Marex Financial Ltd v Creative Finance Ltd and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice Field |
| Judgment Date | 25 July 2013 |
| Neutral Citation | [2013] EWHC 2155 (Comm) |
| Date | 25 July 2013 |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2011 Folio 893 |
[2013] EWHC 2155 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
The Rolls Building
Fetter Lane
London EC4A 1NL
Mr Justice Field
Case No: 2011 Folio 893
Alain Choo-Choy QC and Mehdi Baioui (instructed by Thomas Cooper LLP) for the Claimant
Raymond Cox QC and James McClelland (instructed by Chadbourne & Parke (London) LLP) for the Defendants
Hearing dates: 10,11,15,16,17,18 & 23 April 2013
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is a claim for money alleged to be due on an account between the Claimant ("Marex"), a foreign exchange ("FX") broker, and two of its clients, the Defendants, Creative Finance Limited ("Creative") and Cosmorex Limited ("Cosmorex").
Following the severe earthquake and catastrophic tsunami that struck Japan on 11 March 2011, the US Dollar/Japanese Yen exchange rate dropped steeply and on 16 March 2011, Marex, as it was admittedly entitled to, closed out: (i) Creative's accumulated NZDJPY positions under which it was obliged to buy a total of 450 million New Zealand Dollars ("NZD") in exchange for Japanese Yen ("JPY"); and (ii) Cosmorex's accumulated EURJPY positions under which it was obliged to buy a total of 360 million Euros ("EUR") in exchange for Japanese Yen ("JPY"). The close-out of the EURJPY positions was achieved by trades of 160 million at different times over the Currenex dealing platform and trades of two lots of 100 million at different times through two market makers, ANZ and Citibank, at the best price achievable ("at best"). The close out of the NZDJPY positions was achieved by "at best" trades also through ANZ and Citibank.
Marex debited Creative and Cosmorex sums converted to US dollars ("USD") that reflected the average cost of the close out transactions with a mark up by way of profit in the sum of US$ 2,753,689.19. The mark up was not separately particularised but was simply included in the sums debited. The result was an overall negative ledger balance across Creative's and Cosmorex's accounts of US$ 7,959,383.03, which is the sum sued for, plus interest.
The defences advanced by Creative and Cosmorex allege that the manner in which the positions were closed out was irrational, alternatively grossly negligent, or negligent. In the Defendants' submission, there was only one rational way of closing out the positions and that was by selling each of their entire positions to a market maker at a full amount "risk transfer price" which it is alleged would have produced an outcome that, far from giving rise to negative balances on their accounts, would have left those accounts in credit in respect of which they bring a Counterclaim. Creative and Cosmorex also contend that Marex has no right to charge a profit on the close-out transactions.
Marex accepts that in exercising the power to close out it was under a duty to proceed rationally, i.e. in a manner that is not arbitrary, capricious or perverse, but it denies that the way in which it closed out the Defendants' positions was in breach of this duty. Marex also denies that it was under a contractual or tortious duty to exercise reasonable care and maintains that, if, which is denied, it owed such a duty, the way in which it carried out the close out did not involve a failure to take reasonable care. Finally, Marex contends that it had a contractual right to charge a profit on close-out transactions of such size as it should determine, alternatively that it had a right to charge a reasonable profit, which is what the profit in fact charged was.
The FX market and currency forwards
The FX market is the largest financial market in the world and is open 24 hours a day, five days a week. It is split into three overlapping markets: London, New York and Asia (or Australasia, taking both Sydney and Tokyo into account). The London market opens at 8am and closes at 5pm. The unsynchronised adoption of Daylight Saving Time in the various markets means that opening hours of other markets, relative to London time, are not constant. Generally speaking, however, the New York market opens at 1pm and closes at 10pm (London time) and the first Asian market (Sydney) opens at 9pm (London time), with Tokyo opening 2 hours later at 11pm. There is usually therefore an overlap of one hour between the time when the New York market closes and the Sydney market opens. At the time of the close-out on Wednesday 16 March 2011, however, the New York clocks had moved back by an hour, but the Asian clocks had not, with the result that there was no overlap between the New York and Asian markets when New York closed at 9pm London time.
