In its decision in CFH Clearing Ltd v Merrill Lynch International [2020] EWCA Civ 1064, the Court of Appeal affirmed the importance of certainty, clarity and predictability in interpreting the terms of transactions made under an ISDA Master Agreement and in considering the place of “market practice” within that framework. In declining to read additional terms into the agreement and holding CFH to its bargain, the Court reminded market participants that those who want to transact on non-standard terms will need to draft those terms expressly.

The facts

The case arose out of the brief period of extreme market volatility which followed the Swiss National Bank’s unexpected “de-pegging” of the Swiss Franc from the Euro on 15 January 2015.

The extreme exchange rates being quoted triggered CFH’s automatic processes, causing CFH to send, amongst other orders, 27 over-the-counter FX orders to MLI.

The orders were filled at rates substantially below the “official low” of 0.85 CHF declared by the principal EUR/CHF trading platform. MLI subsequently declined to re-price the transactions to match the official low. Instead, MLI offered on 16 January to re-book the trades at 0.75 CHF and terminated its prime brokerage relationship with CFH. CFH brought a claim seeking either the re-pricing or cancellation of the transactions.

The issues considered

Following the dismissal of its case at first instance, CFH argued on appeal that:

  • MLI’s Terms & Conditions, which provided that transactions were “subject to […] market practice of any exchange, market, trading venue and/or any clearing house”, recognised the potential for conflict between the terms of a transaction and market practice, and directed that market practice would be binding in those circumstances;
  • market practice was therefore incorporated into the transactions, amending the ISDA Master Agreement and associated trade confirmations which CFH and MLI had entered into; and
  • “market” was a broad term that meant any market in which the transaction took place, and the “practice” of re-pricing or cancelling FX trades in the case of extreme events where deals took place outside the authenticated market range was reflected in the November 2013 edition of the Model Code for financial markets published by the Financial Market Association.

The decision

The Court of Appeal noted that the parties had agreed that their FX transactions would be governed by an amended 2002 ISDA Master Agreement, and it was express in the MLI Terms & Conditions that the ISDA Master Agreement took precedence in respect of transactions to which it applied. They had negotiated a schedule to it and incorporated the 1998 FX definitions which would have allowed for provision for market disruption. The parties had chosen to use the industry standard agreement, which reflects market practice, and had then further tailored it to suit their needs. The transactions were thus governed by a detailed contractual regime that did not, however, provide for the incorporation of “market practice”.

In this context, there was no basis to find that the parties had agreed to vary the ISDA Master Agreement’s terms by incorporating an undefined “market practice”, particularly where this alleged variation was not reflected in the ISDA Master Agreement and was inconsistent with other terms of the MLI Terms & Conditions. To hold otherwise would have undermined the certainty, clarity and predictability of the ISDA Master Agreement and made the transactions unworkable.

The Model Code itself recognises the desirability of entering into an ISDA Master Agreement to promote legal certainty, including regarding market practices and exceptional circumstances. A practice to override the ISDA Master Agreement could not therefore be derived from the wording of the Model Code.