• Under the GMRA 2000 Terms, following an Event of Default the non-defaulting party may serve a Default Valuation Notice (DVN) on its counterpart quantifying its valuation of the collateral, but to be valid it must be served before "close of business" both in the place where it is served and in the "Appropriate Market" for the relevant securities.
  • When determining the "Appropriate Market", the non-defaulting party may not specify a market at a high level of abstraction. Instead, a determination must be made on a security-by-security basis.
  • One consequence of this last point is that a non-defaulting party may have to serve multiple DVNs.


In this article, Sean Snook and Alistair Wooder consider the potentially unhelpful consequence of the decision in Lehman Brothers International (Europe) v Exxonmobil Financial Services BV and some consequent close-out conundrums.

Since the 2008 financial crisis, the English courts have had to grapple with some reasonably complex and esoteric banking products.1 Fairly recently, In Lehman Brothers International (Europe) v Exxonmobil Financial Services BV,2 which was a dispute concerning repo transactions undertaken pursuant to a Global Master Repurchase Agreement (GMRA), the Commercial Court was required to resolve yet another knotty issue: when is a bank open for business? Unfortunately, unlike in the days of Bailey Building and Loans,3 this question could not simply be determined by whether or not the bank's doors were open. Instead, and perhaps somewhat surprisingly in an action between two sophisticated financial market players, the point was fully argued at trial.

The Exxon Case was in fact one of the last in a reasonably long line of disputes arising out of the Lehman Group's entry into insolvency in September 2008. As in many of those previous cases, at its heart the main dispute was as to the balance of the account payable between the parties upon termination resulting from that insolvency; and thus the dispute principally raised questions as to the construction of the termination provisions and procedures of the GMRA 2000 Form.

By way of introduction, the GMRA default valuation procedures may perhaps best be thought of as a series of interlocking cogs in a calculating machine which, all going well, turn smoothly to crank out the right answer; namely, the net amount payable on termination as between the parties. Unfortunately, as a guidance manual the GMRA standard terms occasionally leave something to be desired. Or at least, the terms sometimes appear to leave gaps into which clever lawyers can throw spanners. When this happens, the court has to step in and (at the risk of pushing this metaphor beyond reasonable bounds) apply some oil to the cogs by way of clarification as to how the agreement should be understood.

The extent of the potential gaps may be illustrated by the fact that in Exxon the court was asked to address 23 discrete issues arising out of the termination. The busy reader will be relieved to hear that space does not permit us to consider all 23 issues in this article; in any event, many of the issues arose on the particular facts of that case and may be of limited wider interest. Instead, we will concentrate on the decisions with regard to "close of business" and the "Appropriate Market" as these may give some more general guidance to users of the GMRA Form.

It is right to note at the outset that some of the timing issues considered in Exxon have been the subject of revision in the 2011 version of the GMRA standard terms. The Guidance Notes for this form state that the revised terms "provide more flexibility to the non-defaulting party" in that it allows the non-defaulting party to calculate the close-out amounts, whether by reference to actual sales or the market value of equivalent securities, at any time "on or about the Early Termination Date" instead of within the five-dealing-day window under the 2000 Terms. Whether that greater flexibility provides sufficient certainty remains to be tested. But it seems to us that the Exxon case and the other Lehman decisions are likely to remain useful guides unless and until the 2000 Terms fall into desuetude.


As readers will know, a repo is a transaction whereby one party agrees to sell an asset, normally securities, to another, and to repurchase the asset at a higher price in the future. As such, although it is formally a transaction of sale and repurchase, it functions as a secured loan, with the asset serving as collateral.4

Where a repo is governed by the GMRA and an Event of Default occurs, there are two different mechanisms by which the non-defaulting party can value the securities provided as collateral to determine the sums, if any, that remain outstanding from the defaulting party:

  • The non-defaulting party may serve a Default Valuation Notice (DVN) on the defaulting party, specifying:
  • for securities that have been sold, the sale price;
  • for securities that have not been sold, but for which it has been possible to obtain a quotation, the value of that quotation; and
  • for securities that have not been sold and for which a quotation was unavailable, the non-defaulting party's reasonable opinion of their fair market value. The nondefaulting party is then entitled, in broad terms, to receive the difference between the value of the collateral, as specified in the DVN, and the sums advanced under the repo (cl 10 (e) (i)).
  • If the non-defaulting party fails to serve a DVN within the time limit for doing so, it is entitled, in broad terms, to the difference between its reasonable opinion of the fair market value of the collateral and the sums advanced under the repo (cl 10 (e) (ii)).

In some cases, as in Exxon itself, the valuation procedure that applies where no DVN has been served will be more favourable to the defaulting party, and it will therefore be in that party's interests to argue that a purported DVN was served out of time and, therefore, invalid.