It is generally accepted that the London market is where the highest volume of FX trading takes place and that the Asian markets have the lowest liquidity.
In general the FX market is split into two categories, liquidity providers and liquidity takers, although with the growth of e-trading these lines have become more blurred. Traditionally, liquidity providers or "sell side" included banks and brokers, whilst liquidity takers or "buy side" included hedge funds, corporations, professional and retail clients, asset managers and central banks. Both Creative and Cosmorex are examples of professional 'buy side' clients.
The FX market is "over the counter" ("OTC") rather than exchange traded. Thus, rather than there being a single source of price information or liquidity available there are numerous sources of such information eg Reuters, CME (Chicago Mercantile Exchange) and EBS (Electronic Broking System), as well as proprietary single bank electronic trading platforms such as Autobahn and CitiFXPro and multi-bank platforms such as Currenex and FXall
The four most frequently traded currencies are the USD, the EUR, the JPY and the Pound Sterling ("GBP"). Currencies are traded for other currencies and a trade is described by reference to the currency "pair" that is being exchanged, e.g. "EURUSD" or "USDJPY". Most trades involve the USD and any currency pair not traded against that currency is called a "cross currency pair". Historically, a "cross" trade of this kind had to be carried out via the USD but today there is a number of cross pairs that can be traded directly, including EURJPY and NZDJPY.
When a price is given for a particular currency pair, the figure quoted represents the amount of the second currency in the pair that is needed to buy one unit of the first currency in the pair. For example, if a rate of 90.0 is given for the USDJPY pair, this means that at the relevant time JPY 90.0 is needed to purchase USD 1. Although currency prices are usually quoted to four decimal places, prices for pairs involving the JPY are quoted to two decimal places only. Whatever the currency pair, the smallest unit of currency is referred to as a "pip".
Currency trades can be either "spot" or "forward". A spot trade is an agreement to exchange currencies on the "spot date" — usually two business days from the date of the transaction ("T + 2") — whereas a forward trade (also known as an "outright") is an agreement to exchange currencies at some later date. In both cases the price is fixed at the time of the transaction. However, with a forward contract, the price will take into account the gains or losses that can be made, over the maturity period, from the interest rate differential between the currencies in the traded pair.
Marex's role in the FX market
Marex operates as a broker and does not generally take proprietary positions for its own book. Instead, it makes its money from providing clients with access to the market (liquidity). In so doing, Marex enters into direct trades with its customers on a principal to principal basis and does not act as agent bringing its customers into a contractual relationship with a third party.
Customers of Marex wanting to open or sell a position will either telephone the Marex FX desk or contact the desk using the instant message "chat" systems provided by Bloomberg 1 and Reuters 2 or use Marex's online trading platform ("Marex Black"). When seeking to open a position by telephone, a customer may ask for a bid-offer price on a particular currency pair for a particular notional amount or he may give an "at best" or "limit" order for a particular currency. (The "bid" price is the buying price, the "offer" price is the "sale" price and the difference between the two is the "spread"). If a customer asks for a bid-offer price for a particular currency pair and amount, the FX desk will look at prices in the market for that currency pair and amount on its single-bank or multi-bank electronic trading platform screens and will see what bid-offer prices (spreads) are available. Marex might also contact "market makers" or "liquidity providers" (major international banks) directly over the phone or over the bank's instant messaging "chat" system. The bid-offer price on the screens is typically for an amount of between USD1 million and USD5 million (known as a "regular order"). The screens quote a wider spread for larger amounts.
In normal markets, and for liquid currency pairs, Marex takes the price obtainable in the market and then builds into it a pip or two of profit before offering it to the customer. The more illiquid the currencies, the wider the spread that will be quoted.
If the customer accepts the quoted price, the desk books the trade there and then, holding a naked position until a back-to-back order (a "fill") is placed in the market, thereby laying off the trade...
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