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CFH Clearing Limited v Merrill Lynch International & ISDA Master Agreements - Yan Shen Tan

In the recent case of CFH Clearing Limited v Merrill Lynch International (“CFH Clearing Limited”), the Court of Appeal shed much light on the approach to be taken towards the interpretation of the ISDA 2002 Master Agreement commonly used in over-the-counter derivatives transactions. This would have a significant impact on the field of derivatives and similar products that utilise a master agreement.

CFH Clearing Limited

The case concerns 27 electronic market orders the appellant (“CFH”) had placed with the respondent (“MLI”) to trade Swiss Francs for Euros for the next available price during a period of extreme volatility between the two currencies. MLI's automated system filled the orders almost instantaneously at an average rate of 0.1821969 CHF and executed the trades even when the “official low” was declared at 0.85 CHF on the main platform[1]. While other liquidity providers had agreed to re-book any trades executed with CFH below 0.85 CHF to that rate to reflect the official low, MLI was the exception and did not agree to adjust the rate for the 27 transactions to 0.85 CHF[2]. CFH then claimed that MLI breached its contractual obligation to follow market practice, which they claimed involved readjusting the rate to 0.85 CHF.

CFH’s relationship with MLI was governed by, inter alia, an ISDA 2002 Master Agreement ("the ISDA Master Agreement") and MLI's Terms and Conditions of Business (“MLI’s Terms”). The ISDA Master Agreement stated that unless otherwise agreed in writing, the ISDA Master Agreement will apply to each FX Transaction entered between them[3]. The preamble to MLI's Terms on the other hand stated that they applied to all investment and connected business which MLI might carry on with CFH, but subject to any documentation relating to a specific transaction or transactions between MLI and CFH. Clause 2 provided that the FSA Rules were not incorporated into MLI's Terms. Clause 7 includes the following:

“All transactions are subject to… the market practice of any exchange, market, trading venue and/or any clearing house and including the FSA Rules … In the event of any conflict between these Terms and any applicable rules, the applicable rules shall prevail…"[4]

CFH contended that clause 7 of MLI’s Terms imported a contractual obligation to comply with "market practice" and amended the contract constituted by the ISDA Master Agreement. They then took “market practice” to mean the practices of the foreign exchange market in general and not limited to the practice of specific markets or exchanges[5].

MLI contended that the words "subject to" related to conflict between provisions and did not necessarily mean incorporation[6]. Further, clause 7 clearly did not intend incorporation because clause 2 had explicitly stated so and because the incorporation of such a wide range of matters would lead to much uncertainty[7]. In any case, “market” should mean a “specific market or venue with its own set of rules and practices”[8] as the term was situated in the midst of a list referring to any exchange, trading venue and/or clearing house. Further, the alleged market practice was too uncertain and the Model Code was merely "aspirational".[9]

In a unanimous judgment in the Court of Appeal, Philips LJ dismissed CFH’s appeal. His Lordship firstly noted that the transactions in question were governed by the ISDA Master Agreement, which was “a detailed contract … on industry standard terms …tailored by the parties for their specific business relationship”[10]. Given that the detailed contractual regime “[incorporated] industry norms and practices and [was] intended to be a single comprehensive contract for all subsequent transactions”[11], it was unlikely that the parties had intended to incorporate “market practice” despite its absence in the ISDA Master Agreement.

His Lordship then held that on construction, where both MLI’s Terms and the ISDA Master Agreement applied to any FX transactions, the latter will prevail[12]. Thus, MLI’s Terms had not overridden the ISDA Master Agreement and “market practice” is not incorporated.

His Lordship also held that in any case, incorporation would give rise to much uncertainty, rendering transactions “unworkable” especially since it was not clear precisely what obligation was said to have arisen with regard to re-pricing[13]. His Lordship also agreed with the respondents that “market" in that context was plainly intended to cover specific markets and not markets in a general sense such as the FX Market.


As Briggs J (as he then was) had noted in Lomas & Ors v JFB Firth Rixson Inc & Ors[14], the ISDA Master Agreement is one of the most widely used forms of standard market agreements in the field of derivatives and in the financial world. It is thus “axiomatic” that the ISDA Master Agreement should promote the triple objectives of “clarity, certainty and predictability” such that financial institutes are able to predict where they would stand. CFH Clearing Limited promotes these three objectives in the interpretation of the ISDA Master Agreement by refusing to give “market practice” a more nebulous meaning than the one ascribed to it in the case.

This would have much impact on the field of derivatives as financial institutions carrying out swaps on the basis of ISDA Master Agreements will not be able to rely on general market practices to recuse themselves from dire situations such as the one CFH had found themselves in. Nonetheless, CFH Clearing Limited does not completely close the door on the use of general market practices as parties can always contract in clear terms to incorporate such general market practices. Parties, however, will have to be mindful that such terms will always have to be read with the rest of the ISDA Master Agreement and any other relevant contracts as a whole[15] and much care will have to be taken during drafting to ensure that even in the context of the ISDA Master Agreement, it is clear that parties have intended to incorporate general market practices.


[1] at [1] and [16] [2] At [15] [3] At [9] [4] At [11] [5] At [17] [6] At [36] [7] Ibid [8] Ibid [9] Ibid [10] At [40] [11] At [41] [12] At [42] [13] At [45] [14] [2010] EWHC 3372 at [53] [15]Wood v Capita [2017] UKSC 24; Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988

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