Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB

A clearing broker exercising a contractual right to close out a client’s positions after default acts primarily to protect its own interests. The broker’s discretion is constrained by honesty, good faith and rationality, but the court should not retrospectively substitute its own trading judgment for that of the broker. A term requiring reasonable care and skill will not ordinarily be implied into the close-out right under the Supply of Goods and Services Act 1982 or common law. A tortious duty of care is likewise unavailable merely because the broker conducts the close out, unless it acts outside its contractual authority. The contractual power to close out may include recognised market methods involving new trades, including combination trades.

Euroption, an investment fund, sued its clearing broker, SEB, over the forced liquidation of its equity-index options portfolio after Euroption failed to meet margin calls during exceptionally volatile markets.

Euroption alleged that SEB began the close out too early or too late, used unauthorised combination trades, delayed closing certain call positions, and owed contractual and tortious duties to conduct the liquidation competently and with reasonable care.

The central issues were when the close out began, the scope of SEB’s contractual discretion, whether any duty of care applied, whether the combination trades were authorised, and whether SEB had acted irrationally or negligently.

1. The claim was dismissed. SEB began exercising its close-out right on 10 October 2008, not on 9 October. The communications and trading pattern on 9 October showed that SEB had imposed limits and pressed Euroption to reduce its positions, while Mr Scattolon retained control of the trading.

2. The parties accepted that SEB owed a duty to act honestly, in good faith and rationally. That duty does not permit the court to replace the broker’s decision with its own view of what was reasonable. It differs from an objective duty to take reasonable care.

3. No term requiring reasonable care and skill was implied under section 13 of the Supply of Goods and Services Act 1982. SEB’s rights to impose limits, refuse instructions and close out positions were protective contractual rights, not services supplied to Euroption. The Mandate’s close-out right was therefore subject to good faith and rationality only.

4. No tortious duty of care arose merely from SEB’s conduct of the close out. A duty might arise if SEB acted outside its contractual authority, but the combination trades were within clause 11. The phrase “close out” included recognised market methods involving new trades, and there was no contractual exclusion of combination trades. In any event, Euroption had authorised or ratified the relevant trades.

5. The combination trades were neither irrational nor negligent. A clearing broker was entitled to select the sequence and timing of trades by reference to risk reduction, liquidity and market conditions. It was not required to exhaust every possible alternative or follow a fixed hierarchy of strategies.

6. The alleged delay in closing short calls did not breach any applicable duty. It was reasonable to address the portfolio’s greater downside exposure first and to close calls when the directional risk shifted. Euroption also failed to establish recoverable loss, including because its analysis excluded positions whose later closure benefited it.