“We bring your attention to the Risk Warning, attached as Schedule 1 to this letter. By signing and returning this letter, you acknowledge receipt of the risk warning and confirm acceptance of its contents.”
“1. Our Status 1.1 These Terms of Business apply to all designated investment business carried on by The Royal Bank of Scotland plc and National Westminster Bank plc together or, as the context may require, each being referred to as The Royal Bank of Scotland Financial Markets (“RBSFM”), with or on behalf of you. The principal address of RBSFM in the UK is 135 Bishopsgate, London EC2M 3UR. Details of our EEA branches are given in Appendix 1. 1.2 Our affiliates may act as agents for RBSFM. This will be disclosed at or before the time of executing a transaction. It will also be recorded on the confirmation. These Terms shall apply unless our affiliate expressly agrees otherwise. 3.2 We will provide you with general dealing services on an execution-only basis in relation to shares, debentures, government and public securities, certificates representing certain securities, units, options, futures, contract the difference and rights or interests in investments (together “Investments” and individually “Investment”) together with related research and valuation facilities. … 3.3 We will not provide you with advice on the merits of a particular transaction or the composition of any account nor will we bring investment opportunities to your attention. You should obtain your own independent financial, legal and tax advice. Opinions, research or analysis expressed or published by us or our affiliates are for your information and do not amount to advice, an assurance or guarantee. The content is based on information that we believe to be reliable but we do not represent that it is accurate or complete. … 4.2 Provision of services by us pursuant to these Terms will not give rise to any fiduciary or equitable duties on our part or that of our affiliates. 4.6 Any information we have provided to you relating to trades is believed to be reliable, but no representation is made or warranty given or liability accepted, as to its completeness or accuracy. In particular, market conditions and pricing may have changed by the time you approach us with a view to entering into a trade. Any opinions constitute our judgement as of the date indicated and do not constitute investment advice or an assurance or guarantee as to the expected outcome of any transaction.”
“This notice cannot disclose all the risks and other significant aspects of warrants and/or derivative products such as futures, options, and contracts for differences. You should not deal in these products unless you understand the nature and the extent of your exposure to risk. You should also be satisfied that the product is suitable for you in the light of your circumstances and financial position.”
“This CLU figure represents with 95% confidence, based on historic rate movements, the most that the Bank would expect to lose in the event of your default on this trade. Clearly this impact would only be felt to this extent in the event of aggressive $ strengthening. Put another way, according to our calculations, and with a 95% confidence level, this is the maximum negative value that we foresee this trade accruing from a close out/valuation standpoint. Our calculation of CLU is our internal expectation of the maximum close out cost and is by no means a guarantee that this will be the case, in extreme market conditions, this figure could be higher. Please use this calculation as a guide only.”
“I would probably do ½ and ½ subject to cost. I find it hard to believe that the $ will move much beyond 2 but also given Iraq and the start of the election race uncertainties are unlikely to provide any dollar strength. There is no evidence that the long-term interest rates are moving back into a normal curve so I think both look quite interesting. … I suspect the dollar will move between 1.90 and 2 you should have some protection over [the period January to July 2007].”
“So what does that mean for interest rates? • We do not believe that UK interest rates are set to fall back below 5% for the foreseeable future. In fact over the next 18 months – 2 years, we think that rates will most likely have to rise to 6.25 or even 6.5%. Certainly there are few signs that the current monetary stance is doing anything to undermine growth in the UK economy. • It is also likely that we will see UK interest rates range mainly between 5 and 6.5% over the course of the next 10 years, with visits below 5% and above 6.5% likely to be roughly equal in probability” • We do not believe that UK interest rates are set to fall back below 5% for the foreseeable future. In fact over the next 18 months – 2 years, we think that rates will most likely have to rise to 6.25 or even 6.5%. Certainly there are few signs that the current monetary stance is doing anything to undermine growth in the UK economy. • It is also likely that we will see UK interest rates range mainly between 5 and 6.5% over the course of the next 10 years, with visits below 5% and above 6.5% likely to be roughly equal in probability”
“Should you decide to terminate any structure ahead of maturity, you may have to pay market related breakage costs (these could be benefits however). These costs are not predeterminable, depending on prevailing market conditions at the time of breakage.”
“With known repayments, you can budget more effectively.”
