Spreadex Ltd v Battu
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rix,Lord Justice Neuberger,Lord Justice Mummery |
| Judgment Date | 11 July 2005 |
| Neutral Citation | [2005] EWCA Civ 855 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2004/2127 |
| Date | 11 July 2005 |
[2005] EWCA Civ 855
Lord Justice Mummery
Lord Justice Rix and
Lord Justice Neuberger
Case No: A3/2004/2127
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION, Cardiff District Registry, Mercantile Court
HIS HONOUR JUDGE CHAMBERS
Mr Alexander Pelling (instructed by Messrs Eversheds) for the Respondent
Mr Christopher Heather (instructed by Messrs Douglas-Jones Mercer) for the Appellant
This appeal concerns a dispute between a spread betting operator and its customer concerning the margin arrangements applicable under its terms of business. It is primarily a matter of contractual construction.
Spread betting
Spread betting is not so much or not merely a bet, although it can be described as such, as a form of contract for differences. It enables a customer to take a position on a market (or an event) for a very small stake. Thus if the Dow Jones index is, say, at 10,000, one can "buy" or "sell" the market at a spread around the index of, for the sake of example, 10 points either way, 9990 to 10010. If one buys, one is betting that the market will rise above 10010. If one sells, one is betting that the market will fall below 9990. If one buys and the market rises, one stands to gain £1 for every point that the index exceeds 10010. If one sells and the market falls, one stands to gain £1 for every point that the index drops below 9990. If, however, one calls the market wrong, then one will stand to lose £1 for every point that the index exceeds the spread point in the wrong direction. Thus if one sells at 10,000 with a sell spread point at 9990, one will make £1 for every point the market falls below 9990 and lose £1 for every point the market rises above 9990. Until the bet or "trade" is closed, the gains and losses are merely "running" gains or losses. They are real enough, but constantly changing with every change in the index, and have not yet been fixed. Closing the bet will fix the position, win or lose. Unlike a classic bet, the customer can of course lose more than his stake. Indeed, on the example given, of a sale spread point of 9990 when the market is at 10,000, if the market does not move an inch, the customer will lose £10 for every £1 staked. Nor, again unlike a classic bet, are his winnings fixed at the outset by an agreement on odds. In theory winnings based on rising markets are infinite (in practice of course they are not) and losses based on falling markets are limited only in so far as they cannot exceed the consequences of a fall in the index to zero.
Normally, of course, to gain by £1 for every rise (or fall) of a single point in a stock market index such as the Dow Jones would take an investment of significantly more than £1. In effect, one's £1 bet commands a position in the market significantly greater than the stake. In other words, there is a large element of gearing in the trade, and the situation is correspondingly volatile. Where the market in question is itself in a volatile phase, the risks become even greater. Thus, if the Dow Jones is capable of moving within a range of 100 or 200 points in a single day, the customer can be £100 to £200 richer or poorer per £1 stake within a matter of hours of his trade. On a trade of £100, those figures become £10,000 to £20,000.
The spread betting operator who accepts these trades does not bet against the customer, but lays off the trade elsewhere. Ultimately, I suspect, the trade is accumulated in some form of derivative transaction on a futures exchange, but I do not know. The operator, however, by laying off the bet elsewhere seeks to profit by means of the spread. The means by which it does that, and the terms on which it does that, however, are not a matter for the operator's customer: nor, in the present case, have the applicable terms been disclosed.
The credit risk, margin and security
If the customer's trade is efficiently laid off, the spread betting operator does not retain a market risk, but, since its customer is open to volatile swings and losses which are potentially out of all proportion to his initial stake, it does retain a credit risk, which it has to be able to monitor closely. Typically, it seeks to limit that risk by controlling the level of its customers' trading and by taking security for its customers' exposure.
Such security, or margin arrangements, may take two forms, responding to two kinds of risk. Even at the outset of a trade, indeed at the outset of a relationship, the operator may require funds to be deposited with it as security for the customer's potential losses. The size of such a deposit may reflect, of course, the level of the customer's trading and also the volatility of a market in which that trading takes place. The more volatile the market, the greater can be the potential losses. Secondly, security for running losses already incurred in open trades may be required.
It will immediately be obvious that these two forms of security could either overlap or be accumulated. If the operator wishes to have the maximum security possible to be available at all times, then it will ensure that it always keeps in hand security for future potential losses: and, entirely separately, will ensure that each day, or perhaps even several times a day, it will demand further security for any running losses incurred in the course of the day on open trades. In that way, it will, as far as it can, end each day fully secured for such running losses and in addition will be able to begin each new day secured in advance for further potential losses yet to be incurred. On that basis, these two forms of security are cumulative, or, to put it another way, the security to be provided in advance merely as a condition of trading is always to be kept entirely insulated from being used as security in respect of running losses.
On the other hand, such demands may kill the goose that lays the golden eggs. If the customers are required to put up too much security, they may decline to trade, or be unable to trade. Moreover, on one view, such cumulative security, although perfectly understandable from the point of view of the operator, can also be seen as a form of double counting: since the running losses, if they occur, are precisely the contingency against which the advance security is taken, to take further security when such losses occur, save to the extent that the advance security fails to match such losses, may smack of greediness, or at any rate of seeking a second bite at setting the terms of trade in the midst of a deal. In the meantime the operator can always demand that it be fully secured against running losses as they occur.
The issue in this case is whether, on the applicable terms of trade, these two forms of security were entirely separate and cumulative, as the operator submits and the judge found, or overlapping, as the customer submits. The issue has, of course, to be determined as a matter of the construction of the parties' contract.
On either view of this issue, one question which arises is as to the extent of the advance security required. This is settled by a concept known as "notional trading risk" or NTR. It may vary from index to index and from time to time, as well as from operator to operator. It is expressed as a factor of the amount staked. Thus a NTR of 100 means that an operator will in principle require a customer who stakes £1 on the relevant index to provide security of £100 as a condition of placing the bet.
An operator, much as he desires security, may also be willing to extend credit to a customer. On this basis, the amount of credit allowed will stand in place of security. The existence of such credit illustrates the balance which an operator has to be prepared to set between maximising security and encouraging business. Thus a customer with a credit limit of £1000 will be allowed, subject to further agreement, to stake a maximum £10 on a bet on an index with a NTR of 100. If the customer wishes to stake £20, he will either have to negotiate an increase in his credit limit to £2000 or will have to provide £1000 of security up front.
The credit allowed to and/or the security provided by a customer may be said to constitute his trading limit. He can enter into trades which, when multiplied by the applicable NTR, do not exceed his trading limit. Or, putting the matter another way, if an operator allows its customer to place a bet which exceeds his then trading limit, the operator may be able to stipulate for the right to require the customer to secure the level of his trading, by reference to the NTR, by calling for subsequent security.
The parties and the trades
The customer is Dr Vijay Battu. At the relevant time, in September 2002, he was experienced in spread betting, and had used a number of operators to trade with. He was concentrating on the Dow Jones futures index (the "DJ index" or "index"), which he was betting to fall. He is the defendant in these proceedings and here the appellant.
The operator is Spreadex Limited, who provide spread betting facilities on sports events and financial indices. Their customers' trading debts are enforceable by virtue of section 412 of the Financial Services and Markets Act 2000. They were regulated by the SFA, now the FSA. In these proceedings they are claiming just under £25,000 from Dr Battu. They are respondents to this appeal.
On 19, 23 and 24 September 2002 Dr Battu opened five trades with Spreadex, for a total of...
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