yes, sort of,
basically, in short, in HDinstance it works, it is only partly true instancing, but fyffe tested it using 1 billion animated elfes, (using a HDM file, not MDD) so it surely works.
however, someone at the XSI forum pointed out that it might be a problem if the animation loop was long, i mentioned this, but didn’t get an answer.
anyways, 1 billion animated characters is incredible 
(it should be able to run even more instances, who knows what the limit is,…)
as far as the NT team doing this for Lightwave, I have no idea how tricky it would be.