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November 2009

Representatives of the Lehman Brothers Group of Companies ("affiliates")¹, who earlier this year agreed a Global Cross-Border Insolvency Protocol ("Global Protocol")² to enhance cooperation between the various Lehman entities, have held their second meeting.

A key objective of the second meeting was to reach agreement on the determination of both Trading and Non-Trading Inter-Company Balances.

The Global Protocol participants made very significant progress and a methodology for settling all Non-Trading balances between affiliates will be finalised shortly. This will involve accepting as a starting point for final determination, a set of balances as at September 14, 2008. These balances were produced following a worldwide accounting exercise to "close" the Lehman books as at that date, being the day before Lehman Brothers Holding Inc (LBHI) filed for bankruptcy.

Edward Middleton, one of the Liquidators of the eight Lehman Hong Kong entities, says: "Determination of the inter-company positions lies on the critical path for pretty much all administrations and, ordinarily, one of the features of insolvency processes is that creditors are required to prove their claims almost on an item-by-item basis from day one of their relationship with the debtor. If we were to take that approach in Lehmans, however, the length of time over which balances were built up, plus the sheer volume of transactions making up those balances would have made the scale of such an exercise unimaginable.

A better way had to be found and this is it. Lehmans traded normally right up until that very last Friday. Its accounting systems were robust and its routine daily, weekly and monthly accounting procedures were carried out uninterrupted. Accordingly, we have been able to gain comfort that the 'Global Close' exercise has produced a robust starting point for the validation of these inter-company balances, and will reduce by many thousands the hours that would otherwise have had to be spent."

In the case of Trading Balances, the affiliates have agreed the methodology for valuing the various inter-company trades including stock loans, repos and OTC derivatives.

Global Protocol participants will host another derivatives valuations seminar in January 2010 in New York, to coincide with the next meeting of Lehman affiliates.

1. Affiliates are the representatives of the Lehman Brothers Group of Companies who are signatories to the Lehman Protocol. This group consists of administrators, liquidators, receivers, trustees and restructuring advisers.

2. The Global Protocol was devised in order to facilitate multilateral cooperation between affiliates, to ensure that the many and complex inter-company proceedings are dealt with speedily, and to enhance the recoveries of creditors. The Lehman Protocol currently counts 13 signatories representing over 26 proceedings worldwide. It is supported by all the major affiliates, with the exception of Lehman Brothers International (Europe).

KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

© KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

© KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.