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MF Global UK Judgment Clarifies Law on Client Money Entitlement

A High Court judgment by Mr. Justice Richards handed down on January 29 has confirmed that a client’s open positions on trades, made with a firm regulated by the UK Financial Services Authority (FSA) that subsequently enters into an administration or liquidation, should be valued by reference to the market value of the trades at the time of the firm’s failure rather than at the date the positions are closed out.

The administrators of MF Global UK Limited (MFG UK) sought directions from the court as to whether a client’s entitlement in respect of its positions is to be valued as of the date of the firm’s failure or by reference to the value of the positions as of the date that they were closed out. The court rejected arguments advanced on behalf of clients who stood to gain as their positions were closed out at prices which were higher than the market value of the positions on the date that MFG UK went into administration.

The judgment was based on a consideration of Chapters 7 and 7A of the FSA’s Client Assets Sourcebook and, in particular, the meaning of ‘client equity balance’ which is defined in the FSA’s Handbook Glossary as “the amount which a firm would be liable ... to pay to a client in respect of the margined transactions if each of his open positions was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and his account closed.”

Mr. Justice Richards stated “there is no perfect system for establishing the figures at which open positions would close-out on the [date of the commencement of an administration] ... the FSA has taken the policy decision to adopt the same basis as applies to the daily reconciliations for understandable reasons of consistency, simplicity and speed.”

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©2014 Katten Muchin Rosenman LLP

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About this Author

Partner

Edward Black, a partner in Katten Muchin Rosenman UK LLP, has a wide range of funds and financial services experience. He has acted for securities, commodities and derivatives brokers and dealers, banks, investment banks and investment managers for over 20 years. This has led to substantial involvement in commercial and transactional work in the financial services field as well as extensive regulatory expertise, and to significant experience with employment law matters.

+44 2 20 7776 7624
Tim Aron, Katten Muchin Law Firm, Finance Attorney
Partner

Tim Aron, a partner in Katten Muchin Rosenman UK LLP, specialises in the regulation of financial services firms, clearing houses and trading platforms. He advises on a wide range of regulatory matters including securities and derivatives transactions, safe-keeping of money and assets, systems and controls and other high level standards, conduct of business rules, and the restructuring, acquisition and disposal of entities in the financial sector.

+44.0.20.7776.7627