The UK government has proposed changes to insolvency rules to give greater protection to investors and markets in the event of the failure of an investment bank. The rule changes are aimed at rectifying issues that have been identified since the collapse of financial institutions such as Lehman Brothers last year.
The focus is on reducing counterparty risk by providing more information about outstanding trades and mandating that firms implement contingency plans for continuity of service obligations in the event of insolvency. Firms will be required to provide information including the status of outstanding trades and the details of contingency plans to the UK Financial Services Authority (FSA) on a regular basis.
The government decided against adopting a US style Chapter 11 regime because it was deemed unsuitable for the UK market in light of the current legal regime. The proposals claim that the UK regime is more attractive than that of other jurisdictions because it does not distinguish between domestic and international creditors.
Although the introduction of these “pre-failure” steps could be criticised for being too little, too late, the government is keen to be seen to be tackling the systemic consequences that can occur from the collapse of a large financial institution.