The thing about useful stuff is: Clearing up Lehman pending settlements

Clearing up Lehman pending settlements Wednesday, September 17, 2008

News is seeping out about the unwinding of the pending settlements [trades executed but yet to settle] and open interest in exchange traded as well as OTC contracts.

Firstly, Reuters reports that JP Morgan lent $87m to Lehman subsidiaries on Monday to enable them to clear and facilitate securities transactions, but apparently the New York Fed repaid them.

Next, LCH has declared Lehman in default and begun the process of unwinding and moving their trades. Lehman was a clearing member of LCH, acting on behalf of clients as well as its' own trading on variety of Exchanges. Lehman was also a Swapclear member, which clears OTC Interest Rate Swaps.

The easiest transfers are for those clients who traded on a segregated basis i.e. their trades were processed via and held in separate accounts from those of Lehman. Much harder to separate out are clients trades processed through non-segregated accounts in which will be co-mingled Lehman's own proprietary trades and will inevitably require Administrator assistance.

Clients have to make a positive decision as to whether to be segregated or not but firms usually incentivise them to be non-segregated e.g. higher interest rate on credit balances, in order that they can utilise the client assets, which is not permissible with segregated balances.

Any losses resulting from unwinding the business of Lehman will be offset against the margin balances Lehman had with the Clearing House. If these balances are insufficient, then a call will be made on the Default Fund which is funded by the members.

The exercise to close a trading firm is a huge undertaking - you don't simply close the doors because at any point in time, there is considerable activity "in progress" all of which needs to be unwound. It is likely to take months before the majority of the work is done.