“Following our review of your trading activities with us and based on the information available to us as of1st November 2007 , we propose to classify you as an “Eligible Counterparty” where we conduct “eligible counterparty business” (as defined in the FSA Rules). In respect of all other business we conduct with or for you, we will treat you as “Professional Client”
“2. Scope Marex owes a duty of best execution to clients categorised as Professional Clients where we execute orders on your behalf and where we receive and transmit client orders. ... The Best Execution obligation will not apply when we execute orders for Eligible Counterparties (as defined under MiFID).”
“My calculations show that your futures equivalent position increased yesterday by about 5000 contracts so that your position was in excess of 80,000 lots entering today's trading. My review indicates that increase was primarily the result of additional selling of futures although deltas did have some impact as well. It is hard to understand how you are trying to reduce your position when you continue to sell thousands of lots of futures. As the price of the market contract is down today we expect to see a substantial decrease in your short futures position.”
“As of receipt of this email, the Exchange is directing you to stop selling the March '08 Sugar 11 futures contract and to cease any other trading strategies that would result in an increase in your Mar '08 short position. You are further directed to immediately cancel all sell orders involving the Mar '08 futures contract as an outright or a spread or any other orders that would increase your short Mar'08 position. These instructions result from your continued violation of your single month position limit and the significant increase in your Mar '08 short position yesterday. Further, data received in this office indicates that you have now exceeded your 65,000 lot all months position limit as well. Please take immediate steps to correct this situation. In addition, we are currently considering other steps the Exchange may take to ensure that you bring your positions in compliance with your position limits. You have now been in violation of your position limit for 10 business days.”
“Your March '08 position had been in violation of the single month position limit established for Fluxo-Cane Overseas Ltd. for 10 consecutive days entering today's trading. If your trading activity today did not bring the position in compliance with the position limit, the Exchange will invoke the authority provided by ICE Futures U.S. Rule 6.13 on Monday, January 14, 2008 and instruct firms carrying your positions to reduce such positions by the close of trading on Tuesday, January 15.”
“We have a concern now the Exchange's communications with the clearing firms are prejudicing Fluxo Cane's credit lines which make it more difficult to finance our position. As you know from our earlier correspondence some of our credit lines are revocable. So we ask that the Exchange act reasonably and prudently to achieve its self regulatory objective without unnecessarily imperilling Fluxo Cane's financial abilities.”
“Effective immediately and until further notice, all orders for futures and/or options contracts in the ICE Futures U.S. Inc. Sugar No. 11 Contract for the account of Fluxo-Cane Overseas Ltd. and its affiliates (including, but not limited to, Manoel Garcia) may only be accepted directly from a clearing member of ICE Clear US, Inc. and from no other person.”
“With respect to the Exchange’s instructions issued this morning to certain Clearing Members, including your firm, to reduce futures equivalent positions in the March ’08 Sugar No. 11 contract held by Fluxo-Cane Overseas Ltd. and its affiliates (“Fluxo”), we understand that given the circumstances that existed today with the timing of the notifications and trading activity that may have occurred prior to the instructions, it may have been necessary to receive in or give out positions for Fluxo today. However, effective with the start of business tomorrow, January 17, 2008, [Original emphasis] the Exchange is hereby directing that Clearing Members may not receive positions in from or give positions out to other Clearing Members for Fluxo. This means that trading activity for Fluxo should be cleared by the Clearing Member through which the orders were submitted. With respect to omnibus accounts, orders may be submitted by the firm carrying Fluxo’s positions as long as the firm has the Clearing Member’s consent and such orders are consistent with the instructions to reduce Fluxo’s short futures equivalent position in the March ’08 Sugar No. 11 position carried by that Clearing Member.”
“I will not speculate further on what may or may not happen. Let’s enjoy the ride that should follow.”
“35... There was clear concern amongst Marex management (including my colleague James Hearn who had been monitoring the situation closely) because of the unprecedented nature of the events which had occurred and the effects that they were having on the market. I was additionally concerned because Fluxo was my client. As at16 January 2008 , however, all margin calls had been paid. I was also able to speak to Mr. Garcia again and he confirmed to me that he was on his way to the airport and that he was seeking to arrange a meeting/conference call for the next day in New York, in which he proposed to allay the concerns of his brokers. At that stage I did not appreciate quite how many brokers that call would come to involve.”