The concept of "close of business" is relevant to the question of whether a DVN was served in time in two connected, but subtly different, ways:

  • The DVN must be served before the close of business in the place where it is served on the fifth dealing day after service of a Default Notice (cl 14 (d)).
  • The DVN must also be served before the close of business in the "Appropriate Market" on the fifth dealing day after service of a Default Notice (cl 10 (e) (i), cl 10 (d) (ii)).

These are cumulative, rather than alternative, requirements; the DVN must be served before both the close of business

in the place where it is served and in the Appropriate Market.


Annex I to the GMRA will provide the address, including fax numbers, to which notices to each party should be sent. If, as in Exxon, that address is located in London, it will be necessary to serve the DVN before the close of business in London on the fifth dealing day after service of a Default Notice. But what time is the close of business in London?

In Exxon, the defaulting party, LBIE, made what the reader might feel was a rather quaint submission, arguing that for an investment bank in the twentyfirst century, close of business was to be ascertained on the basis that employees worked from "Nine to Five". Blair J rejected that argument, holding that:

"in the context of financial business of the kind at issue in this case, repo financing extended by an oil major to an international investment bank, a reasonable person might be surprised to hear that business closes at 5pm" (151)

Blair J reasoned that the draftsman of the GMRA had deliberately chosen the close of business as a flexible concept in preference to a particular time, and appeared to suggest that the precise time of the close of business was a matter for evidence in each individual case (152). The non-defaulting party, EMFS, had tendered expert evidence that the close of business in international banking was about 7pm. By contrast, LBIE, who bore the burden of impugning the validity of the DVN, had adduced no evidence in response. Blair J therefore held that the close of business was 7pm, "whilst making it clear that this is a finding of fact limited to this case" (155).

Given the terms of Blair J's finding, in any future disputes parties plainly cannot assume that DVNs served before 7pm will necessarily be "in time". It is perhaps unfortunate that Blair J chose to treat "close of business" as a non-prescriptive term,

suggesting that as such it could give "useful flexibility" (152). This may not have been an open invitation to the captious, but it has left the back door ajar. It is therefore suggested that in future, where service is to be made in London, it may be good practice to serve DVNs well before 5pm if at all possible.

Furthermore, in urgent cases it may be better to send the DVN by courier rather than by fax, because a fax will only be an effective DVN when it is "received by a responsible employee of the recipient". The burden of proof in this regard is on the sender; and it may be hard for them to show when receipt as so defined took place. By contrast, a DVN sent by courier will be effective "when it is delivered" (see cl.14 (b)).5


The Appropriate Market is defined in the GMRA as meaning "the market which is the most appropriate for Securities of that description, as determined by the nondefaulting party" (cl 10 (d) (i)). The DVN must be served before close of business in the Appropriate Market on the fifth dealing day after service of a Default Notice.

On the face of it, that seems a reasonably straightforward proposition. The difficulty in Exxon, and which is likely to arise in most similar cases, is that the collateral for the repos contained multiple securities each potentially with its own Appropriate Market.

In Exxon, Blair J held that, although the non-defaulting party had a discretion to select the Appropriate Market (and therefore the ability to influence the deadline for service of a DVN), that discretion was constrained by certain rules, in particular:

  • Even where (as in Exxon) the collateral comprises a very diverse and international array of securities potentially issued, listed and traded in multiple jurisdictions, the nondefaulting party may not designate the "global market" as the Appropriate Market for that basket of securities. A "global market", at least as it came to be understood in the Exxon case, is one in which trading (especially of OTC products) may be undertaken on a 24-hour basis. Such a designation would therefore have the advantage that a DVN could be served any time before the sun set on the last market in the world open for business on the fifth dealing day after service of the Default Notice. Whilst Blair J recognised that there was indeed such a "global market" in securities, the learned Judge held that such a designation was impermissible, because the GMRA envisaged selection of a particular market for each security.
  • For the same reason, a party may not designate a subset of the "global market" unless that is properly applicable to all the securities. Thus, the non-defaulting party's attempt in Exxon to designate the US as the Appropriate Market for all the securities, and thereby win more time for service of the DVN, was rejected (235-236).

The result of all this is that the Appropriate Market has to be determined on a security-by-security basis.

Practitioners and users of the GMRA may care to note that the potentially unhelpful consequence of this decision is that a future non-defaulting party might be required to issue separate DVNs for each Appropriate Market; a possibility recognised by Blair J (238). That is to say, where the collateral under a repo comprises a portfolio of securities listed on (or otherwise connected with) different markets, the consequence of Exxon is that it may be necessary to serve several DVNs to take into account the different timing of the close of business in each market.

