New Rules For U.K. Primes

Apr 1 2010 | 9:12am ET

British prime brokerages face a raft of new rules on how they use client money, as U.K. regulators seek to avoid a repeat of the Lehman Brothers disaster.

Under proposals offered by the Financial Services Authority, prime brokers would have to offer daily reports to their hedge fund clients, detailing how their assets are being held and if any money has been reinvested. While firms will still be permitted to rehypothecate client assets, using them as loan collateral, limits on the practice would have to be set out in contracts with hedge funds.

Rehypothecation has been the source of much trouble in sorting out the assets of Lehman’s London-based unit since the investment bank went under in 2008. Clients, including many hedge funds, have filed more than $800 billion in claims; many prime brokerage assets have been frozen since Lehman’s collapse.

The FSA’s proposal comes in the wake of bitter criticism of prime brokerage rules by the British court overseeing the Lehman bankruptcy. Existing rules on segregating assets are “patently inconsistent and flawed in certain respects,” the court said last year.

The proposals would limit prime brokerages to investing no more than 20% of any client’s bank deposits. Firms would also have to give an executive the responsibility of ensuring that client assets are properly segregated.

“We are keen to learn the lessons of the recent crisis,” Paul Sharma of the FSA said. “The paper goes far wider than Lehman—it sets out ways to protect clients and consider market stability in the event of a firm’s insolvency.”

The regulator is set to issue final rules governing prime brokerages by the third quarter.


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