“[Mr McGuigan]: ... Now I appreciate your situation is that you’re waiting on Manoel coming out of the conference call ... and we’re waiting for that ... but it’s gone from 3 o’clock to 4 o’clock to 5 o’clock and ... you know ... I’m beginning to have less power and my bosses, the directors of the company, are saying to me we either need to have the margin payment made or we need to have orders to buy something. [Maria Pia]: I know. I know all that OK. ...You’ve told us, everyone’s told us. I told you there is nothing we can do so if you need something to get done, then just do whatever you need to get done, but there is nothing we can do. I cannot give you orders. ... I can not do anything without Manoel’s [i.e. Mr Garcia’s] consent.”
“15. It was at this stage, on Thursday afternoon, that a management meeting was held in which I discussed the issue with other senior managers of the business including Mark Slade, Gavin Prentice and Charlie Lesser. Although we did not have all of the facts, certain things seemed clear to us. First, Fluxo and ICE were involved in a major disagreement. Second, ICE was acting in what seemed to us to be a highly aggressive manner, unprecedentedly so. Third, it was clear that Marex needed to comply with the Exchange’s requirement to reduce Fluxo’s positions. Fourth, Fluxo who had previously had a good margin call payment history with Marex, was unable to confirm that the current call or future calls would be met. And finally, the man at the centre of the storm, Mr Garcia, had decided to fly overnight from Brazil to New York to attend a meeting/conference call with Fluxo’s many brokers, at which everything would apparently be explained. This was most unusual behaviour. Meanwhile, the market continued to rally, and the losses on the position continued to mount. Marex needed to be in a position to protect itself, if needs be, from the possibility of significant losses on Fluxo’s trading account. 16. It was decided during the course of this management meeting that unless Mr. Garcia could provide some comfort in relation to the size of his overall commitment and a commitment to pay both the outstanding and future margin calls Marex would be left with no alternative in those circumstances but to start to liquidate Fluxo’s positions. We were looking for some positive confirmations from Mr. Garcia. My recollection is that, at least initially, we expected to get them. The all broker call was a call set up in advance. It was clearly important and I certainly expected a man of Mr Garcia’s reputation and importance in the market to have something positive to say during that call. 17. Our concerns were not allayed by the fact that the conference call which Mr. Garcia had arranged and which was originally scheduled for 3.00pm (London Time) on17 January 2008 was postponed from 3.00pm (London Time) to 4.00pm (London Time) and then 5.30pm (London Time). It did not start until about 6.10pm (London Time) when Mr. Garcia finally joined the call.”
“As per our previous telephone conversations, we are under instruction by the exchange to reduce your NY#11 Sugar position on a daily basis, and to reach a net short of 6200 lots or less by Wednesday 23rd. We have attempted to speak with Senior Garcia throughout the day, but with no success. The conference call/meeting has been postponed twice, and we await another attempt to speak. There is an outstanding margin call today, in excess of$3m – and we do require a response. We want to assist and support you during this difficult period, but we are not receiving any information, whilst the market rallies. We reserve all our rights to take any action that we may deem appropriate as per the terms of our account with you.”
“35. ... The question of how to reduce the FCO short position was discussed at some length as well as whether FCO was in a position to and would meet margin calls. During the course of the discussions one of the brokers spoke to the President of ICE about the situation. 36 In due course a dispute arose on the pleadings as to whether an agreement was reached at this meeting to the effect that FCO's short position would be reduced in a coordinated manner with one clearing house carrying out all the necessary transactions on the exchange including the use of spreads. This issue was the subject of a summary judgment application by the claimants. In due course it was held by the Court of Appeal that no such agreement or indeed any agreement had been reached and accordingly this issue has fallen away: see[2009] EWCA Civ 406 .”