“This client has been re-categorised as ‘Retail’ in accordance with the new regulations. A letter and revised Terms of Business was sent to the client on 10 September. Click here to view the Categorisation Letter and Terms of Business.”
“I would say rates, there is a strong possibility that we see rates at 5.25, 5% I would agree with that, that won’t in my eyes happen, I see 5.50 the back end of well 5, 5.50 the start of this year coming I’m not 100% convinced that rates get cut on November although a lot of people are commenting on that. I then see the next year we will, given various slow downs, still need another rate cut to take us to 5.25. Whether or not long term rates can be sustained below 5% I’m slightly dubious about. I do see that we may get to 5% but it won’t be for a long period of time and I do think that post sort of 2, 3 years the trend for rates will have to be upwards. The reasons for that are that the rest of the global economy will have been through or will be stabilising and moving further forward. And you know I'd cite continued pressure from China and India on raw materials and also prices of goods that are coming out of what are now fairly strong economies. There is the concern that you know the Chinese equity market might blow up and they might have slight concerns if the rest of the world isn’t firing on all cylinders to take that they have geared up for. But I still think that you know there will be, there’s an unbelievable amount of wealth within those countries now and they have started both on a government basis and also on companies in China are actually looking to divest into assets outside of China. That [is] inherent in you know the stakes that have been taken in Blackstones, the stakes that have been taken in Barclays and I just think that, that pricing tension will have a fairly large effect on, on our inflation environment and less about the national picture and more about the global picture I think. But definitely post sort of 2 years we see rates trending upwards again. But I take your concerns Isabel and if that’s you know if that’s what you want to do I’ll certainly…”
“Given the amortisation schedule of the loan the life of the loan is actually c. 4 years (see forward curve attached) as such if we looked at hedging interest only levels of this loan and future loans then we could achieve greater levels in the trade. For example if we looked at hedging£8.5m bullet for the first 5 years and then stepped this up to£12m (this assumes as per previous conversations that you will take on more debt) then the levels achievable are as follows. NB this allows us to move the lower level to 4.50%.”
“And I think in terms of, a market view on where we think base rates are going, I think there's a fairly strong consensus that, maybe February next year that we could get a rate cut, all things being considered, but there are very slowly, we've seen the FTSE climb, certainly over the last 3 to 4 days, quite considerably. Data that was out of the US today showed very robust PPI, so raw material pricing and output, factory output prices actually being very robust and stronger than we'd expected, same with their retail sales. Now, given in a time when that economy is supposedly falling to pieces around peoples' homes, that information buoys the economy significantly. I think a lot of the firming up of financial markets, certainly … you know, Northern Rock haven't fallen over and, it's continuing. So I think the more that we get confidence back into the equity side of things, the more that we will see confidence actually return to the high street and consumers in terms of thinking. That all of that kind of flies back in the face of a rate cut, because the rate cutting, I guess, if you were to sort of say, people who are opining for a rate cut say that, you know, the housing market slow down has started because prices have already started to fall, the consumer will stop spending because, you know, housing market ostensibly in the UK is a barometer for people's confidence of how the economy is actually working. I think you'll find that we've actually seen a significant amount of price flexibility from retailers in terms of not being shy of providing discounts and to continue to push revenues. If that continues and they have the ability to keep costs down, then, you might well see that, you know, the expected fall in, in consumer spending won't actually take place. We still have the issue that we've got very lax consumer credit in this country. People can quite easily rack up credit card bills left, right and centre. So to stem consumer spending, you need a lot of scare stories to happen. I think the stabilisation period that we've seen, certainly over the last three weeks, sort of flies in the face of the need for an immediate rate cut. I think the wait and see tactic will prevail and I think that, although previously the MPC {sc. Monetary Policy Committee} have been very much “Let's act on impulse and do something now rather than … rather than let it happen and then we react”, you've only got to take their rate hike that they came across in January, but I think there is a mind set now that any further shocks to financial markets or to the economy in itself by some unexpected moves isn't a good thing. So I think a case for stability over the next few months is certainly one that you could argue, and the official house forecasts is that we see two rate cuts effectively between now and the end of 2008. The timing of those differs between which economists you speak to, but they think that that's what's required to get the, the UK economy back on track.”
