Investment Bank Special Administration Does Not Trigger Repo Event of Default


On 1 November 2012, the High Court judgment of Richards J in the case of Heis and others (Administrators of MF Global UK Ltd) v MF Global Inc[1] was published.  The judgment is of interest as it provides clarity on the application of the Investment Bank Special Administration Regulations 2011 (the “Regulations”) to boilerplate clauses within standard repo documentation.  The Regulations came into force in February 2011 pursuant to powers conferred under the Banking Act 2009, constituting a response to the financial crisis of 2008 and particularly the collapse of Lehman Brothers.  They included, for the first time, special procedures specifically designed to deal with the issues arising in relation to insolvent banks.


The formal insolvency proceedings relating to the collapse of the MF Global group commenced on 31 October 2011 when MF Global Holdings Ltd (“MFG Holdings”), the US incorporated group holding company, filed for bankruptcy protection under Chapter 11 in the US.  This was followed a few hours later by the appointment of administrators pursuant to the Regulations over MF Global UK Limited (“MFG UK”), the main trading entity for the MF Global group in Europe, on the application of its directors.  Subsequently, still on the same day, a trustee was appointed under the Securities Investor Protection Act 1970 with respect to MF Global Inc (“MFG Inc”), the main trading entity of the MF Global group in the US.

The collapse of the MF Global group was attributed largely to a failed investment in European sovereign debt securities in the period between 2009 and 2011.  As part of this investment policy, MFG UK purchased securities and sold them to MFG Inc via repo transactions documented under a standard 2000 Global Master Repurchase Agreement (“GMRA”) governed by English law.


Paragraph 10 of the GMRA defines Events of Default.  Most default circumstances require the non-Defaulting Party to serve a “Default Notice” on the Defaulting Party before the circumstance itself crystallises into an actual Event of Default for the purposes of the GMRA.  The exception to this rule is the case of:

“…an Act of Insolvency…which is the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party …”

An “Act of Insolvency” is defined in paragraph 2(a) of the GMRA and includes the appointment of any trustee, administrator, receiver, liquidator or analogous officer over a party to the GMRA or any material part of its property.  Broadly speaking, following the occurrence of an Event of Default, valuations for the purposes of closing-out transactions are performed by the non-Defaulting Party.

The Issues

MFG Inc conceded that the appointment of the SIPA Trustee constituted the ‘appointment of an officer analogous to a liquidator’ and that this would automatically lead to an Event of Default under the GMRA.  Ordinarily, this would also have resulted in MFG Inc being the Defaulting Party and MFG UK being the non-Defaulting Party under the GMRA.  However, MFG Inc argued that the earlier appointment of an administrator in relation to MGF UK under the Regulations also constituted ‘the appointment of an officer analogous to a liquidator’.  As such, MFG Inc claimed that the automatic Event of Default had actually occurred at this earlier point, with the result that MFG Inc was actually the non-Defaulting Party and MFG UK was the Defaulting Party.  The fact that MFG UK would have to make payment to MFG Inc was not in dispute.  However, the identity of the non-Defaulting Party was of key importance given that MFG Inc valued its claim at GBP 286.7 million, whereas MFG UK valued the claim at only GBP 37 million.

Broadly, therefore, the issue to be considered by the court was whether the appointment of an administrator in relation to MFG UK was analogous to the appointment of a liquidator and therefore automatically constituted an Event of Default under the GMRA without the need for service of a Default Notice by MFG Inc.

The Judgment

The court considered the nature of liquidation versus administration.  It concluded that the sole purpose of a liquidation is to realise the assets of a company and to distribute proceeds to creditors.  In doing so, the business of the company is brought to an end.  It acknowledged that an administration may also result in the realisation of a company’s assets and a distribution of proceeds among creditors, but noted that administration can also entail the rescue of the company as a going concern.  In reaching this conclusion, the court took support from the objectives of the Regulations, which are:

  • to ensure the return of client assets as soon as reasonably practicable;
  • to ensure timely engagement with market infrastructure bodes and Authorities; and
  • either to:
    • rescue the investment bank as a going concern, or
    • wind it up in the best interests of the creditors.

