Collapse of MF Global

Updated November 2011

As has been well heralded in the press, MF Global entered Chapter 11 in the US on Monday 31 October, with its UK subsidiary entering into the Special Administration Regime (SAR) adopted in February 2011 following the collapse of Lehman Brothers. This has the advantage over ordinary    corporate administration in that it sets special objectives for the administrator. These include a swift return of client assets and timely engagement with market infrastructure. This is the first time the SAR has been initiated and it will be interesting to see how this works. KPMG have been appointed special administrators.

Following the collapse of Lehman Brothers, TLT acted for a number of clients in respect of debt instruments issued by and derivative positions with Lehman. Under ISDA terms insolvency is, of course, an event of default entitling clients to terminate their transactions with MF Global. In the context of the Lehman insolvency a number of clients terminated their positions effectively, with valuations being provided as required by the terms of the relevant contract.  It transpired that in many cases there were significant, and unexpected, disparities in valuation; these were tested before an arbitral tribunal, which, after hearing expert evidence, found in favour of Lehman.

You do not necessarily need to terminate any contract where you have a choice to do so simply because that option exists.  However, it is likely during the course of the Chapter 11 proceedings, albeit these are likely to be long winded, that an application will be made to treat all outstanding contracts as terminated at a particular date.  Depending on the attitude of the relevant judge, this may either be a date in the future or the date of the Chapter 11 proceedings. 

Whether you close out or not is likely to depend on whether you are in or out of the money.  If you are in the money, then think about terminating now in case your position goes out of the money in the future as the market moves.  If you are out of the money now, it may be that termination is the best means of quantifying and mitigating any losses including any losses on related hedges; either way, careful thought needs to be given to what your position looks like and the extent to which either you are hedged or the value you are carrying the contract in your books - experience with Lehman showed that clients had significantly undervalued their exposure to Lehman under derivative contracts which is always a nasty surprise.

While TLT cannot advise on the valuation of any contracts now or in the future, we are able to advise on approaches which may be taken to valuation and termination and are experienced in handling ISDA disputes in the London Court of International Arbitration and the English courts. 

Contact Richard Tall or Richard Clayton for more information.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.