“Settlement Amount” means, with respect to a party and any Early Termination Date, the sum of: (a) the Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party’s Loss (whether positive or negative . . .) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result.” (a) the Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party’s Loss (whether positive or negative . . .) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result.” (iv) Market Quotation is also defined in Section 14 (“the Market Quotation provision”). [I have inserted for ease of cross-reference the letters A, B, and C below]. “Market Quotation” means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party . . . and the quoting Reference Market-maker to enter into a transaction (the “Replacement Transaction”) that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date . . . A) The Replacement Transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. B) The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. C) The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e) . . . If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined.” (v) Loss is also defined in Section 14 (“the Loss provision”): ““Loss” means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from any of them). . . Loss does not include a party’s legal fees and out-of-pocket expenses . . . A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets.” (vi) “(6)(e)(iv) Pre-Estimate. The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses.”
“If you agree that your market quotations were taken on the12th September 2008 , could you then please send us a renewed calculation statement taking the early termination date as valuation date of the trades: i.e.15th September 2008 . If prices cannot be obtained for the early termination date then you need to roll forward and take prices from the next business day.”
“On what basis did your team come to the conclusion that we used quotes for Sept. 12th? In the spreadsheets we sent you, there is no date mentioned. However, in the first spreadsheet, we have stated that the termination date is Sept. 15th. How could we have used quotes from Sept. 12th, when on that date no one knew that LB was insolvent?”
“Given that the valuation method to be used is ‘market quotation’ you need to calculate your loss as at 16-Sept-2008, given that the Japanese Stock Market was closed on 15-Sept-2008, the ISDA termination date.”
“11.126 Quotations for replacement transactions . . . Each quotation is for the amount that would be paid to, or would have to be paid by, the determining party in consideration for a [replacement] transaction . . . This reflects the fact that, in a liquid market, the loss or gain accruing to the determining party as a result of the termination of the parties’ future rights and obligations will generally be the same as the replacement cost, since the determining party can replicate what has been lost by entering into a new transaction for the remaining term. . . . 11.132 Historic Prices Where quotations are not obtained on the Early Termination Date, the Reference Market-makers must provide quotations for the entry into of replacement transactions at the time the quotations are submitted. They are not required to backdate their quotations to the Early Termination Date so that they represent market prices that were prevailing on that date. This follows from the fact that firm quotations must be provided. If the Reference Market-maker is stating the price at which it is prepared to deal, this will necessarily reflect market rates prevailing at the time the quotation is provided. A statement of the price that would have been available on the Early Termination Date is not sufficient, as this is not a quotation but a hypothetical assessment of the price at which the Reference Market-maker (or a third party) would have been prepared to deal. . . . The transactions quoted for must, in any event, be for a term commencing on the Early Termination Date and so the words “as of” are not intended to address this issue. Indeed, the requirement for the determining party to select “the day and time as of which those quotations are to be obtained” would be otiose if it always had to select the Early Termination Date. Instead, the fact that the quotations must be provided “as of” the Early Termination Date, or as soon as reasonably practicable thereafter, reflects the fact that the purpose of the Market Quotation provisions is to ascertain the replacement cost of the transactions at that time. It is the time at which the quotations have to be provided, therefore, that is critical”
“Since the Settlement Amount represents the option premium that [the non-defaulting party] did or could have received (or paid) by executing replacement trades as soon as reasonably practicable, the Non-defaulting Party will be ‘made whole’ regardless of the change in option price after the time of termination. Thus it will be put back into a position as if the early terminations had never occurred.”
“The identification of the Non-defaulting Party’s loss of bargain arising from the termination of the Derivative Transaction requires a “clean” rather than a “dirty” market valuation of the lost transaction. This means that the loss of bargain must be valued on an assumption that, but for termination, the transaction would have proceeded to a conclusion, and that all conditions to its full performance by both sides would have been satisfied, however improbable that assumption may be in the real world.”
“11.133 . . . The purpose of the valuation provisions is, so far as possible, to put the parties into the same position that they would be in if the relevant Termination Event had not occurred.
“If it is clear that quotations will not be available but it is reasonable to expect that the position will change in the near future, it would be impractical to expect the determining party to seek the quotations immediately. On the other hand, if there is no reasonable prospect of the market disruption being resolved in the near term, the correct conclusion should probably be that a Market Quotation cannot be determined (so that Loss should apply instead).”
“Where the Non-defaulting Party has reason to select Automatic Early Termination as the valuation time notwithstanding the closure of the markets on that time, such that it can make that selection in good faith and not irrationally, the effect is that . . . Market Quotation cannot be determined and Loss applies.”
“The Non-defaulting Party is responsible for determining the Settlement Amount and the Agreement provides for the use of the Loss measure only if Market Quotation would not, in the reasonable beliefof that party, produce a commercially reasonable result. The court cannot, therefore, simply substitute its own judgment of what is commercially reasonable for that of the Non-defaulting Party. However, I do think that the Agreement by necessary implication requires the Non-defaulting Party to consider whether the Market Quotation measure would produce a commercially reasonable result and to adopt the Loss measure instead if it does not believe that it would. Moreover, there is some protection for the Defaulting Party in the fact that the view taken by the Non-defaulting Party must be “reasonable”, that is, it must be based on reasonable grounds. That in turn requires that it must be one which can reasonably be held taking into account all the factors which ought properly be taken into account. In many cases there may well be room for different opinions, but in others it may be possible to say that a view one way or the other cannot reasonably be justified. If in such a case the Non-defaulting Party acted on the basis of a view of the matter which could not reasonably be justified, the Defaulting Party would in my view be entitled to relief on the basis that the adoption of the wrong measure in determining the Settlement Amount would amount to a breach of the Agreement.”
“51. As stated above, the Claimant is a subsidiary of LBHI. 52. Since its inception, the Claimant sourced all of its funds from LBHI and has never sought to borrow externally. The Claimant’s cost of funding was therefore derived from LBHI’s cost of funding. 53. LBHI’s cost of funding was calculated on the basis of its senior credit default swaps which, as at12th September 2008 , were priced such that the one year rate was 14.427%. In turn, the Claimant’s cost of funding was also 14.427% above the relevant overnight or money market rate, e.g. EONIA (European Overnight Index Average) in the case of EUR denominated receivables. 54. The Default Rate under the Master Agreement was the “rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum”