The UK Court of Appeal has dismissed an appeal by CFH Clearing to have a judgement in favour of Merrill Lynch International (MLI) overturned – the original case relates to 27 trades submitted to MLI’s trading platform by the broker in the immediate aftermath of the Swiss National Bank removing the EUR/CHF floor at 1.20.
In an indication of the mayhem of that day, the trades, worth just over EUR 20 million were filled at an average rate of 0.1821969 as the cross plunged to near zero. As reported by Profit & Loss on the day, one trade went through the EBS platform at 0.00125, however the platform later set the “official” low traded as 0.8500. MLI re-papered the 27 trades to 0.75, which CFH apparently accepted “under protest” before it launched legal action for financial recompense equal a re-papering to 0.85.
In dismissing the appeal, the three judges state they consider the ISDA Master Agreement as overriding CFH’s claim that MLI should have re-papered the trade as this was “market practice” as witness by three other institutions re-papering to 0.85. “[I]t is difficult to see how a market practice overriding the ISDA Master Agreement standard terms could be derived from the [ACI] Model Code when that Code itself recognised that Master Agreements should be entered into to reflect market practices and to provide for exceptional circumstances,” the judgement states. “…CFH focused on one provision of the Model Code whilst ignoring the more fundamental recognition in the Code that legal certainty, including as to market practices and exceptional circumstances, should be ensured by adopting a Master Agreement.”
In concluding, the judges state, “CFH is a sophisticated commercial party which entered automated transactions at the next available price without specifying a limit. It was bound by the terms of those transactions according to the ISDA Master Agreement it had negotiated and agreed with MLI, an agreement which could have made, but did not make, provision for market disruption. [We] see no reason why CFH should not be held to its bargain.”
For more on this theme see today’s And Finally…