“[Michael Overlander of Sucden]: ... Manoel ... In terms of margin calls that have been called for all day, will you be meeting those? [Mr Garcia]: I told you I have to know all the movements, each one. I will stop [payment] because it makes no sense to go to the infinitum with everyone [losing] their minds, liquidating partially or totally and so on, ... and out of my control.” “[Lou Kayapa of BNP]: That’s not really the choice that the Exchange has given us, and I think that you owe a lot of margin money to a lot of the people around this table, and on the phone. The Exchange has instructed all of us in letters and by phone calls to reduce the positions, and I think we need to know that the margin money that you owe us currently is coming in, the margin calls that were made this morning from yesterday are coming in, and that the margin calls based on market movement today ... [are] going to be met and I haven’t heard an affirmative response from you on that. [Mr Garcia]: Well I think that I told you. We will stop payment until we know what everyone will do, and if you will do it properly. ...” “[Unknown]: “With regards to the margins calls that we made to you this morning ... are you in a position to pay us for those calls? [Mr Garcia]: First of all I don’t know yet how much was because I stayed here. I went to hotel to be prepared for here, I had a meeting with my lawyer and I went to here. I will look this afternoon the numbers, but the problem is not if I have or not the source for that. It is that we are in a system that there is no more limits. We don’t know how much we have cost this buying side without ... certain protection.” “[Unknown]: Is there some way you can get the numbers [of outstanding margin calls] now and tell us whether you can make those, that obligation that is the margin that is due on the basis of prior days, not today’s but prior days? [Mr Garcia]: Our decision up to now is to not pay up to have any agreement what we can do or not do together. ...”
“[Unknown]: ... We [i.e. the brokers] are all going to meet the margin call to the Exchange because that’s what we do, right? If you [are] looking to have a dispute with the Exchange, I think you need to handle it with the Exchange, and leave the brokers out of that dispute. I think that needs to be done by you meeting the monetary obligations on a prompt basis of the margin calls outstanding. ...” “[Unknown]: ...I think that the situation you are putting everyone in here by not meeting your margin calls on a timely basis, ... I don’t think that will lead to ... ultimately a good situation. And I think if you [are] looking for an orderly liquidation of those positions, I can probably say with a reasonable amount of [assurance], looking at the people around this table, ... that that will not occur probably if the funds do not come in, because everyone’s going to be looking to cover their own positions.”
“[Unknown]: Did you [give] any orders today to buy? [Mr Garcia]: No because ... I stopped. First of all the idea was to decide here. And second, since the morning, the system was disturbed. ...”
“19. ... When Mr. Garcia ultimately joined the meeting, he said, on behalf of Fluxo, that he could make no commitment to the payment of margin calls at the current price levels and that he could not give any orders to buy or sell in relation to Fluxo’s positions (which was in direct contravention of the Exchange’s express instructions). 20. It was my understanding, based on what Mr. Garcia said on the call, that Mr. Garcia was not aware of the size of Fluxo’s overall exposure and that he was not able to confirm that Fluxo was able to pay its debts as they fell due. Despite having spent a whole day dealing with these issues and being advised by his lawyers, it appeared to me that Mr. Garcia was a man who had lost control and who was unaware of the risks to which Fluxo was exposed. 21. Hearing these initial comments, Charlie Lesser and Mark Slade broke-off from the conference call to discuss the situation by mobile. I was with Mark Slade. We needed to make a decision as to what should be done in order to protect both Fluxo and Marex. Taking into account all the circumstances together with Fluxo’s non-payment of margin, failure to confirm that the margin would be met and the market disruption and volatility, it was decided that Marex was entitled to and that it was in the best interests of both the client and ultimately the company to start to liquidate Fluxo’s positions.”
“46. The call began with an attendance call. As the individual brokers indicated their attendance it became clear not only that many, if not all, of the market’s major brokers were affected, but also that certain brokers (such as New Edge), who should have been on the call, were not on the call. It was confirmed by Mr. Garcia later on the call that New Edge and ADM had liquidated Fluxo’s positions prior to the start of the call. ... 52. Mr. Garcia had been unable to provide the comfort that we were looking for at the start of the brokers’ call. It was our understanding, based on what he had said, that Mr. Garcia was not aware of the size of Fluxo’s overall exposure and that he was not able to confirm that Fluxo was able to pay its outstanding margin obligations at that point or at any point in the future. He was also not prepared to give any buy orders.”
“Marex chose not to close-out all of Fluxo’s positions on the evening of17 January 2008 . While this was done partly due to a lack of liquidity on the market, it was also part of a strategy to manage the position.”
