Co-authored by Edward Black.
A High Court judgment by Mr. Justice Richards handed down on January 29 has confirmed that a client’s open positions on trades, made with a firm regulated by the UK Financial Services Authority (FSA) that subsequently enters into an administration or liquidation, should be valued by reference to the market value of the trades at the time of the firm’s failure rather than at the date the positions are closed out.
The administrators of MF Global UK Limited (MFG UK) sought directions from the court as to whether a client’s entitlement in respect of its positions is to be valued as of the date of the firm’s failure or by reference to the value of the positions as of the date that they were closed out. The court rejected arguments advanced on behalf of clients who stood to gain as their positions were closed out at prices which were higher than the market value of the positions on the date that MFG UK went into administration.
The judgment was based on a consideration of Chapters 7 and 7A of the FSA’s Client Assets Sourcebook and, in particular, the meaning of ‘client equity balance’ which is defined in the FSA’s Handbook Glossary as “the amount which a firm would be liable … to pay to a client in respect of the margined transactions if each of his open positions was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and his account closed.”
Mr. Justice Richards stated “there is no perfect system for establishing the figures at which open positions would close-out on the [date of the commencement of an administration] … the FSA has taken the policy decision to adopt the same basis as applies to the daily reconciliations for understandable reasons of consistency, simplicity and speed.”