The Investment Management Association (IMA) is calling on the FSA to investigate what it calls weaknesses with default arrangements in cash equity markets "as a matter of urgency".
According to the association, problems were exposed by the "chaos" surrounding the September collapse of Lehman Brothers and the subsequent number of failed trades which had been placed with its brokers by investment managers.
It says reforms are needed to ensure defaults within the UK equity market can be dealt with "swiftly and authoritatively", and that investors can obtain "early certainty" about their trades and associated market risk.
"The Lehman default has resulted in a state of chaos for managers - operationally, legally and from a risk perspective," IMA chief executive Richard Saunders says. "As things stand, if another broker were to default, the same problems would arise again."
According to the IMA a principal cause of the disorder was the fragmentation of trading venues following the introduction of the Markets in Financial Instruments Directive (MiFID).
It argues this fostered a market structure which allowed Lehman to use only a non-segregated account for exchange trades, preventing clients from getting the benefit of the clearing house default rules.
Additionally, it says a nine-week freezing of trades within Crest, the UK's equity settlement system "for reasons which are still unclear" exacerbated the problems.
Among a raft of suggestions to shore up the sector, the IMA says the regulator should be granted new powers to take control of client monies promptly in the event of a default and also calls for the introduction of new terms of business between brokers and clients.
"The work should keep investor interests foremost and not be overly concerned with the impact on market intermediaries," Saunders adds. "We call upon the FSA to lead a review as matter of urgency to secure this outcome, which we see as essential to maintaining market confidence."
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