market risk.”