As part of the Lehman Brothers Inc. ("Lehman") bankruptcy, the Bankruptcy Court for Southern District of New York ("Court") determined that three banks’ (the "Claimants") claims in relation to repurchase agreements ("repos") were not "customer claims" entitled to customer protection under the Securities Investor Protection Act of 1970 ("SIPA").

The Claimants entered into repurchase agreements as Sellers with Lehman as the Buyer through bi-lateral trades (i.e., the securities were not in a tri-party account and the Claimants did not hold the securities for Lehman). Under standard terms of the Master Repurchase Agreement ("MRA"), which were used in the repos, Lehman could use or rehypothecate the Purchased Securities at its discretion and did not have any duty to segregate the Purchased Securities.

The Court found that the Claimants did not have "customer claims" entitled to SIPA protection because Lehman did not hold the securities for the Claimants; instead, Lehman had full authority to use or re-pledge the securities as it saw fit. Lehman was contractually obligated to return the securities under the MRA, but the Court distinguished this obligation from a requirement to hold the securities on behalf of a customer.

The Court also distinguished this case from prior precedents that found repurchase agreement claims to be covered under the SIPA because those prior cases involved situations where a firm covered by the SIPA was actually holding the securities for the customer in a hold-in-custody (HIC) arrangement.

The case will limit the protection of repo sellers who enter into bi-lateral repos with registered broker-dealers. If the broker has no obligation to hold the securities on behalf of the seller, then the claims could fall outside of SIPA protection.