Part II United Kingdom, 9 Lessons of LBIE: Reuse and Rehypothecation

Subject(s):

Shadow banking — Bank resolution and insolvency — Issue and trading of securities — Securities settlement system — Financial collateral — Regulated activities

Two notable traumas followed the failure of Lehman Brothers on 15 September 2008. The first was the catastrophic delivering that affected wholesale financial institutions in 2009, as the post-LBIE markets went into free-fall. The second was the very long delays in the return of client assets held by in the UK Lehman Brothers International (Europe) (LBIE). The systemic failure has been associated with the reuse of securities collateral in general. Some have argued that the client asset delays were associated with a category of reuse, known as rehypothecation, in particular. Regulatory reforms have been introduced with a view to addressing both. However, this chapter argues that the true lesson of both failures is not yet fully reflected in regulation. This is the profound impact of shadow banking, and the reuse of securities collateral within it, upon client asset protection and systemic risk management alike.