Constructing the default valuation procedures found in the GMRA (LBI EHF v Raiffeisen Bank International AG)

Constructing the default valuation procedures found in the GMRA (LBI EHF v Raiffeisen Bank International AG)

This case concerned the interpretation of ‘fair market value’ as it appears in the Global Master Repurchase Agreement (GMRA).

LBI EHF v Raiffeisen Bank International AG

 [2018] EWCA Civ 719

What are the practical implications of this case?

This case confirms that non-Defaulting Parties are given a wide amount of discretion to provide valuations, especially in distressed situations. The only limitation on the non-Defaulting Party is that it should always act rationally and not arbitrarily or perversely. This should be of comfort to parties who are trying to value securities in a market that is illiquid or distressed, since they maintain a wide contractual discretion.

What was the background?

The appeal is in relation to a decision made in March 2017 by Robin Knowles J, whereby the meaning of ‘fair market value’ in the context of a GMRA was discussed. For more information on that first instance decision, see news analysis: Effective service of default notices under a GMRA and GMSLA (LBI EHF (in winding up) v Raiffeisen Zentralbank Österreich AG and Raiffeisen Bank International AG).

The claimant (LBI) entered into a number of trades with the defendants (RZB). In 2008, LBI went into receivership. At this time there were eleven open positions between LBI and RZB relating to repo transactions and three open positions relating to securities lending transactions. These trades were on the terms of two master agreements—the repos were under the terms of the GMRA 2000 edition and the securities lending transactions were under the terms of the Global Markets Securities Lending Agreement (GMSLA) 2000 edition. The dispute between the parties was in relation to valuation and whether default notices were effectively served by RZB. This appeal only relates to the repo transactions.

The failure and insolvency of LBI constituted an Event of Default under paragraph 10 of the GMRA and Default Notices were served by the respondent. What should happen next is that the Defaulting Party (eg LBI) would pay the non-Defaulting Party the agreed Repurchase Price for the securities minus the Default Market Value of Equivalent Secur

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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.