The UK Investment Management Association has urged the Financial Services Authority, the UK's financial regulator, to address shortcomings in the London cash equity market after the “chaos” caused by the collapse of Lehman Brothers International.

Lehman Brothers’ demise in September resulted in a large number of failed trades at the firm’s prime brokerage operation - resolving investors’ positions is proving to be a long and complex process. 

Richard Saunders, chief executive of the IMA, said: "Reforms are needed to ensure that defaults within the UK equity market can be dealt with swiftly and authoritatively, and that investors obtain early certainty about their trades and associated market risk.  The work should keep investor interests foremost and not be overly concerned with the impact on market intermediaries.” 

An urgent review of the default system is needed to maintain market confidence, according to the IMA. “As things stand, if another broker were to default, the same problems would arise again,” said Mr Saunders.

First among the IMA’s criticisms is that Lehmans used only a non-segregated account for exchange trades, preventing clients from benefiting from clearing house default rules.

The IMA highlights the fact that Lehman Brothers didn’t distinguish investment managers’ trades from its own proprietary trading, meaning that client trades became part of the administration of the firm.  More transparency in the terms of business between brokers and their clients is needed, and this should be enforced by regulatory change, says the IMA.

The subsequent nine-week lock-up of Lehman trades within the Euroclear/CrestCo equity settlement system is also slammed by the IMA as a “systemic failure” which gave clients no clear course of action at a time of extreme market volatility.

In addition, the IMA calls for more effective procedures so that in the case of default the authorities can take control of clients’ monies faster, saying that the FSA should take on new powers if necessary.

It is clear that administrators PricewaterhouseCoopers will have a tough job untangling Lehman Brothers’ affairs, particularly because the bankrupt firm acted as a temporary holder of thousands of firms’ shares.

Just one such example is a large shareholder in UBS, the UK activist investment firm Olivant, which has not been able to recover its stake in the Swiss bank as a result of Lehman’s collapse.

Olivant is not alone in its plight as potentially thousands of investors face the laborious task of tracking down assets which were handled by the now defunct US investment firm.