“.. with the view that longer term rates over the next 2 to 3 years would need to go higher and certainly higher from where we are now, almost back to the position we were in 4 months ago where we sort of saw, you know, rates getting up to 6.25%, that is certainly the view and that view is predicated by a much more global picture than anything here in the UK.”
“what that trade is trying to do is give you absolute protection, but what's trying to do is reward you now for taking a view that you think that UK interest rates over the next 5 years, because that's because it is … you know, with all honesty, you have a view or an understanding or an inclination of where interest rates could be over that period … now in a 10 year period, you know, anything can happen and that's the reason why, you know, that worst case rate protection at 6% … if you were going to take … you know, if you were going to say, what are the likelihood of rates being over and above 6% in, in a 5 year, 7 year time horizon and I think it's actually quite high.”
“Years … year 1-5 you are absolutely guaranteed, so in my eyes the crucial part of what you're trying to do with the business so over the next 5 years, there is no way that we can actually touch this trade, it stays exactly as it is with the levels that are in, in the trade that I've shown you, so you pay 5.30 as an enhanced rate or 6.05 as a protected rate and the range is 6% to 4.75. At year 5, we have the right to call the trade. So effectively the trader will say whether or not we want to call the trade. If we call the trade, you revert to paying floating base rate, now that right effectively we have every quarter thereafter …”
“Yes, after 5 years. So the first 5 years … let's just take it in chunks. The first 5 years of the trade, the trader has nothing to do because there's no call option for us, so you get a guaranteed … you get the guarantee of paying of paying … you get a guarantee of paying 5.30 as a swap rate so long as UK rates stay between 6 and 4.75. If they go at or outside either of that range in that time period over the 5 years, then you will pay 6.05. So from a budgeting perspective or from your knowledge, you have a worst case cost of the funds at 6.05 guaranteed for the next 5 years. Hopefully that won't happen, hopefully UK interest rates will remain between that range and you will pay the enhanced rate of 5.30. Now, at year 5, we have the right to call the trade and every quarter thereafter. The trade will still perform exactly as I've just explained it there for 10 years until … until the trader says, actually we're going to call this, we've called the trade. Now if the trader calls the trade, we still have the right, between yourselves and I and the … and here in terms of what we can offer to you … of having a further conversation because the trader turns round to me and says, we're actually going to call this trade. I will then say to you, you are now going to revert to paying base rate. If that is something that … you don't want, we can have a further conversation at that point in time about looking at what solutions are available with regard to interest rate management. Just exactly as we're having this conversation now, there are ways of getting an enhancement to where base rate is at that point in time if your trade gets called, there will be a way of doing that. So it's not to say if we call the trade, the trade is called and that might simply be that future rates, you know, might not be that base rate at that point in time and might be that if we call the trade, you're quite comfortable remaining in floating base rate and paying floating base rate, that might well be the situation. But if that situation is different, then we can engage in conversation just as we are now, just as we have over the last few months, to actually look at putting in some sensible management, interest rate management, that you are comfortable with. So it's not a case of we pull the trade away and you're naked in, in, in the middle of a field almost … it's … the trader's taken a decision based on where his book is and the market is, and that trade is no longer there, let's have a conversation around what we can actually do with trades that we can get away at that point in time.”
“…Now if you were to say you want absolute clarity over your debts for the next 10 years or levels of your debt over the next 10 years, you don't really want us to have a call on, on your ability to pay. Let's say, you know, if that's your mindset, then solution 2 would be a better option. But if you wanted to have clarity for a 5 year window, solution 3 gives you the pick up that you want and also, you know, gives you some certainty, absolute certainly for years … so to year 5. You then have a degree of uncertainty, albeit you know this is in place should we not call it.”
“ … the risks to you would be minimal because interest rates would need to go in the opposite direction that everybody thinks they are actually going to go in.”
“… that process will continue so in my mind and certainly I had this conversation with Neil Parker, our economist, because another client of mine is in the throes of completing a deal of a similar size and quite rightly so he was worried about, you know, timing risk in terms of what happens if his transaction takes another few weeks, what would happen to swap rates. Neil's point of view on it was, the more assured and the more stabilised things become, the more chance we have of actually rates going higher. I think the paragraph that, that Neil actually wrote for the client was, in his view, over the next month, we may see rates on a 10 year/15 year basis rise by as much as 10 or 15 basis points. Now that is certainly something … I wouldn't want to be sitting here in two weeks' time, having … having not done anything, and you guys turning around and saying, “Well actually, Dominic, you know, this wasn't something that was pointed out”
“Dominic thank you for the pricing update. We would need the swap rate and the forward curve to look at to compare the various options so please could you arrange for that”
“I understand from my colleagues Dominic Brindley and Adrian Wood that there is an intention for you to enter into derivative transactions with National Westminster Bank plc. As such I am happy now to attach the following documentation.”
