Effective termination of a repo (Lehman Brothers International (Europe) v Exxonmobil Financial Services)

Effective termination of a repo (Lehman Brothers International (Europe) v Exxonmobil Financial Services)

A recent decision in the Lehmans insolvency discusses the construction of the termination provisions in the Global Master Repurchase Agreement (GMRA), how these provisions are effected in practice and how the securities should be valued

Original news

Lehman Brothers International (Europe) v Exxonmobil Financial Services BV [2016] EWHC 2699 (Comm)

The claimant, Lehman Brothers, contended that a default valuation notice served by Exxon wasinvalid and the valuations ascribed to the securities were incorrect. The Commercial Court held, among other things, that the default valuation notice had been validly exercised and that the valuation had to be rational even if it wasnot objectively reasonable.

What are the practical implications of this case

This case highlights the possible complications that can arise when following termination provisions under a master agreement.

In this case, the trades were governed under a GMRA. The GMRA sets out its termination provisions under section 10. In section 10(e), a 'Default Valuation Notice' (DVN) is defined. The definition does not include specific language that should be included in the DVN. It merely states that it is a written notice which:

'states that, since the occurrence of the relevant Event of Default, the non-Defaulting party has sold, in the case of Receivable Securities, or purchased, in the case of Deliverable Securities, Securities which form part of the same issue and are of an identical type and description as those Equivalent Securities or Equivalent Margin Securities'

The International Swaps and Derivatives Association (ISDA) master agreement includes its early termination provisions under Section 6 and similarly does not set out a sample notice or generic wording that should be included when terminating that notice early.

The case suggests that practitioners should be careful in ensuring that notices are delivered in a timely way and follow the procedures set out in the master agreement precisely.

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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.