Calculating Close-out Amounts under the 2002 ISDA Master Agreement (Lehman Brothers Special Financing Inc v National Power Corporation and another)

Calculating Close-out Amounts under the 2002 ISDA Master Agreement (Lehman Brothers Special Financing Inc v National Power Corporation and another)

The Commercial Court considered the subject of how Close-out Amount is calculated under the 2002 ISDA Master Agreement, including whether it is open to a Determining Party to remake a determination of Close-out Amount and whether the determination of the Close-out Amount only required a rational decision to be made or instead whether thatdecision had to be objectively reasonable.

Lehman Brothers Special Financing Inc. v National Power Corporation and another [2018] EWHC 487 (Comm)

What are the practical implications of this case?

The judge emphasises thatthe Close-out mechanism set out in the 2002 ISDA Master Agreement is designed to, and does, achieve a more commercially reasonable result than the loss mechanism set out in the 1992 ISDA Master Agreement. He sets out thatwhen making a determination of the Close-out Amount, the Determining Party must act in an objectively reasonable manner, which is a higher standard than merely acting in a rational way. It emphasises again to parties to an ISDA Master Agreement thatthey must ensure thatthe close-out process set out in the ISDA Master Agreement is followed to the letter and thatthe Determining Party acts in a manner thatis objectively reasonable.

What was the background?

In 2007 Lehman Brothers Special Financing (LBSF) and National Power Corporation (NPC) entered into a forward currency swap under a 2002 ISDA Master Agreement. This swap was made by NPC as part of a hedging strategy it had, which was broadly to help provide some protection against the risk of devaluation of the Philippine peso (PHP).

In 2008, LBSF filed for bankruptcy relief under Chapter 11 which constituted an event of default under the swap. The swap was therefore terminated early by notice given by NPC with a designated early termination date of 3 November 2008. NPC then had to determine the Close-out Amount using ‘commercially reasonable

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About the author:

Meet Emma:

1.Banking and finance lawyer with experience in derivatives, debt capital markets, securitisation and structured finance in London and Paris

2.Likes ballet, playing the harp and holidays

3.Thinks the law is always changing!

Emma trained and qualified at Allen & Overy LLP and worked in their derivatives and structured finance teams in London and Paris.  She then joined the foreign exchange prime brokerage legal team at Deutsche Bank before spending 4 ½ years with Crédit Agricole CIB advising the fixed income and derivatives desk.