Termination by EMFS
Parties' positions and economic interests
Timing is everything: issues as to notices
Calculated valuations


In Lehman Brothers International (Europe) (in Administration) v Exxonmobil Financial Services BV(1) the High Court considered a range of issues arising from the application of the close-out provisions of the standard-form Global Master Repurchase Agreement (GMRA) 2000.

Although the GMRA 2000 has been supplanted by 2008 and 2011 versions that have revised the close-out procedures considered in the decision, many financial relationships are still governed by the 2000 version. Some of the decisions in the case are of wider application for financial markets in London or transactions governed by English law.

The dispute arose from a tri-party repo trade entered into between Lehman Brothers International (Europe) (LBIE) and Exxonmobil Financial Services BV (EMFS), which was terminated by EMFS as a consequence of the event of default which resulted when LBIE entered into administration on September 15 2008. The October 28 2016 judgment concluded the last piece of English High Court litigation involving the administrators of LBIE.

The judgment covers some narrow but important issues concerning the validity and timing of contractual notices, banking business hours in London and an important point on the English court's approach to determining what counterfactual hypothetical valuations would have been reached by financial markets participants under a contractual discretion to value securities.


In essence, the close-out provisions of the GMRA 2000 provide as follows:

  • The non-defaulting party must serve a notice of event of default to trigger termination.
  • The non-defaulting party is then responsible for calculating the net payment due between the parties by deducting the 'default market value' of the securities purchased under the repo transaction from the value of the cash payment (and accrued interest) made under the other leg of the transaction.
  • The non-defaulting party can elect between two valuation mechanisms:
    • Sale, quotation or valuation – under this mechanism, securities that are sold are to be valued by reference to their net proceeds of sale. If securities have not been sold but quotations have been obtained, they are to be valued at the average of the quotations. If no quotations have been obtained, securities must be valued by the non-defaulting party applying its own methodology.
    • Calculation valuation – under this mechanism, the value of all securities is to be established through calculation by the non-defaulting party applying its own methodology (so sales proceeds and quotations may well be informative, but are not binding).
  • In order to elect for the first of the above mechanisms, the non-defaulting party must serve a default valuation notice on the defaulting party before the default valuation time, which is defined as being the "close of business in the Appropriate Market on the fifth dealing day after the day on which the Event of Default occurs".

Termination by EMFS

On the morning of September 15 2008 EMFS sent a default notice to LBIE by which it stipulated that LBIE entering into administration was an event of default which terminated the repo trade.

At this point, EMFS would have notified JPMorgan Chase (JPM), the tri-party repo collateral manager, that the repo trade was being terminated. That would have triggered delivery to EMFS of the portfolio of securities which were held at (and managed by) JPM as the securities EMFS had purchased from LBIE under the GMRA.

EMFS instructed JPM to sell the mixed global portfolio of equities and bonds in order to realise as much of the $250 million collateral value as possible. This met with mixed success in the notoriously difficult market conditions, particularly for fixed-income securities. JPM sold 163 equity and six bond positions by September 22 2008 and obtained quotations for seven bond positions, but obtained no quotations or bids for five other bond positions.

EMFS then sought to trigger the sale, quotation or valuation limb of the close-out provisions to capture the sales that had been made from September 15 to September 22 2008 (the default valuation window).

Parties' positions and economic interests

LBIE's administrators sought to push the valuation of the portfolio into the second limb of the valuation mechanism. This was in order to displace the sale proceeds and quotations that had been received by EMFS over the course of the default valuation window in favour of the valuation calculation mechanism to be applied at the default valuation time of September 22 2016. As market pricing generally increased somewhat over the default valuation window as the markets started to absorb the initial shock of the collapse of Lehman, this would have the benefit for LBIE of setting aside the lower prices received on sales made in the week of September 15 2008.

With that as LBIE's first step, it then argued that the valuation standard which EMFS would have had to apply in reaching a valuation of the securities was a high one – an objectively reasonable assessment of their fair market value as at the default valuation time. LBIE sought to show through its expert evidence that such an objectively reasonable assessment would have resulted in a higher default market value than that which EMFS had in fact attributed to the portfolio, by around $20 million.

LBIE also sought to displace the seven bond quotation prices on the basis that JPM had obtained only a single quotation, rather than the minimum of two required under the contract. Lastly, it sought to impugn the valuations which EMFS had placed on the five bonds for which no bids or quotations had been obtained, on the basis that EMFS had applied an inappropriate 40% discount to the available (but unreliable) Bloomberg screen prices.

In contrast, EMFS sought to bring itself within the first limb of the valuation mechanism, so that the sale proceeds and quotations would form the basis of the valuation for the relevant securities. In relation to those securities which in any case had to have their value calculated, EMFS argued that its only duty was to exercise the contractual discretion as to how that calculation should be performed in an honest and rational manner (ie, in good faith and without arbitrariness, capriciousness, perversity or irrationality).