“I should be obliged if you could please review the draft Schedule and either let me know that it is in an acceptable form for execution, or provide your comments. Should you have any queries relating to the documentation please do not hesitate to contact me.”
“Yes, so I just think that its possibly going to be one of the most contested rate decisions for a very long period of time because it will pretty much govern how quickly we get to, I mean we see the trough in UK interest rates at the bank now at 5.25, we see that whatever happens if it doesn’t happen now we’ll see a rate cut February, and we see by the back end of sort of 2008 that rates will be at five and half and in 2009 may be going to 5.25 and then subsequently coming back up once the economy has, you know, had the chance to sort of recover from what's been happening. And a period of stabilisation at that point is probably what the market actually needs. Now for all that being said you know it is a case of timing and my sort of gut instinct is that with everything that is going on I think the MPC may well hold off from cutting rates in November unless they because they have foresight as well of the quarterly inflation report and they will be looking at analysing that probably they probably even had a draft copy of it prior to them going into the meeting given how important it is. And if there is something in there that we don’t know about we say they’ve made a market projection for then we may well see rates get cut but as it stands I’m of the mind-set that it remains on hold. I keep convincing myself one way or the other but I think the arguments are sort of very much 50/50…”
“what it says to me is that people are not going to hang their hats on interest rate cuts just now because effectively the last month and a half people are saying yes definitely going to get a cut in November and all of a sudden in the last two weeks that thought process has actually eroded. So I think what the curves [are] actually saying is that they fully priced in one interest rate cut between now and a two-year time period.”
“DB Yes its inverting. What I would say is as well is the market doesn’t view that we see rates go higher over the next two to three years it sees rates going lower….”
“Great news - I will keep everything crossed - will need a drink to get over this when done.”
“Whilst I am more than happy to renew this credit limit with my committee I wondered if you could let me know your plans / timeframes so that I can obtain renewal of the credit limit for an appropriate time.”
“A Thanks for this – yes George and I have looked at this last Friday – I think that in the light of the current press/city new that we feel that there will be 1 to 2 rate cuts in near future – so given this view we will hold off on doing a trade. When we feel it is best to relook we can reprice and ask for credit approval then Thanks”
“Massive risk to take with huge debt coming their way – I cannot understand why they would take this much risk on?”
“I told him that hedge was not unconditional but personally I think it is remiss of the bank not to insist on insurance on any debt over£0.5m and 6 months, and that I did not want to have a chat along the lines of ‘I wish we’d locked in’ in 6 months, 1 year et cetera et cetera I know he insures against all relevant intangibles but could not understand why he would not insure against something which could have a detrimental effect on business and cash flow if moves against him. … His response was that his cash flow is not impacted for 10 years - his payments are fixed and if base rate goes up it will affect his bullet in year 10 - payments in between then and now will stay the same and pay more interest and less capital rather than fluctuate if base rate increases - TANYA CAN YOU CONFIRM IF THIS IS TRUE Thus his issue was 10 years away with a [worst-case scenario] bigger bullet against planes they expect to appreciate.”