For example, the DVN in relation to Japanese-listed securities would (usually) need to be served before the close of business in Japan on the fifth dealing day after service of the Default Notice, because Japan would usually be the Appropriate Market for those securities. By contrast, the DVN in relation to US-listed securities would (usually) need to be served before the close of business in the US, which would obviously take place at a later point in time than the close of business in Japan. Unless the non-defaulting party elected to serve the US notice early, which might have adverse financial consequences, it would have to serve at least two notices. The preparation of these notices is not always an easy matter and we wonder whether it can be right that the GMRA terms are to be read as placing this additional burden on a non-defaulting party in what might be (and in fact was in the case of the Lehman default) circumstances of extreme market stress.6

On the facts in Exxon, in order to resolve this point Blair J did not need to decide whether the non-defaulting party should have issued separate DVNs for each of the Applicable Markets referable to the 181 securities in the diverse portfolio; the learned judge simply concluded that there had to be a separate determination of the most Appropriate Market for each one.

The non-defaulting party had, understandably, relied on the practical objections to any conclusion that required multiple notices. It was suggested by them that:

"there would be nothing irrational when confronted with a portfolio of 181 securities in circumstances of extreme market stress, and in a context of some urgency as a result of the clock ticking on the five dealing days, about seeking to simplify the exercise as much as possible. On the contrary, it would be entirely rational to avoid a multiplicity of different DVTs, with the attendant risk of confusion, by taking a fairly high level approach to the question of Appropriate Market." (210)

It seems that option is not now available. In Exxon the question of whether more than one DVN was ever served in practice was canvassed; and the answers given led Blair J to conclude that in practice Lehman had never received more than one DVN per portfolio (170). This seems to have persuaded the learned Judge that the problem was more apparent than real. We wonder if that is really so. But as things stand, in any future case involving a diverse portfolio of securities, a nondefaulting party may need to give careful consideration as to whether it should serve multiple DVNs out of an abundance of caution.7

The final point relevant to this short review is that Blair J also held that the close on of business in the Appropriate Market did not mean the close of trading on the major exchanges in that market, but rather the close of business for banks in that market more generally (256262). For example, where the Appropriate Market is Japan, although trading on the Nikkei closes at 3pm, it would be permissible to serve a DVN after that time, provided always that it was served before the close of business for banks in Japan.


Brainteaser 1: A Default Notice is served on Friday 9 December, and the GMRA provides for notices to be sent to a fax machine in London. When should the DVN be sent in relation to a security issued by a German company and listed in Frankfurt?

Brainteaser 2: A Default Notice is served on Monday 12 December, and the GMRA provides for notices to be sent to an address in London. When should the DVN be sent in relation to a security issued by a Japanese company and listed on both the Nikkei and Nasdaq?

Answer 1: The DVN must be served by the close of business on the fifth dealing day after the Event of Default, namely Friday 16 December. On the conservative assumption that the close of business in Frankfurt takes place at 5pm, the DVN should be served by 4pm London time, as Germany is one hour ahead of London.

Answer 2: The fifth dealing day after the Event of Default is Monday 19 December. Let us conservatively assume that business closes in Japan at 5pm. Japan being nine hours ahead of London, the DVN would prima facie need to be served by 8am. As this is outside business hours in London, the DVN would probably need to be served before the close of business on the previous dealing day, ie Friday 16 December.

In practice, how should a nondefaulting party go about determining the Appropriate Market for a particular security, so as to work out when the close of business in the Appropriate Market occurs? This can be difficult where a security has links with several different markets, such as a US$-denominated security listed in both London and Singapore. In such difficult cases, it is our view that it is likely that the court would uphold the non-defaulting party's exercise of discretion in designating the Appropriate Market, provided always that choice is clearly indicated in the DVN. That said, it is suggested that the safest approach in the example just given would be to serve the DVN before the close of business in Singapore, because that takes place earlier than the close of business in either the US or the UK.


There has only been space to cover a short selection of the multiple issues raised in the Exxon Case. However, we hope to have shown how the GMRA Terms tend to support that well-known but curiously under-examined maxim: unnecessarily complex documentation + big money deals = litigation. Whilst Blair J's decision for the most part enhances his deserved reputation for finding a sensible and clear solution to the banking litigation issues that come before his court, some points have been left open. Moreover, and as noted above, whilst some of the points covered in Exxon have been addressed in the updated 2011 version of the GMRA Terms, experience suggests that it is likely that not all loopholes will have been closed. Our view therefore is that lessons learned from cases on the 2000 Terms will in all likelihood remain relevant, at least for the immediate future.

All this may be very interesting you may say,8 but haven't we had our generation's financial crash? Why should we be worried about how to close out repos under a GMRA in a major default scenario when we cannot expect to see another Lehmanstyle event again? Has not the City and Wall Street learned its lesson? To this we say that the average interval between major banking crises in the last 100 years is no more than about six to ten years. The next crisis will soon be overdue.9 As to whether the City and Wall Street have learned lessons from the events of 2008, we leave you to ponder the wisdom of Upton Sinclair:

"It is difficult to get a man to understand something, when his salary depends on his not understanding it."