The court also referred to Australian authority[2] in which the appointment of statutory administrators and receivers appointed by secured creditors was held not to be analogous to the appointment of a liquidator, their relative positions being summarised as follows:

“The function of a liquidator…is to preside over the death of a company.  An administrator…strives for the opposite result (even though the company may yet in the end die).  A receiver appointed by a secured creditor does neither of those things, being largely unconcerned about the fate of the company.”

The court contrasted the unqualified power of an administrator “to carry on the business of the company”, establish subsidiaries, borrow money and do “all other things incidental to the exercise of the foregoing powers” against the more restricted powers of a liquidator.  This, it felt, was consistent with the differing nature and objectives of the two regimes.  It also drew further support from the drafting of the GMRA itself, commenting that it was understandable that a non-Defaulting Party would wish to have an opportunity to wait and see how administration proceedings develop before deciding whether to exercise its right to serve a Default Notice.  In contrast, in a liquidation scenario where the company will cease to carry on business, it is equally understandable that an Event of Default occurred automatically without the need to serve notice.

Accordingly, the court held that the appointment of a special administrator under the Regulations was not analogous to the appointment of a liquidator and furthermore that an application under the Regulations for a special administration order was not analogous to a petition for a winding-up for the purposes of paragraph 10(a)(iv) of the GMRA.  Accordingly the appointment of administrators with respect to MFG UK on 31 October 2011 did not constitute an Event of Default under the GMRA.


This case provides useful insight into the operation of the Regulations and their interaction with standard repo documentation.  Thankfully, the Bankruptcy Events of Default under both the 1992 and 2002 ISDA Master Agreements would seem less susceptible to this issue, due to the manner in which “Automatic Early Termination” operates under the ISDA Master Agreement and the specific drafting of the standard ISDA Bankruptcy Event of Default.  Nonetheless, the conclusions of the court provide a timely reminder of the way in which legal risk can develop when portfolios of documentation fail to keep pace with changing circumstances and the benefits of performing period reviews in managing that risk.

[1] [2012] EWHC 3068 (Ch)

[2] Lindholm, In re Opes Prime Stockbroking Ltd [2008] FCA 1425 and Beconwood Securities Pty Ltd v. Australia and New Zealand Banking Group Pty Ltd (2008) 66 ACSR 116

European Banking Federation responds to Liikanen


On 14 November 2012, the European Banking Federation (EBF) published its response to the final report of the Liikanen Group on proposed structural reforms to the EU banking sector.  Broadly, the Liikanen Group had recommended the mandatory separation, with respect to all banks exceeding a certain threshold, of trading business from more ‘traditional’ banking activities.  The resulting entities would be required to fund themselves separately and meet other prudential regulatory requirements on a stand-alone basis.  The main issues addressed by the EBF are summarised below.

Mandatory Separation

The EBF believes that the case for mandatory separation has not been made in light of the Liikanen Group’s conclusions that:

  • no particular business model was more or less vulnerable in the crisis;
  • the benefits of the universal banking model should be retained;
  • the EU Single Market should remain intact; and
  • the regulatory reform agenda represents a “substantive and robust” response to addressing the deficiencies which become apparent during the financial crisis.

The EBF believes that mandatory separation:

  • does not adequately address the riskiness of assets;
  • does not solve the issue of systemic risk;
  • has distortive effects upon bank functions;
  • will impact negatively on banks’ ability to lend;
  • will reduce diversification benefits of the universal banking model;
  • will reduce the competitiveness of the European financial sector by creating a two-tier system where banks with risky trading positions below the threshold obtain an unfair advantage;
  • will lead to a further fragmentation of the Single Market due to the fact that the reforms proposed by the Liikanen Group represent an add-on to national structural reform proposals such as Vickers and Volcker as well as future proposals being discussed in other Member States, including France, Holland and Belgium; and
  • would result in higher costs for bank customers.