“I also promised to back off with the info flow until I am back from hols (26th November) DOM PLEASE NOTE ALBEIT I DID PROMISE IF ANYTHING HAPPENS IN MARKET WE WOULD LET HIM KNOW Dom will leave with you to decide what is important and not in terms of advice. Dom - seems to me our focus should be on cap and collar perhaps we can work some scenarios and different prices I think he may have an issue with paying a premium … Dom I know you were pricing£200 -£250k on this - I think for all this work we need to work something upward of this I hope this is all clear - good news is that he is receptive and he is still interested in hedging just now is not a good time maybe we need to get to see George, Isabel and Patrick on my return with tax expert to kill off any concerns LETS DO THIS”
“£10.38m Loan maturing January 2018 • Based on current forward rates, the principal balance outstanding in January 2018 is estimated to be£4.74m • The worst case outstanding balance at a 95% confidence level is£6.22m • This represents an outstanding principal at-risk amount of£1.49m £2.5m Loan maturing December 2012 • Based on current forward rates, the principal balance outstanding in December 2012 is estimated to be£1.14m • The worst case outstanding balance at a 95% confidence level is£1.27m • This represents an outstanding principal at-risk amount of£134k ” • Based on current forward rates, the principal balance outstanding in January 2018 is estimated to be£4.74m • The worst case outstanding balance at a 95% confidence level is£6.22m • This represents an outstanding principal at-risk amount of£1.49m • Based on current forward rates, the principal balance outstanding in December 2012 is estimated to be£1.14m • The worst case outstanding balance at a 95% confidence level is£1.27m • This represents an outstanding principal at-risk amount of£134k ”
“i.e having to pay cheaper debt costs now or receiving funds now is much better than receiving funds in 10 years’ time as the time delay of money will erode values”
“We think UK swaps have reached a threshold and will eventually push higher by between 20-30 basis points from 7 years out”. c. The next slide showed in diagrammatic form a series of thought bubbles as to why one might move from a straightforward interest rate collar to a value collar (that is where there is a higher knock-in interest rate if the base rate falls below the floor of the range). The final question posited by the hypothetical customer was whether it was possible to move the floor any lower “so I am completely comfortable that there is a minimal chance of the trigger rate being reached?”
“DB The first… the first trade will be it's a ten year trade, the first five years of that trade will be on£4 million on a bullet basis as agreed stepping up to£6 million for years six to ten. That will roll quarterly out of… out of today, which is12 February 2008 and that will… it's a five year plus five year extendable value collar. So, the first five years of the trade is guaranteed to be in place. At year five RBS have the one time right to actually extend the trade on exactly the same basis for a further five years. The levels within that trade are base rate cap at 5.75%. So, your cost of funds will never be greater than 5.75% plus your lending margin. You pay floating from 5.75 between … all the way down to the floor, which is at 3.75%. So as we stand at the moment at 5.25% you would pay effectively 5.25% and nothing would happen under the transaction. If interest rates were to rise let’s just say 6% you would receive the difference between 5.75 and 6, so 0.25% as a payment on the outstanding balance at that point in time. Should you get interest rates or average base rate trade at or below 3.75% for a period of three months or longer, you will effectively be knocked into paying 5.49% for that period. So, should you get interest rates, get to let's just say 3.50, you would pay 5.5% effectively, or 5.49% underneath that transaction. Now… .. so should interest rates move back into the range you would just continue to pay floating interest rates. So, that's the first trade that we're going to look at… look to put in place. So, I can get your okay to go ahead and put that trade in place, Patrick? PMR Yep, you can. Do you want me to repeat it? DB No, no, no, it's fine. It's just that we just need your okay to go ahead and put that in place. PMR Yeah… that's fine. On what you've just said, that's fine. DB Perfect, excellent, thank you. The second trade we're looking to put in place again is in the name of London Executive Aviation Limited and on the same basis as the first trade, it will be on a notional amount out of today the12 February 2008 on£4 million starting for the first five years and that will be on a bullet basis rolling quarterly. They will then step up to£6 million from year six to ten and that is a ten year trade again with the first five years of the trade being guaranteed to be in place and RBS having the right to cancel the trade at year five and every quarter thereafter through to maturity. Um, LEA will pay a fixed rate of 4.69% so long as UK base rates remain between the range 6.25% and 4%. So, effectively what happens is, you pay 4.69% as of today plus your lending margin on£4 million of your debt. UK interest rates would need to trade at or outside of that range before you pay the higher fixed rate or protected fixed rate of 5.35% as per our previous conversations. So, should UK interest rates move to 6.25% you would then revert… you would then pay 5.35% and again just as we talked about before, if the… if UK interest rates move back within that range, so if interest rates fell to 6% you would revert to paying the 4.69% plus the lending margin. Just one final thing before I get your OK to go ahead to put that in place, should you wish to terminate the trades, Patrick, ahead of maturity, there may or may not be a breakage cost attributable to that trade and that can only be determined by the prevailing market at that point in time. So again, if you're comfortable with all of those details that I've just said for that trade, can I get your okay to go