Close-Out Amount Differs Radically From Market Quotation And Loss

The English Court of Appeal issued a judgement on 14 March 2013 in the case of Lehman Brothers International (Europe) v Lehman Brothers Finance SA EWCA Civ 188. The judgement can be viewed here

The appeal related to an earlier decision of Mr Justice Briggs which was a subject of another briefing we issued at the time.  The Court of Appeal have reversed that earlier decision.

The critical issue was whether the "value clean" approach (which is now firmly established as applying to the Market Quotation and Loss measures under the 1992 ISDA Master Agreement) applies to the Close-out Amount measure under the 2002 ISDA Master Agreement. The Court of Appeal decided that it did not. This means that, when a Terminated Transaction is to be valued upon close-out under a 2002 ISDA Master Agreement there is no requirement to assume that the replacement transaction would continue to maturity, so that the economic effect of termination rights must be taken into account.