Cross Border Insolvency Issues

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Clementine Chandler
5 years ago
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1 Cross Border Insolvency Issues Experience from MF Global and Lehman Brothers 15 May 2012 Patrick Cowley

2 Global Presence Lehman Brothers 1 st 8 th Ranking in US corporate bankruptcy history MF Global Pre- liquidation Over 7,000 legal entities in more than 40 countries Pre- liquidation Operated in 12 countries with more than 130,000 active accounts Resulted in more than 75 separate and distinct bankruptcy proceedings around the world. Bankruptcy proceedings started for group companies in 6 key jurisdictions including Hong Kong, US, UK, Singapore, Canada and Australia. 2

3 Client Assets intra-group dependencies MF Global BONY (A third party broker) US Exchanges Omnibus accounts MFG HK (In Liquidation) Liquidate/ Transfer instructions Clients MFG Inc (SIPA ) Back office support X Montreal Exchange Liquidate/ Transfer instructions MFG Singapore (In Liquidation) Operational Issues Difficult to identify the required authority to execute client instructions Dependency on group companies to perform settlement function Dependency on group companies to provide trading data Legal Issues Limited authority governed by local regulations and laws Repatriation of client assets; Group company vs. Third party broker 3

4 Client Assets Prime Brokerage issues Lehman Brothers Operational Issues Other relationships Prime brokerage agreement HK Exchange LB Asia (In Liquidation) Omnibus accounts LBIE (In Administration) Prime brokerage accounts Custody agreement Other relationships Prime brokerage model - hypothecation and rehypothecation of client assets Communication and coordination between liquidators and administrators Sales of business > limited access to former employees and transaction data Legal Issues Substandard IT system dependency or incomplete legal documentation Extended liens Location of assets -> Client assets protection regimes Hedge Funds/ Investment Funds Counterparty Forced liquidation of open positions > substantial claim 4

5 Client Monies treatment in different insolvency regimes Germany UK LB Bankhaus (Insolvency proceedings) US$1 billion of client monies Client Monies LBIE (In Administration) Client Monies Legal Issues Different legal systems Different insolvency regimes 51% of total client monies pool LBIE claimed LB Bankhaus for segregation of client monies LB Bankhaus administrator disallow the claim and subordinated the claim On going litigation in the Court of Frankfurt Clients Disputes over client monies pool Supreme Court judgments Regulatory Issues Different regulatory frameworks and client money regimes 5

6 Assets Recovery policies and politics Lehman Brothers LB Bankhaus (Insolvency proceedings) Dividend distribution Depositors Legal Issues Recognition Territoriality approach Enforcement Dividend distribution Loan Participant LB Asia (In Liquidation) External factors Domestic politics and international diplomacy US$500m Loan Taiwan Company Principle + Interest 6

7 Collateralised Debt Obligations Flip Clause LBSF Swap SPV Note Transaction Note Holders Trustee United States Bankruptcy Court Collateral UK Supreme Court Conflicting decisions 7

8 Options available Adoption of UNCITRAL Model Law Global Protocols Bilateral negotiations / settlement Litigation 8

Thank you Patrick Cowley Principal, Restructuring Services Tel: + 852 2140 2836 Fax:+ 852 2869 7357 patrick.cowley@kpmg.

All rights reserved. Printed in Hong Kong. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

10 Thank you Patrick Cowley Principal, Restructuring Services Tel: Fax: patrick.cowley@kpmg.com 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in Hong Kong. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

1. Introduction. This information relates to the model set out in the FCM Rulebook and not to the model set out in the General Rulebook.

1. Introduction. This information relates to the model set out in the FCM Rulebook and not to the model set out in the General Rulebook. IMPORTANT NOTICE: In providing this information, the Clearing House (as defined below) is not making any recommendations or providing any advice (commercial, legal or otherwise) to any clearing member,