ahead and put that in place? PMR - Yeah, and the breakage relates just to the second trade or both trades? DB Both trades. Effectively, because… we're agreeing the trades for a ten year… for a ten year period and if you were to wish… if we exercised that right to cancel the trade you'd just revert to paying floating base rates for nothing. So… but, given the profile of the business and what we discussed in terms of we're only looking to hedge 8 million of your initial£12 million worth of debt, um and then, you know, subsequent to the increases in debt that you envisage by purchasing further aircraft, you know, that will… you know, that's the reasons why you're stepping that into 6 million. Is that okay? You’re happy comfortable with that. Okay… Patrick, all of that's done then so the trader will put that in place and that will start today so what you will receive is a confirmation. So, two emails confirmations… if you can just check the details of them, make sure you're happy with it, sign it and fax that back to the relevant number on the… on the confirmations. What will follow in eight to ten working days is a more long form confirmation again just detailing exactly what the trade is. If you could just satisfy yourself that that's exactly what we agreed sign that and send that back then that's everything done from the formalities and just one final thing, Patrick, as per the start of the conversation, both of the trades will be governed by the ISDA document that I talked about from the bank's perspective. What I will do is I'll get our legal guys to actually send out a copy of that document for you and we need to put that in place within a month's period of time just from the… from credit perspective. So, that… we can start that process. But, that's all done for you. And uh as I said, you'll receive a confirmation and maybe as and when you're back I can… I can take yourself and Isabel and Adrian out for some dinner maybe or some drinks in town if you're… if you so like.”
“114. In the present case, I find myself unable to resist the conclusion that the banks successfully disclaimed responsibility for any advice that Mr Gillard might give and (as I have found) did give. The Risk Management Paper and the two sets of terms of business were unequivocal; they defined the relationship as one in which advice was not being given. They were clearly drawn to Mr Parker's attention before the swap contract was concluded. He rightly understood (…) that they were not empty words but were intended to have legal effect as part of any contract. 115. Although Crestsign was a retail client and not a large and sophisticated commercial party, it was not in a position akin to the buyer of a second hand car. I do not accept Mr Edwards' submission that it would be rewriting history or parting company with reality (in Clarke J's phrases in Raffeisen) to define the relationship as one in which advice is not given, even though I have found that, in substance, it was. The line that separates provision of information from giving advice may be a fine one, as where advice is conveyed by presenting information selectively. It is not always easy for a salesman such as Mr Gillard to know where one ends and the other begins. Reasonable people could disagree about whether the line is crossed in a particular case. 116. It is considerations such as these that lead parties in this type of arrangement legitimately to define their relationship and avoid disputes afterwards. No violence is done to history or reality by construing the documents as meaning what they say, even though the first document in time – the Risk Management Paper – postdated the meeting on28 May 2008 , and even though what Mr Gillard said at that meeting (and subsequently) in my judgment crossed the line and would have amounted to advice coupled with an assumption of responsibility, were it not for the disclaiming effect of the documents. 117. The end result is that by the time the swap contract was entered into, what Mr Gillard was saying in effect was: "although I recommend one of these products as suitable, the banks do not take responsibility for my recommendation; you cannot rely on it and must make up your own mind." I do not see anything unrealistic about that, nor does it mean the documents must be exemption clauses not basis clauses. As correctly submitted by [counsel for the bank], the disclaimers in the Risk Management Paper, the two sets of terms of business, the written acknowledgment of the transaction, and the formal written swap contract, are all basis clauses.”
“94 Against this background, it is inappropriate to go through the hundreds of conversations that took place between Mr Wilson and Mr Gainsley, or even the relatively few that are available, with a view to classifying everything that fell from Mr Gainsley's lips according to a rigorous analysis into separate categories of "information", "opinion", "advice" and "recommendations". That is simply not the way the conversations were conducted. Obligations of that sort could not be imported without express written amendment to the terms of business governing relations between the parties. … 96 It is clear from the conversations that there was a good deal of banter and light-hearted badinage and, from having seen the transcripts and listened to a few samples from the audio tapes, it is clear to me that what was happening can best be characterised as exchanging information and "bouncing ideas" off each other or swapping hunches about the market. Much of it was spontaneous and off the cuff. It would be unfair and unrealistic to pick upon certain passages in Mr Gainsley's observations, with six or seven years of hindsight, and to conclude that he had suddenly changed into "advice mode" and was undertaking an obligation, on his own initiative, to give advice on behalf of his employers to an "intermediate customer". If such conversations were to be subjected regularly to analysis of that kind with a view to changing the express terms of the parties' relationship, brokers would not be able to operate and communications would soon be drastically curtailed.”
