Latest Lehman judgment reassures end users on Close-out Rights

It is undeniable that the legal complexities, and unprecedented facts, of the long running Lehman Brothers saga have generated a wealth of legal principal, most notably through the Waterfall series of litigation.

Summary

On 12 May 2015, the English High Court provided guidance on the interpretation of the Loss provision under the 1992 ISDA Master Agreement in its judgment in Fondazione Enasarco v Lehman Brothers Finance S.A. and another [2014] EWHC 34 (Ch). The judgment will be of interest to participants in the derivatives markets as it provides:

The English High Court in Fondazione Enasarco v Lehman Brothers Finance S.A. and Anthracite Rated Investments (Cayman) Limited [2015] EWHC 1307 (Ch) applied a common sense approach in the circumstances to the determination of Loss under the 1992 ISDA Master Agreement. The judgment of the judge (Mr Justice David Richards) is useful reading for those involved in structured products and derivatives.

Background

 BoE has published a paper on central counterparty (CCP) loss-allocation rules. To avoid a CCP’s insolvency, these rules allocate among the CCP’s participants any losses exceeding the CCP’s pre-funded default resources, such as the margin posted by clearing members (CMs), the mutualised default fund and the CCP’s own equity. The options the paper suggests include calling additional resources from CMs, applying haircuts to margin owed to any CM or terminating unmatched open contracts.

In an important new English Court of Appeal judgment in LBI EHF v Raiffeisen Bank International AG [2018] EWCA Civ 719 (11 April 2018), Lord Justice Flaux approved and expanded the earlier High Court judgment of Mr Justice Knowles CBE in LBI EHF (in winding up) v Raiffeisen Zentralbank Osterreich [2017] EWHC 522 (Comm) (20 March 2017) on the correct meaning and treatment of t

Lehman Brothers Special Financing Inc. v National Power Corporation & Anor [2018] EWHC 487 (Comm) is a significant case on the calculation of Close-out Amount under the 2002 ISDA Master Agreement.  

Two important points of principle arise from this judgment, which will have general application to transactions governed by the 2002 ISDA Master Agreement:  

The High Court has recently considered the interpretation of Section 6(a) of the 1992 ISDA Master Agreement: Grant & Ors v WDW 3 Investments Ltd & Anor [2017] EWHC 2807 (Ch).

On the Horizon

Welcome to the second edition of the On the Horizon newsletter - a regular update on upcoming cases and anticipated regulatory developments by the DLA Piper Banking and Finance Litigation team.

AUTUMN 2016

Cases to watch

The English High Court in Lehman Brothers International (Europe) (In Administration) [2016] EWHC 2417 (Ch), in one of a series of cases arising from the Lehman insolvency, has had to consider (among other issues) the meaning of “Default Rate” under the ISDA Master Agreement.

The High Court in London handed down judgment on Part C of the Lehman Waterfall II Application on 5 October 2016.

The judgment examines the extent of creditors’ entitlements to Default Rate interest on debts arising under ISDA Master Agreements governed by English law and New York law. As some £4.4 billion of LBIE’s admitted claims arise under ISDA Master Agreements and the debts were outstanding for more than five years, this judgment will materially influence the amount of money which must be applied in satisfaction of creditors’ entitlements to statutory interest.