MF Global UK Ltd, Re

Client money entitlements following a primary pooling event must be calculated under the Client Assets Sourcebook rules. Open positions are valued notionally at the primary pooling event by reference to published closing or settlement prices, or another appropriate pricing source. They are not valued by reference to prices obtained when positions are subsequently closed out.

The hindsight principle applies to the estimation of contingent or unascertained claims. It does not operate as a general default rule where the regulatory scheme prescribes a notional valuation method. CASS 7 and 7A form a detailed code, and the reference to client money entitlement being calculated under the set-off rule does not leave a gap to be filled by insolvency principles.

The administrators of MF Global UK Ltd sought directions concerning the basis on which clients’ open positions should be valued when distributing pooled client money after a primary pooling event. Attestor supported valuation by market or mark-to-market value at the event date. Schneider supported valuation by the actual prices at which positions were subsequently closed out, relying on the hindsight principle.

The application concerned the construction of CASS 7 and 7A, including the definitions of client equity balance and client money entitlement, and the effect of the Supreme Court’s decision in Lehman Brothers International (Europe) v CRC Credit Fund Ltd [2012] Bus LR 667.

1. The court held that client money entitlement is to be calculated by reference to each client’s individual client balance and client equity balance, using the method prescribed in Annex 1 to CASS 7, subject to the mandatory set-off required by CASS 7A.2.5R. The applicable valuation date is the date of the primary pooling event.

2. The definition of client equity balance requires a notional liquidation of open positions at closing or settlement prices published by the relevant exchange or another appropriate pricing source. The definition applies alike to daily reconciliation and to distribution following a primary pooling event. It does not permit actual subsequent close-out prices to be substituted for notional prices at the event date.

3. The hindsight principle is concerned with estimating contingent or unascertained claims. The CASS rules require a different exercise: a notional valuation of open positions at a specified date. There was therefore no gap in the regulatory code requiring the general insolvency principle to be imported.

4. The court rejected the argument that references to contractual entitlement in Lehman Brothers International (Europe) v CRC Credit Fund Ltd supported hindsight valuation. Those references concerned the contractual entitlement to have client money segregated and held on trust, rather than contractual claims generally.

5. Policy considerations did not alter the conclusion. The use of notional prices maintained consistency with daily reconciliations and could facilitate timely distribution. The court concluded that the hindsight principle was not applicable to determining claims to client money under CASS 7A. The parties were invited to consider the precise form of the direction.