Investment managers call for urgent UK reform following Lehman 'chaos'

The UK's Investment Manager's Association has called for urgent reform of stock trading and settlement rules after the 'chaos' inflicted on the markets by an escalation in failed trades following the overnight collapse of Lehman Brothers.

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Investment managers call for urgent UK reform following Lehman 'chaos'


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Richard Saunders, chief executive of the IMA, says: "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."

Some of the problems in unraveling outstanding trades has stemmed from fragmentation of trading venues post-MiFID, says Saunders, but others relate directly to shortcomings in the London market.

The IMA has written to the Financial Services Authority calling for urgent action to address specific failures in the operation of the UK market. These include:

  • 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 nine 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;
  • * Effective procedures - which may involve new powers for the FSA - to take control of client monies promptly in the event of a default.

"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," says Saunders. "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."

Euroclear, the operator of the UK's Crest settlement system, says all settlement instructions related to Lehman Brothers were first frozen and then deleted, when it became apparent "that a market solution, as to how OTC trades and their related settlement instructions in Crest should be handled, was not going to be reached".

In addition, says Euroclear, "the large number of unsettled instructions in the Crest system were causing risks for the Crest system and its participants, impacting operational efficiency and causing uncertainty for Crest participants".

Euroclear stresses that all actions were taken in approval with the FSA and that the status of the underlying contracts would be unaffected by the deletions of the settlement instructions. "Counterparties would need to continue to work with the administrators in relation to such contracts," says the depository.

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