“70. Mr Burgess is a salesman. His job is to sell derivatives and he makes his money by selling derivatives. He does not make money by providing advice in return for a fee. It is an integral part of the sales process in my view that he should have a dialogue with the customer and in the course of that dialogue may express opinions to the customer but those expressions of opinion have to be viewed in the context of the entire dealing. This expression of opinion is in my view the expression of a salesman selling his product not an adviser providing advice. 71. In my view this is not a conversation in which Mr Harrison is being advised as to what to do. It is clear from the exchange on rates in which Mr Harrison rejects the lower rates that a longer term would provide, that Mr Harrison understands the options that he is being offered and decides on the one which he feels is appropriate for him.”
“Although [the bank’s witnesses] were reluctant to accept that such recommendations could be characterised as "investment advice", the real point, in my judgment, is not the semantic one as to whether such recommendations are "advice", or "investment advice", in a loose or a strict sense, but rather whether the giving of such advice, on a regular basis, by a salesperson in such capacity, attracts the obligations and duties of care of an investment advisor in respect of the views actually expressed, or indeed, a positive duty to give advice on a wider basis as to the structure, or concentration, of the portfolio within the asset class of emerging markets securities, or as to wider diversification into other asset classes.”
“30. I therefore reject the suggestion that the Bank here owed to Messrs Green and Rowley a common law duty of care which involved taking reasonable care to ensure that they understood the nature of the risks involved in entering into the swap transaction. The existence of the action for breach of statutory duty consequent upon contravention of a rule does not compel the finding of such a duty – indeed for the reasons I have already given it rather tells against it. Mr Berkley’s further argument that such a cause of action would afford protection to those who, not being a “private person” cannot avail themselves of a cause of action for breach of statutory duty, is an invitation to the court to drive a coach and horses through the intention of Parliament to confer a private law cause of action upon a limited class.”
“We were effectively trying to understand what people were trying to achieve from the objectives and then show them some solutions”
“Q. So instead you wrote to him saying that the credit limit that was in place for the trade, that had been put in place for the trade, was about to expire? A. Mm-hm. Q. That wasn’t true, was it? A. Yes, it was. Yes. When we agree facilities the liability goes on our books and there is a period of three months that they are available … - in the expectation that the deal is concluded within a three-month period, because 99% of transactions were concluded in that time frame. If a transaction had not been concluded -- it is still the same now, we have to effectively go back to our credit committee to either refresh the deal and say this is the reason it is not drawn, there could be a hold up in this, that or the other but we expect it to happen, or do you know what, it is not going to happen, we need to take it off our books. Q. So why was the credit limit put in place until1 February 2008 ? A. So we have, as well as those -- so effectively you have a review date when the entire connection is due for review and for LEA it was in February, the year - I don’t know why it was February, probably an anniversary of when we originally opened the accounts because you usually roll facilities for 12 months. But anything agreed in the interim period or at any point with our credit function remains live for three months until you can actually physically mark the limits if the transaction is done, or if you need to go back to your credit committee to say, “Sorry this isn’t going to happen we need to cancel this.”
“given the profile of the business and what we discussed in terms of we're only looking to hedge 8 million of your initial£12 million worth of debt, and then, you know, subsequent to the increases in debt that you envisage by purchasing further aircraft, you know, that will… you know, that's the reasons why you're stepping that into 6 million. Is that okay?”
“I like the flexibility of the dual rate protection as it allows me to benefit from my view (that base may head to 5.0% or slightly lower) and also retain protection at no worse than 5.75%. However, if the range was wider and the enhanced rate lower I would feel more comfortable.”
“Introducing the right for RBS to call the trade at year 5 and every quarter thereafter allows us to give you the following; So long as UK Base Rate trades between the range 6.25% to 4.0% LEA will pay the enhanced rate of 4.70%. If rates trade at or outside the range then you are fully protected at 5.35%.”
