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CFH Clearing v Merrill Lynch (2020) – The ISDA Master Agreement takes precedence over ‘market practice’

CFH Clearing Ltd v Merrill Lynch International [2020] 8 WLUK 84

The England and Wales Court of Appeal in August 2020 confirmed the High Court’s 2019 decision for MLI against CFH, dismissing the latter’s appeal.

The courts did not find any express or implied term in the ISDA Master Agreement that a counterparty must adjust foreign exchange trades in a time of significant market fluctuation. Unlike CFH’s other counterparties, MLI did not vary their 2002 ISDA Master Agreement to reflect market changes (in this case, the Swiss National Bank de-pegging the Swiss Franc from the Euro 17 minutes before the swaps were executed).

MLI offered CFH an exchange rate of 0.75 CHF during the resulting period of high volatility, while the ‘official low’ on the EBS trading platform was declared to be 0.85 CHF. Thus, CFH attempted to claim for the resulting 0.10 CHF per Euro (an overall sum of slightly over 2 million Euro), arguing that MLI had an express or implied obligation to follow the adjustments made by other banks to reflect the official low.

The express obligation was theoretically found in MLI’s standard terms of business, which mentioned, ‘where relevant, the market practice of any exchange’ (Clause 7). CFH’s other counterparties (Barclays, UBS and JP Morgan, para 15) agreed to rebook their own trades at 0.85. As these trades were OTC, not exchange-traded, the High Court dismissed the argument that the behaviour of other banks placed a legal obligation upon MLI to do the same.

Lord Justice Phillips in the Court of Appeal concluded that CFH and MLI were both ‘sophisticated commercial part[ies]’ that were able to competently bargain, and so could have adjusted their agreement to encompass market disruption. As they did not, and retained the standard terms of the ISDA Master Agreement, they had no grounds to appeal against MLI adhering to the terms laid out in the Master Agreement. Furthermore, ‘market practice’ is too vague to be taken as a legal standard, so there is no implied legal obligation to follow other banks’ decisions.

The first key takeaway is that OTC trades do not fall under a legal obligation to follow the behaviour of other counterparties (due to the lack of regulated exchange).

The second key takeaway is to be wary of commercial reality. There is a clear inequality of bargaining power between Merrill Lynch and a smaller counterparty (CFH is now part of Finalto Group). MLI did not wish to rebook their trades – and were clearly disinterested in doing CFH a favour by agreeing to do so when they had no legal obligation.

Simply, it is not possible to rely on an implied term stemming from vague concepts of market practice, even if it is mentioned in a counterparty’s general terms of business.

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