Timing is everything: issues as to notices

In order for LBIE to succeed in displacing the sales proceeds and quotations received during the default valuation window, it needed to show that EMFS had failed to serve its default valuation notice in time. There were two moving parts relevant to this. The five-day default valuation window starts with service of the default notice and the default valuation notice must then be served before close of business five days later. The timing of service of both of these notices was contested for a wide range of quite narrow reasons, the decisions on which may well have some bearing in a wider context:

  • EMFS sought to establish that the default notice which it sent to LBIE on the morning of September 15 2008 was invalid on the basis that the notice did not specify the event of default. The purpose of this was to establish that a second notice which it sent on September 16 2008 (which did specify that the event of default was LBIE's entry into administration) constituted the start of the default valuation window. The judge rejected this argument, finding that the default notice need specify only that an event of default had occurred, not what it was.
  • LBIE argued that the default valuation notice which EMFS had sent on September 22 2008 was contractually non-compliant and therefore ineffective, because it had not been sent to the fax number specified in the contractual elections made under the GMRA. EMFS had tried to do so, but the prescribed LBIE fax machine was consistently busy (no doubt because it had been specified under many contracts as the destination machine for notices, which for obvious reasons were pouring into LBIE at the time). EMFS had instead sent the default valuation notice to a different LBIE fax machine, which LBIE became aware of on reviewing a fax transmission sheet disclosed by EMFS in 2014. The judge accepted that the notice was contractually ineffective because it was sent to the incorrect number. However, he found that LBIE had waived the obligation to comply with that requirement.
  • LBIE argued that the default valuation notice was not received until September 23 2008 (and so was sent out of time) on the basis that it was received on the fax machine at 6:02pm (which was after the close of business for commercial banks in London), or alternatively that a responsible member of LBIE would not have seen the fax until the following morning. The judge found that, on the balance of probabilities, the fax would in fact have been seen by a member of LBIE on or around 6:02pm. In relation to the close of business point, "as a finding of fact limited to this case", the judge accepted the rough approximation given by one of EMFS's experts that "in the modern world, commercial banks close at about 7pm".
  • At a yet more granular level, the required timing for a valid default valuation notice is stipulated in the GMRA 2000 as being "close of business in the Appropriate Market on the fifth dealing day after the day on which the Event of Default occurs". In the context of a portfolio with a global mix of securities, the question therefore arose as to whether 6:02pm London time was before or after close of business in the appropriate market for particular securities. EMFS sought to argue that the appropriate market for the portfolio was a singular global securities market, and that practical considerations made it commercially unrealistic to expect different notice timing requirements to apply to different securities within the portfolio. However, in order to knock, for instance, Asian market securities out of the sales proceeds valuation methodology, LBIE argued that the appropriate market had to be considered for each security position separately. The court agreed with LBIE's position on this, finding that the default valuation notice was valid only for those securities for which 6:02pm London time fell before a 7:00pm close of business in the relevant appropriate market. On this basis, EMFS's default valuation notice was effective for securities with North American, UK and Irish appropriate markets, but ineffective and invalid for those securities for which the appropriate market fell in a time zone one or more hours ahead of the United Kingdom.

Calculated valuations

The starting point for the court's findings on valuation duties was unsurprising. It follows a now well-established line of principle in English commercial law: that is, the duty which EMFS owed when exercising its contractual discretion to value the securities was to do so honestly, in good faith and rationally, and without arbitrariness, capriciousness or perversity. It was not obliged to reach some objectively reasonable valuation standard, as LBIE had sought to argue.

With that as the background, the court found as follows:

  • In relation to securities which had been sold earlier in the default valuation window (but which did not fall to be valued directly by reference to their sales proceeds because the default valuation notice was served out of time in their appropriate market), it would be contractually impermissible and therefore irrational for EMFS to seek to rely on those earlier sales prices as the valuation price on September 22 2008, because prices do and did fluctuate over time.
  • As a matter of general principle, the question which had to be determined was what valuation EMFS would hypothetically have ascribed to the relevant securities, in circumstances where it was hypothetically aware that it was obliged to calculate a value for those securities. In fact, EMFS did not know that it had any such obligation, as LBIE had not objected to the late service of the default valuation notice until several years later. The relevant hypothetical was in effect that LBIE would have objected and told EMFS that it was not entitled to rely on sales proceeds and must instead carry out a calculation of the default market valuation. EMFS would then have done so in a manner which best protected its own commercial interests within the bounds of the rationality requirement. Accordingly, the court rejected an argument raised by LBIE that EMFS had not established that it would at that time have obtained the valuations that it was relying on from its valuation expert in the litigation, and that those valuations were therefore beside the point. To the contrary, the "necessarily tentative" findings that the court reached as to what hypothetically would have happened were that EMFS would rationally have reached valuations which accorded with the "lower bound level" established in EMFS's valuation expert report. For practitioners and market participants, this is a finding of considerable importance.
  • In relation to the seven bonds which JPM was unable sell, but for which it had been able to obtain a single quotation in the market, EMFS would in any case have been entitled rationally to base a valuation on that single quotation.
  • EMFS had acted irrationally in applying a 40% discount to screen prices for bonds for which no bids or quotations were received. The court was heavily swayed by an internal EMFS valuation which applied a 20% discount, which the court indicated it saw as the price which EMFS would have reached if acting rationally.

For further information on this topic please contact Jake Hardy at RPC by telephone (+44 20 3060 6000) or email ([email protected]). The RPC website can be accessed at


(1) See