Dossier Lehman. Point d étape. Traitement des suspens UK

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Mervin Pearson
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SSP. 13/10/2008 Dossier Lehman Point d étape Euroclear UK & Ireland Limited (EUI) This note is provided for information purposes only and does not constitute legal advice.

1 SSP. 13/10/2008 Dossier Lehman Point d étape Euroclear UK & Ireland Limited (EUI) This note is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this note. Euroclear UK & Ireland Limited (EUI), which operates the CREST settlement system in the UK, has, following consultation with the FSA and PwC (the administrators of Lehman Brothers International (Europe) (LBIE)) instructed all CREST members (including LBIE) to withdraw all settlement instructions relating to unsettled cash bond and cash equities trades with LBIE that were due to settle within CREST but have failed to settle following the suspension of LBIE's CREST account. This move will mitigate the residual uncertainty about the effectiveness of attempts by LBIE clients to cancel those unsettled equity and bond trades by accepting LBIE's repudiatory breach for failing to settle them. A link to the EUI bulletin is available here (Annex 1). A link to the joint statement made by the FSA and EUI is available here (Annex 2). In addition to the above announcements, PwC has made a statement about a new cancellation procedure for OTC equity and bond transactions, which is available here (Annex 3). The statement indicates that PwC is now willing to agree a valuation figure for the cancelled equity and bond trades in return for payment of a 10 basis point fee (plus an indemnity (covering potential PwC liabilities) from the relevant LBIE client). Clients will need to consider very carefully whether they want to participate in the process (for the additional certainty in relation to valuation that it will afford) rather than (where applicable) relying on their own unilateral terminations of unsettled trades by accepting LBIE's repudiatory breach. Participating in the PwC process could leave some clients in a worse position. Dossier Lehman Page 1 sur 6

2 Annex 1 / SITE EUROCLEAR UK AND IRELAND Operational news 8/10/ Joint announcement from Euroclear UK & Ireland and the FSA Lehman Brothers International (Europe) in Administration Euroclear UK & Ireland Limited (EUI), which operates the CREST system, first announced in its Operational Bulletin No (18 September 2008) that accounts relating to any of the Lehmans companies in UK administration (Lehmans) had been disabled and all related unsettled instructions in the system were simultaneously disabled, and therefore not included in CREST settlement processing. The bulletin noted that securities trades involving Lehmans subject to default rules applied by relevant exchanges and/or clearing houses which have been closed-out under such rules should not settle in the CREST system. Those close-out processes are now well underway under the auspices of the relevant exchanges and/or clearing houses. In line with such default rules, CREST members with pending unsettled transactions with Lehmans as counterparty should bilaterally delete the relevant settlement instructions in the CREST system. For transactions not subject to specific default rules, the bulletin suggested that counterparties should contact Lehmans joint administrators to resolve the issue bilaterally. The continued presence of these settlement instructions in the CREST system gives rise to increased operational issues and increases the risk for the system and its operational efficiency; and, as a result of remaining uncertainty in some firms in respect of these transactions and how they are to be dealt with, may come to affect market confidence in the wider financial system. It is becoming apparent that settlement through the CREST system in relation to these transactions will not proceed. Following consultation with and the agreement of the Financial Services Authority (FSA), as well as consultation with the joint administrators and other market counterparties, EUI is seeking to resolve this matter and also to limit the risks which arise out of the failure of settlement in the CREST system of these transactions and of the relevant parties to reach an agreed protocol for their matched deletion. EUI therefore now directs all parties to all relevant outstanding transactions (whether relating to on exchange or over the counter trades) bilaterally to delete the related settlement instructions in the CREST system. The underlying contractual terms remain unaffected and will be necessarily negotiated on a counterparty-to-counterparty basis, outside the CREST system (to the extent not already closed out under applicable default rules). The FSA and EUI will not be engaged in the negotiation of these terms. CREST participants should consult EUI Operational Bulletin No below for additional details. This process will give all parties certainty that transactions by whatever route they were initially conducted (whether on exchange, through other trading platforms or over the counter) will not settle through the CREST system and will resolve the risks for the CREST system which have arisen out of Lehmans default. Any enquiries concerning the contents of this bulletin should be addressed to the Client Contact Centre on +44 (0) Calls to Euroclear UK & Ireland may be monitored and recorded for security purposes. Calls from the United Kingdom will be charged at local rates. Call charges from mobile phones may vary depending upon provider. Page 2 sur 6

