The IMA has written to the FSA calling for urgent action to address the shortcomings in the London cash equity market revealed by the collapse of Lehman Brothers International (Europe).
The Lehman collapse resulted in a very large number of failed trades which had been placed with Lehman's brokerage operation by investment managers. In contrast to the handling of previous defaults, the resolution of the managers' and their clients' positions will be a long process, the complexity of which far exceeds that experienced in other financial centres.
This situation is the result of the interaction of a number of complex and technical factors, some derived from the fragmentation of trading venues post-MiFID. But the IMA identifies a number of specific issues needing to be addressed, including:
- A market structure which allowed Lehman to use only a non-segregated account for exchange trades, thus preventing clients from getting the benefit of the clearing house default rules;
- A freezing of trades within Crest, the UK's equity settlement system, for up to 9 weeks, for reasons which are still unclear;
- The need for terms of business between brokers and their clients which deal fairly and transparently with the needs of both parties. IMA has, for some months, been promoting model terms which would clarify terms in the market and ensure proper protection of investor interests. It now calls upon the FSA to supplement this with regulatory change.
- Effective procedures - which may involve new powers for the FSA - to take control of client monies promptly in the event of a default.
Richard Saunders, Chief Executive of the IMA, said:
"The Lehman default has resulted in a state of chaos for managers - operationally, legally and from a risk perspective. 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. The work should keep investor interests foremost and not be overly concerned with the impact on market intermediaries. We call upon the FSA to lead a review as matter of urgency to secure this outcome, which we see as essential to maintaining market confidence."
A copy of the paper sent to the FSA is here.
