Journal of Investment Compliance

Purpose – The purpose of this paper is to help parties to “TBA contracts” better understand how their claims would be treated in the event that a Securities Investor Protection Act of 1970 (SIPA) proceeding was commenced with respect to their counterparty.

Design/methodology/approach – The paper explores the arguments made in favor of and against treating TBA contract claims as “customer claims” under SIPA in the Lehman Brothers Inc. SIPA proceeding and the resulting decision of the United States Bankruptcy Court for the Southern District of New York on the issue.

Findings – The Bankruptcy Court found that TBA contract claims are not “customer claims” under SIPA and properly are classified as general unsecured claims.

Practical implications – This was an issue of first impression for the Bankruptcy Court and may have a binding effect on other TBA contracts (although other TBA contracts may have distinguishable facts). Future investors may alter the way they purchase and sell these securities in order to manage counterparty risk. Deeming TBA contract claims as general unsecured claims will also result in a larger pool of assets for creditors actually deemed customers of Lehman Brothers Inc. under SIPA.

Originality/value – The paper provides guidance from experienced bankruptcy lawyers.