“If the transaction needs to be amended in any way after it has been put in place, e.g. by amending its size, maturity date, reference exchange rates or cancelling, then there may be a cost to you to do so, credit parameters permitting; The potential cost will depend upon a number of factors including, but not limited to, the prevailing market rate compared to the transaction rate, the length of time to original maturity and the current volatility of the market. These factors may generate a cost to amend the trade even where the transaction rate compared to the prevailing market rate would indicate a favourable position; Should you decide to terminate any structure ahead of maturity, you may have to pay market-related breakage costs (these could be benefits however). These costs are not pre-determinable, depending on prevailing market conditions at the time of breakage;”
“If derivative contracts are closed before their maturity, breakage costs or benefits may be payable. The value of any break cost or benefit is the replacement cost of the contract and depends on factors on closeout that include the time left to maturity and current market conditions such as current and expected future interest rates.”
“Over-the-counter derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. … In general, all OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore the Recipient should ensure that, before entering into any OTC derivative transaction, the potential risks and return thereof is fully understood and the Recipient should also determine whether the OTC transaction is appropriate for the Recipient given its objectives, experience, financial and operational resources, and other relevant circumstances.” “Over-the-counter derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. … In general, all OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore the Recipient should ensure that, before entering into any OTC derivative transaction, the potential risks and return thereof is fully understood and the Recipient should also determine whether the OTC transaction is appropriate for the Recipient given its objectives, experience, financial and operational resources, and other relevant circumstances.”
“DM Just one final thing before I get your OK to go ahead to put that in place, should you wish to terminate the trades, Patrick, ahead of maturity, there may or may not be a breakage cost attributable to that trade and that can only be determined by the prevailing market at that point in time. So again, if you're comfortable with all of those details that I've just said for that trade, can I get your okay to go ahead and put that in place? PMR - Yeah, and the breakage relates just to the second trade or both trades? DM Both trades. ….”
“Q. And if the bank had told you that its internal credit line for these products was£1.65 million , that would not have affected your decision to go ahead, because you already knew the downside was potentially£1.7 million , and you nevertheless went ahead. A. I didn’t know, my Lady, that the downside was£1.7 million . That was the starting point on a sheet which didn’t put in all the variables, point 1. If I had thought that£1.7 million was the potential downside, I would have run a mile from those products. If I had been told that the potential downside was£1.65 million , in my personal view, I would be saying: I have got a potential liability the Bank is telling me that might occur on my balloon payment at£1.5 million so it would go up from 5 -- let’s say it was 5 million, 5 to£6.5 million , and against that, to protect against that possibility, I would then take on an unknown uncertainty, and if it was 1.65 and that was an ongoing risk on a regular basis, to me, I think it is fairly obvious that one would just say no to the products. Q. But that is too simplistic, isn’t it? You realised didn’t you, that in a situation where the balloon payment was very high at£1.65 million , for example then by entering into the swaps, you would receive huge payments from the bank that would counteract that. Conversely, in a scenario where the pain under the swaps was very high, your balloon payment would be that much lower. So the entire point of entering into the swaps was to smooth out those risks, wasn’t it? A. Maybe I am a very simple person, then, because the explanation that I gave my Lady is how I would have approached it.”
“Q If the bank had told you at the February meeting that its internal credit line for these products would be£1.6 million , you would still have gone ahead with the transactions, wouldn’t you? A. The first thing I would have asked is what credit line is, because as I said I’m not familiar with terms like this. If it was explained to me that this is the risk the bank assesses at that point of time that our loans have, I would have taken into consideration. If I was given the risk at the same time what the products have, I would clearly assess once against the other. Common sense, I think. Q. But if -- you were told, I think, at the meeting that there was a risk on the loan agreements that if interest rates went unusually high the balloon payment could be, say, 1.5,£1.6 million higher; do you remember being told that? A. I do not remember this being raised at the meeting. That is why it is not in my witness statement. However, I do understand that was brought up from disclosure later on, and on the basis of that I did my second witness statement which assumed that if Mr Wood or Mr Brindley, I can’t remember, used that, it would have made some difference. Yes, I didn’t care about the balloon, but if someone is telling me, “Well, we assess that your loan has£1.5 million risk and you know what, I will take the risk away from you”, I said, ”
“1.2 Our affiliates may act as agents for us and we may act as agent for one or more of our affiliates. This will be disclosed at or before the time of executing a transaction. It will also be recorded on the confirmation. These Terms shall apply unless our affiliate expressly requires otherwise.”