In his Pre-Budget Report delivered on 24 November 2008, UK Chancellor of the Exchequer Alistair Darling announced the Government’s intention to introduce special insolvency procedures for investment firms holding client assets or client money.  

The procedures will be introduced by secondary legislation under the Banking Bill (which was introduced into Parliament in October 2008) following a government sponsored review by an expert liaison group.  

The review, to be concluded by summer 2009, will consider, inter alia:  

  • To which firms the new procedure should apply;
  • The treatment of unencumbered client money and client assets;
  • The treatment of client money and assets posted as collateral;
  • Arrangements for allowing temporary continuation of brokerage activities (including matching unsettled trades); and
  • How an insolvency procedure should work in the context of firms covered by the new rules.  

The purpose of the reform is to address concerns over the recovery of hedge fund and other investor client assets held with London investment banks following the collapse of Lehman Brothers and delays in accessing assets held by Lehman Brothers International (Europe), which is under administration. It can be anticipated that there will be extensive debate and no predictions can be made at this time as to the detail of any new rules. Until new legislation comes into force, the current regime, which is perceived to be unsatisfactory, will continue and so current initiatives, both by hedge funds and prime brokers, to address concerns about exposure will remain relevant, at least in the short term.  

The full text of the report is available on: http://www.hm-treasury.gov.uk/prebud_pbr08_repindex.htm