3 Annex 2 / SITE DU FSA Joint FSA/EUI announcement: Lehman Brothers International (Europe) in Administration Briefing note 30 8 October 2008 Euroclear UK & Ireland Limited (EUI), which operates the CREST system, first announced in its Operational Bulletin No (18 September 2008) that accounts relating to any of the Lehmans companies in UK administration had been disabled and all related unsettled instructions in the system were simultaneously disabled, and therefore not included in CREST settlement processing. The bulletin noted that securities trades involving Lehmans subject to default rules applied by relevant exchanges and/or clearing houses which have been closed-out under such rules should not settle in the CREST system. Those close out processes are now well underway under the auspices of the relevant exchanges and/or clearing houses. In line with such default rules, CREST members with pending unsettled transactions with Lehmans as counterparty should bilaterally delete the relevant settlement instructions in the CREST system. For transactions not subject to specific default rules the bulletin suggested that counterparties should contact Lehmans joint administrators to resolve the issue bilaterally. The continued presence of these settlement instructions in CREST gives rise to increased operational issues and increases the risk for the system and its operational efficiency; and, as a result of remaining uncertainty in some firms in respect of these transactions and how they are to be dealt with, may come to affect market confidence in the wider financial system. It is becoming apparent that settlement through CREST in relation to these transactions will not proceed. Following consultation with and the agreement of the Financial Services Authority (FSA), as well as consultation with the joint administrators and other market counterparties, EUI is seeking to resolve this matter and also to limit the risks which arise out of the failure of settlement in the CREST system of these transactions and of the relevant parties to reach an agreed protocol for their matched deletion. EUI therefore now directs all parties to all relevant outstanding transactions (whether relating to on exchange or over the counter trades) bilaterally to delete the related settlement instructions in the CREST system. The underlying contractual terms remain unaffected and will be necessarily negotiated on a counterparty-to-counterparty basis, outside CREST (to the extent not already closed out under applicable default rules). The FSA and EUI will not be engaged in the negotiation of these terms. CREST participants should consult the EUI Operational Bulletin No for additional details. This process will give all parties certainty that transactions by whatever route they were initially conducted (whether on exchange, through other trading platforms or over the counter) will not settle through CREST and will resolve the risks for the CREST system which have arisen out of Lehmans default. Page 3 sur 6

4 Annex 3 / SITE PWC Lehman Brothers International (Europe) (in administration) Unsettled OTC trades - Update Background Further to the statement issued on 24 September 2008 concerning the possibility of cancelling unsettled OTC trades, the joint administrators (the Administrators ) wish to propose a possible approach which would deal with the legal and operational uncertainties caused by the large number of unsettled transactions to which LBIE is a party. Contracts - default rules LBIE was party to a large number of transactions with a large number of counterparties, which were entered into prior to the date of LBIE going into Administration (15 September 2008) and which were due to settle some time after that date, but which remain unsettled today. Many of those transactions are subject to a legally binding default process that will govern how those unsettled obligations will be valued and determined. Examples of those processes are the default rules of a central counterparty (such as LCH.Clearnet, which apply to contracts registered with the LCH), the default rules of an Exchange (such as the LSE) which apply (broadly) to other on-exchange LSE trades, and bilateral master agreements (such as ISDA) entered into by many counterparties and LBIE. In most instances, that will result in a process being undertaken to convert the respective obligations of LBIE and the counterparty into a single net cash sum in respect of all of the contracts subject to the default process in question. OTC contracts - no default rules Other transactions between LBIE and counterparties fall outside any such default arrangement - referred to here as OTC contracts, though that term excludes in this context contracts executed off exchange but subject to a binding master agreement with default arrangements as described above. That therefore could cover pure cash equities trades, or fixed income trades, executed off exchange and subject only to standard terms of business. As a result, there is considerable uncertainty as to the legal obligations, and possible rights and liabilities, associated with those contracts. The Administrators believe it would be beneficial for a process to be established which would facilitate the removal of that uncertainty. Match deletion of settlement instructions on CREST The Administrators are also aware that uncertainty has been caused by the existence of matched settlement instructions on CREST in respect of a large number of such OTC contracts. EUI has today directed all market counterparties with outstanding settlement instructions of all types involving LBIE to input instructions in the CREST system to match delete those instructions. For clarification, this instruction will not, however, cancel the underlying contractual obligations between the parties in relation to the relevant transactions. Proposal for bilateral agreed net settlement on OTC contracts In order to deal with the contractual rights and liabilities associated with OTC contracts, the general approach which the Administrators propose would be for LBIE and each counterparty to agree bilaterally that their respective liabilities under their OTC contracts would be cancelled and replaced by a determination of a net position between LBIE and the counterparty. The net position would be calculated in a manner analogous to the approach applied under the LSE default rules - namely that each contract would be valued by comparing the trade price and its close-out price as at an agreed valuation date. Note that, as the purpose of adopting this approach is to provide legal certainty, and a single net position in respect of all relevant liabilities, it will be a condition of the approach that all relevant OTC contracts be included in the arrangements, and not only some. Page 4 sur 6

