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MFA calls on Bank of England to free hedge fund assets from Lehman administrator

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The Washington-based hedge fund industry organisation Managed Funds Association has called on the Bank of England to intervene to expedite the release of billions of dollars in hedge fund

The Washington-based hedge fund industry organisation Managed Funds Association has called on the Bank of England to intervene to expedite the release of billions of dollars in hedge fund assets now frozen in the UK as the result of the insolvency of Lehman Brothers.

In a letter to the governor of the Bank of England, the association has highlighted the systemic risks resulting from the Lehman insolvency, which it says include the loss of liquidity estimated at anywhere between USD40bn and USD70bn now frozen at Lehman Brothers International (Europe) in London, the potential destabilisation of financial firms as assets are moved away from prime brokers, and the potential failure of firms with significant financial exposure to Lehman Brothers International (Europe).

The MFA has put forward recommendations for an expedited administration process that would reduce systemic risks, inject much-needed liquidity and financial stability into capital markets and protect the viability of the UK’s prime brokerage industry.

‘The approach outlined by the LBIE administrators involves a lengthy process with no definitive date for distribution of client assets. It creates systemic risk and adds more uncertainty to global markets which are already being driven by fear, anxiety and uncertainty,’ says MFA president and chief executive Richard H. Baker (photo).

‘We encourage the Lehman administrator [PricewaterhouseCoopers] to take immediate action to reduce the uncertainty and mitigate systemic risk by distributing these assets in an expedited manner.

‘Such action would provide markets and market participants with a much-needed boost of liquidity and confidence. It’s critical that the Bank of England intervene to co-ordinate and clarify the process and remove obstacles that prevent the quick and orderly release of client assets from LBIE.’

The MFA’s proposal includes a plan to prioritise distribution to clients of Lehman Brothers International (Europe) by reference to the applicable systemic significance of their exposures. This will allow the administrators to distribute assets in the context of systemic risk concerns.

A combined industry and government response involving the Bank of England, the UK Treasury, the Financial Services Authority and industry participants would give the administrators appropriate reassurance regarding their liabilities, the association says. This would remove the liability risk component for the administrators and allow them to return client assets without fear of liability to other creditors.

The MFA also calls for enhanced transparency and clarity regarding the administration process and related client positions, and says providing clarity regarding existing short positions and developing a protocol for the closure of these positions would allow clients to manage their exposure to market risk.

The Managed Funds Association, whose members include hedge fund, fund of funds and managed futures fund management professionals, was established in 1991 as a source of information for policymakers and the media as well as an advocate for sound business practices and industry growth.

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