On 5 October 2016, Mr Justice Hildyard handed down his judgment in the third tranche of what has become known as the “Waterfall II Application” (“Waterfall IIC”)1. Waterfall IIC was filed in the context of the administration of Lehman Brothers International (Europe) (“LBIE”) by LBIE’s administrators in order to obtain directions as to the allocation of the surplus remaining after the payment in full of the proved debts. The surplus amounted to around £7 billion and, inevitably given such a large amount, created grounds for litigation between competing creditors.
Waterfall IIC is of particular interest for the derivatives market as it addresses, in the context of debts proved in an administration, the default interest payable on “close-out” amounts arising after a termination of certain standard form master agreements for derivatives transactions governed variously by English, New York or German law (namely the 1992 and 2002 ISDA Master Agreements and the German Master Agreement).
Initially, Waterfall IIC was also intended to address similar issues arising from master agreements governed by French law, namely the FBF and AFB Master Agreements (for derivatives transactions), the AFTB Master Agreement (for repurchase transactions) and the AFTI Master Agreement (for securities lending transactions) (the “French Law Issues”)2. However, parties to Waterfall IIC with competing interests eventually reached an agreement on the issues relating to the Euro denominated claims arising under the FBF and AFB Master Agreements (the “Agreed Position”3) and also agreed that the other issues relating to the AFTB Master Agreement and the AFTI Master Agreement did not need to be resolved in either the proceedings in the High Court or in the Agreed Position as they were de minimis. All French Law Issues were therefore removed from Waterfall IIC4.
This Client Alert focuses on the guidance on the construction of default interest provisions in standard form master agreements that can be drawn from the judgment rendered by the High Court (for the 1992 and 2002 ISDA Master Agreements) and the Agreed Position (for the FBF and AFB Master Agreements). It also incidentally addresses certain aspects of the default interest provisions in the AFTB and AFTI Master Agreements that can be inferred from the position papers and expert reports filed by the parties and their relevant experts in relation to the French Law Issues.
Please click on the file below to read the full Client Alert.
1 A copy of the judgment is available here.
2 Issues 22 to 26 of Waterfall IIC.
3 A copy of the Agreed Position is available here.
4 Further to the pre-trial review held on 9 October 2015, the parties agreed, and Mr Justice Hildyard approved, in an order which was sealed on 30 October 2015 (the “PTR Order”), the removal of all French Law Issues from Waterfall IIC. A copy of the sealed PTR Order is available here.