The EBF believes that there is a real risk that an independent trading entity would not be viable and would be downgraded by credit rating agencies, forcing up funding costs.  This, together with the likely increase in administrative costs arising from the proposed requirements for separate reporting and  independent boards and governance, could lead to non-EU banks replacing European banks as providers of ‘trading’ services as well as the concentration of risk in the few market participants large enough to bear the increased cost.

Instead of the proposed mandatory separation, the EBF supports a solution that targets high-risk and speculative trading activities, using proprietary trading activities with no link to clients’ needs as an example.  To this end, it recommends the enhanced use of Recovery and Resolution Plans (RRPs) as a way to address any impediments to resolvability.  However, it maintains that structural separation of certain activities conditional on the RRP should be viewed as a last resort.


The EBF is yet to be convinced that a designated bail-in category, as recommended by the Liikanen Group, is preferable to the proposals in the draft EU Recovery and Resolution Directive (RRD) requiring a broad range of bail-in-able debt instruments.  The EBF also believes that further consideration needs to be given to the exclusion of short-dated instruments, although it acknowledges that a broad range of views exist even within the EBF, from suggestions to remove the short-dated exclusion altogether, to proposals that the one month period be increased to six months on the basis that this is more consistent with other supervisory requirements such as the Net Stable Funding Ratio under Basel III.  The EBF believes strongly that derivative positions should not be included within the scope of bail-in.

Capital Requirements

The EBF believes that the introduction of floors for risk weightings “constitutes a significant threat to risk modelling and to the principle of calibrating capital requirements according to actual risks”.  It also believes that proposals to establish extra non-risk based capital buffers for the trading book as well as LTV caps for real estate related lending (both of which would take effect on top of existing risk-based requirements) should be deferred pending the finalisation of the new Capital Requirements Directive.  Specifically, the EBF states that exposures to funds falling within the scope of the Alternative Investment Fund Managers Directive should not be perceived as risky or speculative activities for which extra measures needs to be undertaken.


CASS Resolution Pack Compliance: Don’t Expect Sympathy From the FSA

On 20 November 2012, the FSA published a speech given by Richard Sutcliffe, Head of the Client Assets Unit at the FSA on the background and purpose of the unit he leads and its future policy initiatives.

The speech underlined the priority given by the FSA to improving the client assets regime.  Mr Sutcliffe noted that there are over £9.7 trillion of custody assets within the UK, the protection of which is crucial if the FSA is to meet its objectives of protecting consumers and enhancing the integrity of UK markets.  In his words, CASS compliance is “not a regulatory fad, it is a fundamental duty” owed to customers.

The Client Assets Unit was created in the wake of the Lehman collapse and since that time has initiated a number of policy reforms, including:

  • the stratification of firms into “small”, “medium” or “large” based on the value of their holdings;
  • the requirement for all medium and large firms to submit a monthly Client Money & Assets Return; and
  • the introduction of the CF10a role – the dedicated control function with responsibility for client money compliance in all medium and large firms.

Mr Sutcliffe made clear that the FSA actively uses all of the material generated by firms and takes the issues of quality and accuracy of data very seriously.  Whilst acknowledging that progress has been made, he noted that concerns regarding CASS compliance remain – particularly the continuing failure of firms to properly document trust arrangements.  In light of these concerns the FSA will intensify its supervisory approach in the future, visiting more firms and returning to other firms to cover different issues or check on progress.

On the subject of CASS Resolution Packs, the FSA is aware of the costs involved in creating and maintaining a CASS Resolution Pack and the tight compliance deadlines.  However, it is not particularly sympathetic to the concerns of firms in this area on account of the fact that it is only asking for documentation which, in the main, should have been available to firms before the introduction of the CASS Resolution Pack requirements.

