NERA's Role in the Matter of MF Global UK Limited and in the Matter of the Investment Bank Special Administration Regulations 2011

The Situation

On 31 October 2011, global brokerage firm MF Global declared bankruptcy, an event which under FSA regulation triggered a Primary Pooling Event (PPE) to be declared on that date, pooling the client funds of MF Global's customers for redistribution. In the case of MF Global default, there were not adequate funds to cover the total value of client accounts as at the PPE.

After the PPE was declared, the various exchanges at which MF Global's client positions were established began to liquidate the open positions, which ultimately led to the potential for client positions valued as at the PPE to differ substantially from liquidation values.

The issue in this case was whether in calculating a client's entitlement -- at least in the context of administration or liquidation -- the client's open positions on trades made with the firm should be valued by reference to market value as at the PPE, or alternatively, by reference to the prices at which the trades were subsequently liquidated. This issue became the subject of a High Court hearing of the "Hindsight Application" as the Administrators for MF Global sought direction in how to value the open positions and distribute Client Money Entitlements.

NERA's Role

Counsel for representative clients that objected to the use of hindsight (by referencing PPE values) retained now former NERA Senior Vice President Matthew Evans to provide expert economic analysis and testimony. In his expert report, Mr. Evans addressed relevant market practices with respect to valuations in exchange-based and OTC derivatives. He provided evidence and analysis showing that mark-to-market valuations for the types of contracts in MF Global's customer accounts are routinely carried out by reference to daily settlement pricing and analogous sources from the OTC market. He opined that deriving mark-to-market valuations for the dominant majority of these contacts as at the PPE presented no particular challenge relative to any other day. Mr. Evans also presented market pricing analysis demonstrating that changes in market conditions between the PPE and liquidation date could have caused, and did cause, valuation changes across a broad spectrum of implicated asset classes, some quite significant.

The Result

The Judge ultimately agreed that hindsight (liquidation values) should not be used in this matter. When addressing the expert analysis, the Judge also agreed with Mr. Evans' expert view that market risks can cause liquidation values to differ from PPE values. Additionally the Judge, in specific reference to the joint expert statement filed in this case, agreed with Mr. Evans' views that there were adequate exchange-based and OTC pricing sources available to conduct valuations as at the PPE for the types of contracts implicated in this matter.