Ascertaining Fair Market Value For 'Repo' Trades Under GMRA Standard Terms

In the recent decision in LBI EHF v. Raiffeisen Bank International AG [2018] EWCA Civ 719, the Court of Appeal has considered the close-out valuation provisions for "repo" trades entered into under a Global Master Repurchase Agreement (2000 edition). The court refused to limit the wide discretion given to a non-defaulting party to determine fair market value under the GMRA.

The factual background

The two banks had an ongoing trading relationship. When LBI failed and went into insolvency in October 2008, it had open positions on some of its trades with Raiffeisen, including 11 "repo" trades subject to the terms of the related GMRA. (Repo trades are economically, if not legally, a form of collateralised lending. In this case, LBI sold a portfolio of debt securities to Raiffeisen and agreed to repurchase equivalent securities at a later date and at a predetermined repurchase price. The initial purchase price paid by Raiffeisen represented the financing amount, and the repurchase price to be paid by LBI represented repayment of this amount, together with an amount representing interest.)

Following LBI's failure, Raiffeisen served default notices under these trades. Under the GMRA, LBI was required to pay Raiffeisen the agreed repurchase price minus an amount representing the "Default Market Value" of the repo securities, to be ascertained by Raiffeisen as the non-defaulting party.

LBI disputed Raiffeisen's valuation, which was based on the information available to it at the time of the default. This consisted of bids invited from counterparties, algorithm-based prices on Bloomberg and its own activity around that date. LBI argued that the relevant provisions of the GMRA required Raiffeisen to make its assessment without reference to any pricing information that reflected the distressed nature of the market at that time.

Valuation under the GMRA

The GMRA provides for various methods of ascertaining the Default Market Value (paragraph 10(e)(i) of the GMRA). These allow for the Default Market Value to be determined by reference either to the sale price of the repo securities (if sold in good faith), or to commercially reasonable quotations obtained from market makers for such securities or, where a sale or quotations are not possible, to the "Net Value" of equivalent securities. A valuation similarly based on net value of equivalent securities must also be used in all instances where the default valuation notice has not been served by the default...