The multi-faceted impact of Lehman

The demise and subsequent break up of Lehman Brothers will provide strong case study material for many MBA courses, for many years. There are several lessons to be learnt beyond the crucial role of customer confidence in business success. For example, there are the difficulties involved in splitting or decoupling the heavily centralised Lehman IT systems (discussed in detail in one of Paul Penrose’s Finextra blogs this month). There were similar issues with ABN Amro systems when the RBS consortium looked to split systems between the consortium members. There are also the Prime Broker issues that we discussed in last month’s MPIE Bulletin entry “What next for Hedge Funds”.

One of the other clear impacts of the demise of Lehmans in Europe is a wake up call to asset managers and other investors that the single broker aggregator model for managing commission sharing agreements (CSA’s) is too dangerous. Putting all your CSA “eggs in one basket” and relying on a single equity broker to manage all your research commission funds could lead to high counterparty and operational risk in current volatile markets. This realisation has re-energised a number of alternative solutions and is leading to a number of client and market initiatives in this specialist area.

We are seeing a change in the way firms are looking to address this requirement and an increased urgency to put applications in place as the number of CSA’s looks to increase and the frequency of research distributions is set to increase to reduce the size of undistributed research commission pools held by brokers at any one time.

So a single event with multiple market impacts.