Lehman Brothers International (Europe) (in Administration) Client Money - Q&A 13/11/08

1. Where did LBIE typically hold client money?
LBIE used the alternative method under the FSA Client Money rules, and pooled client monies in banks, as well as sub custodians, settlement agents, exchanges and clearing houses as permitted by FSA rules.

Accounts with the Bank of England have been established since Administration, and the process has commenced to start to recover (where appropriate) the monies from the various sources into centrally administered pools.

2. How is client money treated as at Administration?

Client money held by LBIE prior to administration ("Pre Administration Client Money") was held in a number of different accounts. At the event of LBIE's administration a 'primary pooling event' has taken place, which means that Pre Administration Client Money held by LBIE is pooled into a single client money pool, and a client's entitlement is then to a pro-rata share of this Client Money pool. This means that if there is any shortfall in the Pre Administration Client Money pool, then all clients who have a share in that pool will incur the shortfall proportionate to their original entitlement.

3. Are there known issues that could cause a potential shortfall in the Pre Administration Client Money?

Efforts are underway to calculate client entitlement to the Pre Administration Client Money pool, and recovering all monies held with third parties to constitute this pool. It will take some time before all positions are known and monies have been recovered, and therefore determining whether a shortfall exists.

Nevertheless, it has been identified that, prior to the administration, US$1billion of client monies were deposited for LBIE with Lehman Brothers Bankhaus, a material proportion of the total Pre Administration Client Money held. On 15 September, Bankhaus was placed under the regulatory supervision of the German regulator, BaFiN. While Bankhaus remained subject to this supervision, no action could be taken to recover any deposit made with Bankhaus. This moratorium was not an insolvency proceeding, but was imposed by BaFiN to protect the assets of Bankhaus. In compliance with its duties under German law to make an announcement on the subject, BaFiN
announced on 28 October 2008 that depositors with Bankhaus were able to start submitting claims for their deposits to the German deposit protection fund. Then on 12 November, BaFIN announced that insolvency proceedings had been commenced in relation to Bankhaus. Bankhaus' failure will materially impact both the ultimate level of client monies which LBIE will be able to distribute and the timing of the return of such monies to relevant clients.

The Administrators have been in contact with both BaFiN and Bankhaus. FSA is also aware of the situation. All appropriate steps will continue to be taken in relation to the deposit.

In any event, FSA's rules provide that the proper costs of distribution of the client money pool will be borne from that pool on a first priority basis. This means that, even if all client monies are ultimately recovered by a firm, clients will bear a pro rata share of the distribution costs and therefore will normally experience some degree of shortfall.

4. Is client money received by LBIE in Administration treated differently than Client Money received prior to Administration?

LBIE in Administration continues to receive client money, such as income, dividends and redemptions of maturing client assets ("Post Administration Client Money"). Such money is treated differently to Pre Administration Client Money.

The Post Administration Client Money shall be returned to the relevant client once all appropriate steps have been undertaken to establish client entitlement and appropriate systems and controls are in place to manage a transfer.

For Post Administration Monies received in relation to a Client Asset (i.e. dividend from an equity holding) establishing client entitlement will mean establishing whether the Client has entitlement to the Client Asset (see Client Money and Assets update - 07/10/08 for further detail regarding Trust Property for the process the
Administrators are undertaking to establish client asset entitlement and return of those assets).