Richard Fleming, Richard Heis and Michael Pink (Acting as Joint Special Administrators of MF Global UK Ltd) v LCH.Clearnet Ltd and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice David Richards |
| Judgment Date | 31 July 2015 |
| Neutral Citation | [2015] EWHC 2319 (Ch) |
| Docket Number | Case No: No.9527 of 2011 |
| Court | Chancery Division |
| Date | 31 July 2015 |
In the Matter of MF Global UK Limited (In Special Administration)
And
In the Matter of the Investment Bank Special Administration Regulations 2011
[2015] EWHC 2319 (Ch)
Mr Justice David Richards
Case No: No.9527 of 2011
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Rolls Building
London, EC4A 1NL
Felicity Toube QC (instructed by Weil, Gotshal & Manges) for the Applicants
Gabriel Moss QC (instructed by Freshfields Bruckhaus Deringer) for the Respondents
Hearing dates: 12, 13, and 14 May 2015
The Joint Special Administrators of MF Global UK Limited (MF Global) apply for an order under section 236 of the Insolvency Act 1986 against LCH.Clearnet Limited (LCH UK) and LCH.Clearnet SA (LCH France). The order seeks the production of documents and a full description by way of witness statement of the sales or auction processes by which the respondents closed out MF Global's open positions with the respondents very shortly after the appointment of the administrators.
The respondents oppose the making of the order. LCH France submits that the court has no jurisdiction to make an order against it under section 236. Both LCH UK and LCH France, if there is jurisdiction to make an order against it, submit that the court should not exercise its discretion to make the order sought.
In the alternative, the administrators seek an order against LCH France under section 237(3) that the court should issue a request to the French court under Council Regulation (EC) No.1206/2001 of 28 May 2001 (the Evidence Regulation) to examine a responsible officer of LCH France in compliance with sections 236 and 237(3) and to receive from the responsible officer copies of all existing documents that can be located following a reasonable and proportionate search, the extent of which is to be determined by the English court if not agreed between the parties, and setting out the information requested in the schedule to the proposed order. LCH France resists this alternative order and submits that, in the circumstances of this case, a request cannot be made under the Evidence Regulation.
MF Global was a member of the MF Global group of companies which carried on business as broker-dealers in financial markets throughout the world. The group's principal operations were in New York and London, the latter being carried on by MF Global. MF Global and other companies in the group entered formal insolvency proceedings in the United States and England on 31 October 2011. The administrators of MF Global were appointed under the Investment Bank Special Administration Regulations 2011. Under the terms of those Regulations, sections 236 and 237 of the Insolvency Act (apart from section 236(1)) apply in the special administration of MF Global.
The respondents operate clearing houses in securities and other financial instruments in a number of jurisdictions, including England and France. As with other clearing houses, the system operates on the basis that the relevant respondent is interposed as a principal party to trades in securities or other financial instruments. Accordingly, a sale of securities from A to B becomes a contract for the sale of the securities from A to the clearing house and a back-to-back contract for the sale of those securities from the clearing house to B. The purpose of a clearing house is to reduce and allocate the inherent risks arising from transactions between market participants. They protect their members from the potential losses that would otherwise result from the default of a clearing member and they provide protection to the market from systemic risk. The respondents, like all clearing houses, have rules, arrangements and resources to ensure that they can respond in an orderly and efficient way to defaults by members. They are entitled to close out the open positions of defaulting members and they can use netting procedures to set-off amounts that would otherwise arise from non-cleared trades.
When MF Global went into administration on 31 October 2011, it had a number of very large open positions with the respondents, in particular with LCH France, involving European sovereign debt. The contracts were repurchase to maturity contracts whereby MF Global sold bonds to a counter-party for a cash payment on day 1 and agreed to repurchase the same quantity of bonds for a specified amount on a specified future date, typically a few days before the bonds matured. These contracts were cleared through one or other of the respondents, with the result that MF Global sold the bonds and received the initial payment from the relevant respondent which in turn sold the same bonds and received the same amount from the original counter-party. The relevant respondent remained liable to the counter-party to repurchase the bonds on the specified future date and had back-to-back contracts with MF Global. The open positions taken by MF Global were very large, including €2.8 billion of Italian government debt and €1.49 billion of Spanish government debt cleared through LCH France. Other European government debt positions were also held with both LCH UK and LCH France.
These positions were held at a time of extreme uncertainty regarding the debts of certain states in the Eurozone, in particular Greece but involving other states as well. Italy's sovereign debt rating was downgraded by Standard & Poor's from A+ to A—on 19 September 2011 and by Fitch Ratings from AA—to A+ on 7 October 2011. At much the same time the sovereign debt rating of Spain was downgraded by the rating agencies. On Thursday 27 October 2011, Eurozone states agreed a plan to resolve the European sovereign debt crisis, including a proposal that holders of Greek sovereign debt should cut the value of their holdings by 50%. On Monday 31 October 2011, the day on which MF Global entered administration, the Greek government issued a statement, calling for a referendum on the Eurozone proposal and suggesting that Greece might leave the euro.
The appointment of administrators of MF Global constituted an event of default under the rules governing its contracts with the respondents. The respondents exercised their rights to close-out MF Global's open position. Losses against the repo prices totalling approximately €422 million were suffered on those close-outs, which were deducted from the margin held by the respondents. In particular, losses of approximately €127.3 million were suffered on the close-out of MF Global's position in Italian sovereign debt.
The administrators accept that it was inevitable that the close-outs would result in significant losses but they are concerned that, when compared with contemporary prices quoted on Bloomberg screens, the losses were exceptionally large. The administrators have calculated that if all the open positions had been closed at or around the prices quoted by Bloomberg, on the relevant termination dates, the discount suffered would have been €241 million, as opposed to €422 million. In particular, losses of €127.3 million arose on the sale on 2 November 2011 of €2.2 billion of Italian Government bonds at 5.83 points below the corresponding Bloomberg price and 5.51 points below the price obtained by the respondents for the residual €625 million of the position sold via an auction the next day. The administrators state in their evidence that it is not clear to them why there were such significant differences between the Bloomberg price and the close-out prices or why the prices fluctuated so much between the various close-outs.
It is against this background that the administrators make the present application for the disclosure of documents and information relating to these close-outs. Mr Richard Heis, one of the joint administrators, explains the reasons for the present application in paragraphs 10 and 13 of one of his witness statements in support of the application:
"10. In light of the scale of the losses described above, and the discrepancies between the prices obtained for the bonds, the JSAs are concerned to establish whether the LCH Entities conducted the close outs in a manner consistent with their duties under the appropriate laws and regulations. Accordingly, the purpose of the Application is to provide the JSAs with sufficient information in order to make this determination including whether it is appropriate for the JSAs to make claims against the LCH Entities in England, France or both.
13. … If there is evidence to suggest that the LCH Entities did not close out the RTMs in accordance with their duty of care, then it is incumbent upon the JSAs to seek recovery of MFGUK's losses. As matters stand, the information that has been provided by the LCH Entities leaves many questions unanswered as to why the RTMs were terminated at a discount of approximately €422 million rather than a discount of approximately €241 million according to the Bloomberg prices on the relevant dates."
The administrators' position was summarised in the skeleton argument of their counsel, Ms Toube QC:
"6.2 … at present, however, all that concerns the JSAs is to understand the option process in order to determine whether there is any claim that should be brought. In that context, the variance from Bloomberg pricing remains of concern to the JSAs, particularly in the absence of any transparency as to what exactly happened at the auction."
The application notice, as issued, sought an order that the respondents provide to the administrators' solicitors:
"a witness statement from the appropriate person on behalf of each Respondent exhibiting copies of all existing documents...
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