On May 11, HM Treasury published a report entitled: “Developing effective resolution arrangements for investment banks” (the Report). The Report is the result of Treasury working with a specialist Advisory Panel of investment banking, insolvency, legal and other experts, as well as the UK Financial Services Authority and the Bank of England. It sets out the UK Government’s initial thinking on various reforms which may need to be considered in developing effective resolution arrangements for investment banks. It responds directly to the issues that were highlighted by the failure of Lehman Brothers, including the treatment of client money and assets, and the treatment of clients’ open or unreconciled trading positions. It also examines what can be done to make the process of insolvency itself more effective, and limit the damage that may be caused by an investment bank failure.
Chapter 2 of the Report outlines the trading, clearing and settlement issues being considered. Client money and client assets issues are addressed in chapter 3, and insolvency proposals are set out in chapter 4.
A key element of the Report is addressing misconceptions on how the US and UK insolvency regimes respectively have dealt with the Lehman Brothers failure. It states:
There has been some market commentary to the effect that customer protections and insolvency arrangements in the US have been operating more effectively than the UK arrangements in the context of the failure of Lehman Brothers. The industry experts assembled through the Advisory Panel have been clear that this perception is misconceived.
The Government is committed to working with the Advisory Panel and other industry experts, to explain, and where appropriate dispel, any of the misconceptions around how the US and UK regimes have operated with regard to the Lehman Brothers failure.
The comment period lasts until July 10. The next stage will be more detailed consultation as appropriate, including more detailed Treasury consultation in the fall of 2009 outlining possible market, regulatory and legislative solutions.