A CASS Resolution Pack provides a convenient snap shot of the state of a firm’s CASS compliance, which can be requested by the FSA at any time.  Given this, the particular concerns that that the FSA has regarding trust notifications and acknowledgments (which are required to be an immediately available component of every CASS Resolution Pack) and the stated intention to increase the intensity of future supervision, firms would be well advised to ensure that their approach to CASS Resolution Pack compliance is on a firm footing before the FSA next come knocking.

New Developments in the Market for CoCo Bonds

Here is a link to an FT article discussing the recent issuance by Barclays of CoCo bonds, the positioning of CoCo bonds within the capital structure and some of the risks associated with this type of instrument.

Traditionally, CoCo bonds have converted to equity once a particular threshold is breached.  In contrast, the bonds recently issued by Barclays are written down to zero if the bank’s common equity tier-one ratio falls below 7%.  In return, investors receive a coupon of 7.625%, which at least one analyst has described as a “depressingly low” yield for effectively providing protection to the equity investors in a bank.

IAIS consults on policy measures for global systemically important insurers


On 17 October 2012, the International Association of Insurance Supervisors (IAIS) published a consultation document relating to proposed policy measures for global systemically important insurers (G-SIIs) i.e. insurers whose distress or disorderly failure would cause significant disruption to the global financial system.

The consultation remains open until 16 December 2012 and details policy measures designed to reduce the probability and impact of G-SII failure as well as to incentivise G-SIIs to become less systemically important and non G-SIIs not to become G-SIIs.  The policy measures are broken down into three main categories:

  • Enhanced supervision;
  • Effective resolution; and
  • Higher loss absorption (“HLA”) capacity.

Enhanced Supervision

Non-traditional and non-insurance (NTNI) activities of G-SIIs, such as derivates trading, are regarded as particular sources of systemic risk.  Within most G-SIIs, NTNI activities are carried out within separate group companies.  As such, it is necessary for supervisors of G-SIIs to have group-wide supervision powers.  Within this context, enhanced supervision will take the form of:

  • Enhanced liquidity planning and management; and
  • Systemic Risk Reduction Plans.

Enhanced Liquidity Planning and Management

G-SIIs will be required to have adequate arrangements in place to manage group liquidity risk, primarily in relation to NTNI activities and channels of interconnectedness.

Systemic Risk Reduction Plan

In addition to maintaining recovery and resolution plans (RRPs), G-SIIs will be required to develop Systemic Risk Reduction Plans (SRRP).  The purpose of an SRRP is to shield traditional insurance business from NTNI business (and vice versa), reduce the systemic importance of the G-SII and improve resolvability.  Where appropriate, an SRRP should include ex-ante measures to ensure the effective separation of systemically important NTNI activities from traditional insurance business into standalone, regulated entities.  GSIIs must ensure that any entities created as a result of this process do not benefit from subsidies in the form of capital and/or funding and are:

  • Structurally self-sufficient: meaning that the entity could be liquidated without impacting the remaining group and that intra-group transactions such as guarantees  and cross-default clauses are either prohibited or at a minimum adequately monitored and restricted; and
  • Financially self-sufficient: meaning that the entities in question are adequately capitalised.

 In addition, the following specific policy measures should be considered:

  • Direct prohibition or limitation of systemically important activities;
  • Requirements for prior approval of transactions that fund or support systemically important activities;
  • Requirements for spreading or dispersing risks relating to systemically important activities; and
  • Limiting or restricting diversification benefits between traditional insurance business and other businesses.

 Effective resolution

The FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions” (Key Attributes) details the specific resolution requirements for all G-SIFIs and forms the basis for improving G-SII resolvability.  These requirements include:

  • The establishment of Crisis Management Groups (CMGs);
  • The elaboration of recovery and resolution plans (RRPs);
  • The conduct of resolvability assessments; and
  • The adoption of institution-specific cross-border cooperation agreements.

