A Statement of the (Not So) Obvious? English High Court Rules on ISDA Calculation Statement
The High Court has recently concluded that a calculation statement given by a non-defaulting party under a 1992 ISDA Master Agreement (where "Loss" was the applicable Payment Measure) did not meet the requirements set out in Section 6(d) of that agreement. The Court's view was that the calculation statement did not show "in reasonable detail" the calculations and relevant quotations used by the non-defaulting party in determining the net close-out sum. The case is of interest not just because of the level of detail that was considered to be inadequate, but also because of the reasoning given by the Court in reaching its conclusion.
The case (Goldman Sachs International v Videocon Global (2013) EWHC 2843 (Comm)) involved a calculation statement given by the Claimant (Goldman Sachs International) upon the failure by the Defendant (Videocon) to discharge a margin call under a Credit Support Annex. The Claimant closed out the outstanding FX transactions, delivered a statement under Section 6(d) setting out the values of the terminated transactions and sought summary judgment against the Defendant for the amount specified in that statement. The Claimant's request for summary judgment was not granted, and the case will proceed to trial.
The Claimant had included various details in its calculation statement, including separate loss calculations for each terminated transaction and a description of the way in which the loss calculations had been determined. The description in the Claimant's calculation statement identified that the Claimant had obtained an independent quote from a third party source and a quote from the Claimant's group, for spot exchange rates, forward rates and FX volatilities for the relevant currencies, used the quotes that were more favourable for the Defendant and used an options pricing model based on market accepted standards. It seems that the "quotations" were for data inputs into the Claimant's valuation model rather than quotations for the terminated transactions themselves.
Despite the information included in the Claimant's calculation statement, the Court concluded that the statement did not contain sufficient detail on the basis that it:
- did not show any calculations (other than the simple addition of separate termination values for each transaction);
- did not show any of the quotations used or identify who provided the quote; and
- did not identify the pricing model used or show how it was used.
Conclusion and potential implications
Whether any particular calculation statement satisfies the requirements of Section 6(d) of the ISDA Master Agreement will be heavily fact-specific, and will depend entirely on the content of that statement. However, this case will raise eyebrows not just because of the type of information and detail that the Court considered was necessary, but also because of the general approach taken by the Court in reaching its conclusion. The Court stopped short of saying that it is an express requirement that calculation statements must contain sufficient details to enable the defaulting party to determine whether the calculation was reasonable and carried out in good faith, but arguably that is the natural consequence of the decision.
Aside from finding themselves in the difficult situation of providing some of the information that the Court found lacking (for example, details of how a pricing model was used), and doing so in a suitably timely fashion, many market participants will be concerned as to whether disputes that would otherwise focus on valuations, calculations and quantum might develop into disputes regarding the actual validity of calculation statements, which could possibly give rise to more drastic consequences. While the Court suggested that the issues for trial relate to quantum, the general reasoning appears to call into question the statement's inherent validity. The broader implications of the judgment will not be seen until the case proceeds to trial, since the Court did not consider the consequences of a statement failing to satisfy the requirements of Section 6(d). However, if such a statement is invalid, then while the immediate consequences under the terms of the ISDA Master Agreement may be limited - primarily when default interest runs from - there may be much more significant ramifications in the broader context. For example, the validity of the statement determines when the payment obligation arises, which in turn may be relevant to questions such as cut-off times for proving in insolvency, set-off and guarantee claims.
If you have any questions regarding this case or its impact on your business, please contact any member of the Derivatives & Structured Finance Group.