Interpreting the main provisions in ISDA Master Agreements (Waterfall IIC)

Interpreting the main provisions in ISDA Master Agreements (Waterfall IIC)

Christopher Robinson, partner at Freshfields Bruckhaus Deringer LLP, assesses the key takeaways from the judgment in the Lehman ‘Waterfall’ litigation, which addresses the interpretation of the main provisions in the ISDA Master Agreements concerning interest on sums due following the close-out of transactions upon early termination.

Original news

Re Lehman Brothers International (Europe) Lomas and others v Burlington Loan Management Ltd and other [2016] EWHC 2417 (Ch), [2016] All ER (D) 40 (Oct)

The Companies Court ruled on a number of issues concerning the application of statutory interest, under rule 2.88 of the Insolvency Rules 1986, SI 1986/1925, on debts proved in the administration of Lehman Brothers International (Europe) (LBIE).

What are the key takeaways from the Waterfall IIC case?

Subject to any appeal, the case provides important guidance on legal issues relating to default interest under the ISDA Master Agreement (and certain other agreements), although it does not address the facts of individual claims for default interest.

The ISDA Master Agreement provides that, when a party to an ISDA Master Agreement defaults on a payment obligation, the person to whom the payment is due (known as the ‘relevant payee’) is entitled to interest at the ‘default rate’ on the amount of that payment. The default rate is defined (in summary) as the rate the relevant payee certifies to be the cost to it if it were to fund or of funding the amount of the payment, plus 1% per annum.

The case provides guidance on the way in which a default rate can be calculated by a relevant payee in accordance with this contractual definition.

There are three key takeaways from the decision.

First, the judge decided that cost of funding is to be determined by reference to the cost which the relevant payee is, or would be, required to pay in borrowing the amount in qu

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