However, measures to resolve G-SIIs must also account of the specificities of insurance including:

  • Measures needed to separate NTNI activities from traditional insurance activities;
  • The possible use of portfolio transfers and run off arrangements as part of the resolution of entities conducting traditional insurance activities; and
  • The existence of policyholder protection and guarantee schemes (or similar arrangements).

Higher loss absorption (HLA) capacity

The IAIS proposes a cascading approach to increasing HLA capacity.  Initially, higher HLA requirements would be targeted on specific G-SII group entities depending on the extent to which it had demonstrated effective separation between traditional insurance and NTNI activities, with additional capital being required in relation to activities that have the potential to generate or aggravate systemic risk (e.g. NTNI businesses).  Subsequently, an assessment of the adequacy of group HLA levels would also be performed.  This would take into account the level of HLA in individual group companies and any entity separation that exists, but only where that HLA was not created by multiple-gearing through down streaming capital within the G-SII.  However, the IAIS acknowledges that there is an on-going internal discussion as to whether this subsequent step is required if targeted HLA and other measures (such as restrictions and prohibitions) are effective in reducing systemic importance to an acceptable level.  In all cases, higher HLA capacity could only be met by “the highest quality capital”, being permanent capital that is fully available to cover losses of the insurer at all times on a going-concern basis.

Implementation time frame

A detailed timeline for the implementation of G-SII policy measures is detailed below:

Key Implementation Dates and Timeframes

Action Required


April 2013

First G-SIIs designated (with annual designations thereafter   expected each November)

From 2013

Implementation of enhanced supervision and effective resolution   commences

End 2013

IAIS   to elaborate proposed HLA capacity measures

Within 12 months of designation

Crisis   Management Groups (CMGs) to be established

Within 18 months of designation

Other   resolution measures to be completed

Within 18 months of designation

Systemic   Risk Reduction Plan (SRRP) to be completed

Within 36 months of designation

Implementation of SRRP to be assessed

November 2014 to 2016

G-SIIs   designated annually (with HLA not applicable until 2019)

November 2017

G-SIIs   designated based on 2016 data (with HLA applicable from 2019)

January 2019

HLA   capacity requirements apply based on assessment of implementation of the   structural measures


Financial Markets Law Committee responds to Liikanen Report

On 13 November 2012, the Financial Markets Law Committee (“FMLC”) published a response to the Liikanen Report on structural reform of the EU banking sector (see blogpost dated 4 October 2012 for more detail on the report itself).  The response focuses on two aspects of the Liikanen Report:

  • Bail-in, and
  • Ring-fencing.

On the subject of bail-in, the FMLC supports the Liikanen group’s recommendation that the set of instruments to which the bail-in tool would apply needs to be more clearly defined.  It also reiterated its previous concern that over-reliance on exemptions from the scope of the bail-in tool risks undermining one of the key principles of insolvency law, being the pari passu distribution of assets to creditors of the same class.

On the subject of ring-fencing, the FMLC made clear its belief that any structural reforms implemented at an EU level must take account of existing and proposed Member State ring-fencing regimes, or risk a situation where certain institutions would, in effect, have to be split into three parts.

Make All Existing Debt “Bail-inable” Say Banks

This is a link to an FT article reporting on evidence given yesterday to the Parliamentary Commission on Banking Standards by Stephen Hester, Chief Executive of Royal Bank of Scotland and Peter Sands, his opposite number at Standard Chartered.

Both men support proposals to make all existing unsecured bank debt “bail-inable”, irrespective of maturity.  This, the FT reports, would create a buffer of more than £200 billion before bank failure would result in taxpayer liability.  Mr Hester is reported to have recognised that such a move was “essential for society”, even if it led to increases in the cost of bank debt.

