Richard Heis, Michael Robert Pink and Richard Dixon Fleming (joint administrator of MF GLobal UK Ltd) v Attestor Value Master Fund LP (as a representative) and Another The Financial Services Authority (Interested Party)
| Jurisdiction | England & Wales |
| Judge | Mr Justice David Richards |
| Judgment Date | 29 January 2013 |
| Neutral Citation | [2013] EWHC 92 (Ch) |
| Docket Number | Case No: 9527 of 2011 |
| Court | Chancery Division |
| Date | 29 January 2013 |
[2013] EWHC 92 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Rolls Building
7 Rolls Building London EC4A 1NL
The Honourable Mr Justice David Richards
Case No: 9527 of 2011
In the Matter of MF Global UK Limited (In Special Administration)
and
In the Matter of the Investment Bank Special Administration Regulations 2011
and
Antony Zacaroli QC and Adam Al-Attar ( instructed by Weil, Gotshal and Manges) for the Administrators of MF Global UK Limited
Richard Snowden QC and Ben Shaw ( instructed by Simmons and Simmons) for Attestor Value Master Fund LP
Barry Isaacs QC and David Allison ( instructed by MacRae & Co LLP) for Schneider Trading Associates Limited
Glen Davis QC for the Financial Services Authority
Hearing date: 30 and 31 October 2012
Introduction
Investment firms are required to segregate money received from or held for their clients and hold it on trust for them. In certain circumstances, including the administration or liquidation of the firm, the money held for clients (client money) must be distributed among the clients, pro rata according to their entitlements. The rules creating this obligation and governing the relevant arrangements are contained in chapters 7 and 7A (CASS 7 and 7A) of the Client Assets Sourcebook section of the Financial Services Authority Handbook. The value of a client's entitlement for distribution purposes is to be established as at the date when this obligation arises, the primary pooling event (PPE).
The issue in this case is whether in calculating a client's entitlement, at least in the context of administration or liquidation, the client's open positions on trades made with the firm are to be valued by reference to market value as at the PPE or by reference to the prices at which the trades are subsequently closed-out, whether at the contractual settlement date or at an earlier date in accordance with applicable default provisions.
The issue arises on an application for directions made by the investment bank administrators (the administrators) of MF Global UK Limited (MFG UK). The direction sought is:
"Whether a client's client money entitlement in respect of its position is to be valued as at the PPE by reference to the market value or any mark-to-market value as at the PPE or by reference to the liquidation value".
For these purposes, "the liquidation value" is defined as "the value of an open position as at the date that position was closed-out". An "open position" is defined as "a transaction, whether a margin transaction or not, between MFG UK and a client or a creditor open as at the PPE".
The issue arises because positions which remained open at the PPE applicable to MFG UK were subsequently closed-out at prices which in many cases varied from the market value of the position assessed by reference to prices as at the PPE.
Two respondents were joined to represent the clients of MFG UK who would gain from the adoption of one or other of the alternative valuation bases and to advance the case of each group. Mr Snowden QC and Mr Shaw appeared for Attestor Value Master Fund LP (Attestor), the respondent representing the clients whose claims would be higher if open positions were valued by reference to market value as at the PPE. Their positions were closed-out at prices lower than their market values as at the PPE. There are in this category some 370 clients with claims totalling a little under US$450 million calculated on the basis of the actual closed-out prices. The administrators estimate that their cumulative position would improve by US$59.1 million if their claims were valued on the basis of market value as at PPE. Mr Isaacs QC and Mr Allison appeared for Schneider Trading Associates Limited (Schneider), the respondent representing the group which would gain if claims are valued by reference to their subsequent closed-out prices. There are some 315 clients in this group with claims totalling a little over US$244 million, which would reduce, it is estimated, by US$27.9 million if calculated by reference to market value at the PPE. 1,746 clients with claims totalling about US$341 million are not affected by this issue.
