The Exchange has been advised by Lehman Brothers International (Europe) that all its unsettled on Exchange transactions were undertaken in a principal capacity. On the basis of this information, the Exchange, will apply the provisions of the default procedures applicable to unsettled relevant principal contracts in accordance with paragraphs D120 - D146 of the Rules of the London Stock Exchange. See below for full details of this process.
Unsettled Relevant Principal Contracts
The Exchange will determine the final cash settlement payable between the two counterparties involved in each transaction. This is based on the difference between the original trade price and the Exchange’s middle market price (“the hammer price of the relevant securities immediately prior to the time at which the default was declared, namely 11am Monday 15 September 2008.
In accordance with Rules D141 and D142:
If the hammer price exceeds the contract price:
- If the contract was a purchase by the defaulter the defaulter is entitled to receive the excess from the counterparty
- If the contract was a sale by the defaulter the defaulter is obliged to pay the excess to the counterparty
If the hammer price falls short of the contract price:
- If the contract was a purchase by the defaulter the defaulter is obliged to pay the shortfall to the counterparty
- If the contract was a sale by the defaulter the defaulter is entitled to receive the shortfall from the counterparty
If hammer price is equal to the contract price:
- Zero position – nothing owed between counterparty and defaulter
Publication by the Exchange of a hammer price in any particular security should not be interpreted to mean that the Exchange accepts that these are unsettled on Exchange market contracts in any such security. The Exchange's reconciliation process is intended to identify the unsettled market contracts that are on Exchange.
Additional Hammer Prices
We have a Hammer Price list (dated and version controlled) on a dedicated website page. Additional security hammer prices will be added to an updated list (with a new version number) and highlighted in red text. The Exchange will communicate that an updated version of the list is available to market counterparties via a Stock Exchange Notice and Service Announcement together with a link to the site.
Objection to Hammer Prices
Under Rule D132 a member firm may object to a hammer price in writing (email will suffice) within five business days of the date of notification (ie: when the given hammer price first appeared on the Exchange’s list). Any dispute will be determined in accordance with Rule D132 and the determination will be final and binding on all concerned. In making any objection, the member firm should state why it does not believe the stated hammer price reflects the Exchange’s middle market price of the security as at 11am Monday 15 September 2008, when the default was declared.
Hammer prices will be communicated to member firms by way of a London Stock Exchange Notice and a Service Announcement. Where hammer prices have not yet been fixed they be added to the list as soon as reasonably practicable. Member firms will be able to track if these prices have been updated by way of the version number and the date of the excel spreadsheet attached to this page e.g. V1 15-09-08
Member firms should be aware that hammer prices are not applicable for the valuation of lending arrangements.
Rate of Exchange for Net Sums Due under Default Procedures
Under Rule D120 The Exchange will calculate the net amount due between Lehman Brothers International (Europe) (“LBIE”) and its counterparties where they were party to unsettled, non-CCP trades undertaken on the Exchange in currencies other than sterling.
In accordance with Rule D144, for the purpose of discharging the amounts calculated in respect of such trades, the Exchange will aggregate all the relevant amounts which are in the same currency, creating a "currency aggregate". This is to allow the Exchange to certify a single net amount to be paid by LBIE to its counterparty or by the counterparty to LBIE, as appropriate.
The currency aggregates will be converted into sterling at the spot rate of exchange set by the Bank of England for the relevant currency on the day of default. The spot rate of exchange is set by the Bank of England at 16:00 on each business day and published on its website at 9:30am the following business day. As a result, the applicable rates will be those set by the Bank of England at 16:00 on Friday, 12 September 2008, as published at 09:30 on Monday, 15 September 2008.
The relevant spot rates of exchange are set out here.