EU Parliament Sets its Sights on RRD Early Intervention Powers

The RRD needs to focus less on the issue of individual failing banks and more on ways to resolve a general banking crisis, according to an EU Parliament press release published on 6 November 2012.

In addition, the next priority should be to clearly define the point at which resolution is triggered and control of an institution passes from its management to resolution authorities.  According to the EU Parliament, there must be no “grey zones” as to who is running a bank.

Beyond this, the question of resolution financing must be also addressed.  Clear rules, which allow the use of public funds only once shareholders have been wiped out, should be established.  These arrangements should be supported by the creation of a resolution fund, financed by way of ex ante industry contributions.

Deadline for G-SIB Resolution Plans Pushed Back

On 5 November 2012, the Financial Stability Board (FSB) published a letter dated 31 October 2012 addressed to the G20 regarding progress made with respect to financial regulatory reforms.

The FSB reported ‘solid but uneven’ progress” in the four priority areas identified by the G20, being:

  • building resilient financial institutions (i.e. Basel III);
  • ending “too big to fail” (i.e. RRP);
  • strengthening the oversight and regulation of shadow banking activities; and
  • completion of OTC derivatives and related reforms.

On the subject on ending “too big to fail”, the FSB noted that a peer review of national actions taken to legislate its “Key Attributes of Effective Resolution Regimes” document will now be published in the first half of 2013.  More importantly, however, on the subject of resolution planning for Globally Systemically Important Financial Institutions (G-SIFIs), the FSB confirmed that the deadline for completion of operational resolution plans for Globally Systemically Important Banks (G-SIBs) has been extended by six months until mid-2013.  Consequently, the FSB’s peer-based resolvability assessment process will now be delayed until the second half of 2013.

Changes to the G-SIFI List

In November 2011, the Financial Stability Board (FSB) published its initial list of Global Systemically Important Banks (G-SIBs).  On 1 November 2012, the list was updated, with BBVA and Standard Chartered being added to the list and Commerzbank, Dexia and Lloyds all being removed.

The significance of being classified as a G-SIB lies in the fact that, under Basel III, any bank identified as a G-SIB in November 2014 will be required to maintain additional loss absorbency.  This requirement will be phased in between January 2016 and January 2019 and ranges between 1% and 2.5% of risk weighted assets depending on the significance of the individual firm.  G-SIBs are also required to meet higher supervisory standards for risk management functions, data aggregation capabilities, risk governance and internal controls.  Any firm newly designated as a G-SIB is required to implement certain resolution planning requirements within specified deadlines.  Furthermore, even where a financial institution is no longer designated as a G-SIB it will continue to be subject to the requirement to prepare an RRP to the extent that it is assessed by its national regulator to be systemically significant or critical in the event of failure.

For the first time, the current list of G-SIBs has been allocated into provisional buckets corresponding to the required level of additional loss absorbency, as set out in more detail in Annex 1 below.  The timetable for implementation of resolution planning requirements for newly designated G-SIFIs is detailed in Annex 2 below.

Annex 1



G-SIB in alphabetical order within each   bucket







Deutsche Bank


JP Morgan Chase




BNP Paribas



Bank of America

Bank of New York Mellon

Credit Suisse

Goldman Sachs

Mitsubishi UFJ FG

Morgan Stanley

Royal Bank of Scotland




Bank of China


Group BPCE

Group Credit Agricole

ING Bank

Mizuho FG



Societe Generale

Standard Chartered

State Street

Sumitomo Mitsui FG

Unicredit Group

Wells Fargo

Annex 2

G-SIFI Requirement Deadline for completion following date of G-SIFI designation
Establishment of Crisis Management Group (CMG)

6 months


Development of recovery plan

12 months


Development of resolution strategy and review within CMG

12 months


Agreement of institution specific cross-border cooperation agreement

18 months


Development of operational resolution plan

18 months


Conduct of resolvability assessment by CMG and resolvability assessment process

24 months