5 For OTC contracts that were to be settled through a clearing or settlement system any cancellation will normally need to be subject to the relevant matched settlement instructions first being duly deleted in accordance with the rules of that system. For contracts which were to be settled through CREST, this will be achieved consequent on the directions published by EUI earlier today, as referred to above. Valuation date The valuation date would ideally be the date which most accurately reflects the date that a court would use to value a party s loss on the relevant trade. In practice, it would be operationally onerous to have multiple, different valuation dates, and accordingly the Administrators propose that a single valuation date be adopted for the relevant trades. One option would be for the parties to adopt a value equivalent to the LSE s hammer price approach in its default rule. It is possible other valuation dates would need to be adopted, but in principle the Administrators are open to prioritizing operational simplicity in this regard. Payment of the net sum Where the calculated net position is an amount due to LBIE, this would be payable in cash by the counterparty, subject to the pre-existing rights of the counterparty. Where the calculated net position is an amount due from LBIE, it will represent a claim on the LBIE estate and the counterparty will rank as an unsecured creditor. The Administrators wish to make clear that under no circumstances will a net position payable by LBIE rank as an expense of LBIE s administration. Operational costs In order to justify adopting this approach, which will involve a prioritization of LBIE s resources to calculate the relevant net sum, the Administrators need to be able to recover the costs from counterparties adopting this approach. LBIE would therefore propose to charge a fee equal to 10 basis points multiplied by the notional value of the cancelled trades with the counterparty in question, which they believe to be a reasonable proxy for the operational costs in question. Indemnity The Administrators will ask counterparties to indemnify them from the risk that this approach is subsequently held to be invalid, or involves the giving of a preference to any creditors. That indemnity will be in a standard form. Legal terms and process Any counterparty which is interested in adopting this approach should make contact in the manner described below. They will be then provided with a copy of a standard form legal agreement which will govern the arrangement and a request for further details of the positions and contracts affected. Assuming the parties can agree in principle to the approach, arrangements will then need to be agreed by which the relevant OTC trades are identified, reconciled and valued. Process management framework and prioritization The Administrators intend to priorities each counterparty in accordance with the order in which they agree to the above terms. Next steps The Administrators confirm that the principles contained in the update issued on 24 September 2008 continue to apply, but wish to extend the proposal as described in this update. For further details please contact: enquiries.lehmanbrothers@uk.pwc.com ensuring that the subject field is entitled OTC UNSETTLED TRADES. Page 5 sur 6

6 Further details relating to the administration are included on the PwC website Notes to Editors: AV Lomas, SA Pearson, DY Schwarzmann and MJA Jervis were appointed as Joint Administrators of Lehman Brothers International (Europe) on 15 September 2008 to manage its affairs, business and property as agents without personal liability. AV Lomas, SA Pearson, DY Schwarzmann and MJA Jervis are licensed to act as insolvency practitioners by the Institute of Chartered Accountants in England and Wales. Page 6 sur 6

LBIE Joint Administrators update to creditors 21 November 2011

www.pwc.co.uk LBIE Joint Administrators update to creditors Agenda Presenters Content Tony Lomas 1. Review of key matters from sixth Progress Report Russell Downs 2. Developments since 15 September 2011