“[Mr Hearn]: I just need you to be aware that ... we are at the moment down millions of dollars in the trade which is coming out of our pocket at the moment. If we do not have the comfort that the margin call is going to be paid, we are left with no alternative but to liquidate the position. I need you to be aware of that. [Mr Garcia]: Okay, okay. Do your decision. Thank you and goodnight.” [Mr Garcia]: Okay, okay. Do your decision. Thank you and goodnight.”
“I reject an alternative case that has been advanced by Fluxo-Cane to the effect that it had five business days in which to pay margin by reference to Rule 5.01 of the ICE Rules. As Sucden says, while this Rule defines “reasonable time” as “less than 5 Business Days”, it is plain that this is in the context of and for the purposes of the Rules themselves. The Rules lay down a maximum period within which margin must be paid in order to comply with ICE Rules and avoid regulatory sanction. The Rules do not purport to, and do not, lay down some minimum period to which the payer is absolutely entitled. Nothing in the ICE Rules prevents a broker and customer from agreeing a shorter period between themselves as a matter of contract.”
“[The] general market understanding [is] that best execution and best interests obligations do not apply in a situation where a broker is liquidating positions on behalf of a client who is in a state of default” “... Moreover, in my view, the requirements of best execution and bests interests would cease to apply if the client is deemed to be in default, when I believe the broker would have a wide discretion in limiting and closing down the set of positions, which could now constitute a direct risk exposure for the broker itself.”
“76. ... As regards the best interests of the client, this is a difficult concept in circumstances where the client is refusing to pay margin and expecting [the broker] to close out as best it can. [The broker] was in effect trading on its own account. Furthermore the interests of [the broker] were in common with FCO namely to limit the loss that might be sustained as a result of the liquidation. Thus I reject the suggestion if it be made that [the broker was] obliged by COBS 2.1.1 to manage FCO’s position as if still acting as FCO’s broker but at its own risk and without the provision of margin.”
“2.6 ... It needs to be recognised that futures and options brokers are not normally in the business of taking outright risk positions, since they generally have neither the market expertise nor the level of capital required to do so. ... 2.7 It is also worth pointing out that a broker left with client positions is generally in a more risky situation than a client, such as Fluxo, who is classified as a hedging client. Such a client has the potential to delivery physical commodities against its derivatives positions, and the derivatives losses if any will be offset by profits on the physical positions. The broker by contrast will only have one side of the client’s position, and thus end up with a purely speculative position of someone else’s choosing. In my view, a reasonable broker in such circumstances would be concerned to eliminate the risks as quickly as possible.”
“... I am quite satisfied that Dr Fitzgerald is correct to express the view that it is only with the benefit of hindsight that it can be seen that liquidation during the period 22 to25 January 2008 would have been most advantageous. The market might have risen, as Mr Levy thought it would, or Mr Garcia might have been proved correct in his conviction that the market would fall. I am satisfied that following the action taken by the Exchange, the liquidation of Fluxo-Cane’s positions was going to be extremely problematic, as indeed both Mr Garcia and Mr Overlander foresaw. I very much doubt in these circumstances whether there is a single template by reference to which it can be said that liquidation was, or was not, negligent.”
“There are several points that need to be made, in my view, with respect to this complaint. First, it is apparent that no-one actually trading on a derivatives market can guarantee to achieve prices equivalent to the average daily price, since that price is known only at the end of the day, after all trading is complete. Second, the price of 12.70¢ per lb includes the block trade, which did not occur during the trading day on 18/1/08. In my view, the actual achieved Marex average price (without the block trade) of 12.51¢ per lb is so close to the actual overall average price of 12.40¢ quoted by Fluxo, as to remove any cause for complaint.” “... from the opening [of18 January 2008 ] the March No 11 futures price traded down to a low of 11.80¢ per lb, before recovering sharply. Marex purchased a net 2394 March No 11 futures contracts (i.e. excluding the block trade) between 06.30 London time and 10.38 London time. All of this trading took advantage of the declining sugar price, and Marex achieved an average price of 12.51¢ per lb. In my view, the purchase of those futures during a falling market at an average price of 12.51¢ per lb, represented a thoroughly reasonable approach to the liquidation process, which achieved a successful result for the Fluxo account.”