Derivatives – Lehman Judgment Reassures End Users on Close-out Amount Calculation Rights

    View Author August 2015

    On 12 May 2015, the English High Court provided guidance on the interpretation of the Loss provision under the 1992 ISDA Master Agreement in its judgment in Fondazione Enasarco v Lehman Brothers Finance S.A. and another [2014] EWHC 34 (Ch). The judgment will be of interest to participants in the derivatives markets as it provides: 

    • The calculation of Loss can be made by reference to the cost of a replacement transaction; 
    • A calculation of Loss made several months after the Early Termination Date can be considered to have met the contractual requirements of the 1992 ISDA Master Agreement for Loss to be determined as of the Early Termination Date or the earliest date thereafter as is reasonably practicable; 
    • The terms of a replacement transaction do not necessarily have to be identical to the original transaction; and 
    • Only in limited circumstances will the defaulting party be likely to be able to successfully challenge the non-defaulting party’s determination of Loss.

    The judgment is reassuring for end-users as it preserves the recognition of a wide scope of calculation methodologies on a termination of a 1992 ISDA Master Agreement.