The Financial Services Authority (the FSA), as the body responsible for making and administering the relevant rules, has exercised its statutory right to participate in the application. Appearing by Mr Davis QC, it has drawn attention to relevant considerations and has supported the position for which Attestor argues. The administrators, appearing by Mr Zacaroli QC and Mr Al-Attar, have taken a neutral position.
Summarising the respondents' positions in the broadest terms, Attestor submits that valuation by reference to the market value as at the PPE is dictated by the terms of the relevant rules, particularly when read in the light of the majority judgments in the Supreme Court in Lehman Brothers International (Europe) v CRC Credit Fund Ltd [2012] Bus LR 667 ( Lehman). Schneider submits that, just as it applies in the valuation of claims for the purposes of a distribution of a company's assets among its unsecured creditors in a liquidation or administration, the hindsight principle should be applied so that the return of client money is made on the basis of the prices at which open positions are later closed-out.
The rules which are most relevant to the issue on this application were the subject of detailed scrutiny in Lehman, albeit largely for the purposes of a different issue (among many raised in that case). The issue was whether the basis on which clients were entitled to participate in the distribution of client money following a PPE was the amount of client money held for them respectively immediately prior to the PPE (the contributions basis) or the amount which the firm should then have been holding for them respectively (the claims basis). At first instance, Briggs J held that the contributions basis applied, but he was unanimously reversed on this issue by the Court of Appeal. The Supreme Court divided on the issue, the majority holding that the claims basis applied, with the leading majority judgment being given by Lord Dyson. It will be necessary to refer to the judgments in Lehman. The numbering of the relevant rules is not the same, but their wording remained the same so far as applicable to MFG UK.
MFG UK
MFG UK is a subsidiary of MF Global Holdings Ltd, a company incorporated in Delaware. Companies in the MF Global group carried on business as broker-dealers in financial markets throughout the world. The group's principal operations were in New York and London, carried on by MF Global Inc and MFG UK respectively. These and other companies entered formal insolvency proceedings in the United States and England on 31 October 2011. The administrators of MFG UK were appointed under the Investment Bank Special Administration Regulations 2011.
MFG UK acted as a broker-dealer in commodities, fixed income securities, equities, foreign exchange, futures and options, and also provided customer financing and securities lending services. In particular, MFG UK acted as an intermediary broker for the European business of the MF Global group and provided, amongst other services, matched-principal execution and clearing services for exchange trades and over-the-counter (OTC) derivative products, as well as for non-derivative foreign products and securities in the cash markets.
MFG UK entered into bilateral transactions with customers where the customer took a long or short interest in an asset or a derivative of a referenced asset. Normally, MFG UK would hedge its position by entering into a trade with a third party on terms as to payment and delivery which were equal and opposite to the terms of the trade with the customer. MFG UK took both exchange-traded and OTC positions. Exchange-traded positions are traded on a recognised exchange and would include, among other assets, future contracts, options and listed shares. OTC positions are bilateral contracts with a creditor or client that provide the creditor or client with exposure to an asset or derivative that is not traded on a recognised exchange. Such positions would include, among other assets, contracts for differences, foreign exchange related contracts, spread bets and forward contracts and options on referenced assets that are not listed on a recognised exchange.
Many of the transactions entered into by MFG UK involved clients taking open positions for which they were required to provide margin, both when the trade was made, by reference to the underlying risk of the position, and on a continuing, normally daily, basis while the trade was open. This variable margin requirement reflected the daily market value of the contract as against the price of the contract at inception. It might increase or reduce the margin requirement, resulting in sums being debited or credited to clients' accounts.
CASS 7 and 7A
The FSA Handbook contains the rules made, and guidance given, by the FSA in accordance with its powers under Part X of the Financial Services and Markets Act 2000 ( FSMA).
CASS 7 and 7A were made for the purpose of implementing in the UK the requirements of the Markets in Financial Instruments Directive 2004/39/EC (MiFID) and the Commission Directive 2006/73/EC (the Implementing Directive). The overall purpose of the Directives is to provide a high level of protection to clients. One aspect is safeguarding client money. Recital 26 to MiFID...
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