Treasury has published a consultation paper on resolution powers for failing investment banks. The paper looks at issues the Lehmans' failure highlighted and discusses options for reform. The Government believes the UK insolvency and administration regimes are fundamentally robust and fit for purpose so is looking just at an area where normal insolvency procedures could be improved on. The paper looks at:
- issues around clearing, trading and settlement associated with cross-border broker insolvency: Lehmans illustrated the complexity of issues around the treatment of open positions when a broker goes into default. Treasury is looking at principles it should have in mind for future change, including transparency, a greater use of clearing and more focus on collateral management and counterparty risk as well as regulatory requirements for segregated client accounts for clearing and settlement. It looks in more detail at some challenges, such as trades executed outside recognised exchanges and whether it is more appropriate to have a market-led or statutory approach to contractual certainty;
- prompt return of client assets and where effective segregation has not happened or rehypothecation has occurred: this chapter looks at practical problems with the regime. Treasury thinks the market can do a lot to address these risks, supported by regulation. Among the issues it is considering is how to get better clarity on the basis on which assets are held as there are some complex arrangements that make legal categorisation difficult. The paper also covers the possibility of having a pool of money in insolvency based on different categories of client rather than a single pool; and
- a more timely and effective response mechanism to investment bank failure: this section looks at various possibilities, including requiring firms to have full contingency plans for their own failure and introducing continuity of service obligations on administrators and other relevant third parties.
The paper does not contain any firm proposals as it seeks views on the principles behind potential changes and asks for ideas on what it should consider under various issues The consultation closes on 10 July.