Vol 6 (2009) - Issue 3

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Re Global Trader Europe Limited (in liquidation) [2009] EWHC 602 (Ch)

Introduction

If a financial services firm fails, how should money in its various bank accounts be treated in its administration or liquidation?

The answer is reasonably clear at common law. If no trust of that money was effectively constituted, or no trust money can be traced, the money held in the various bank accounts is to be distributed in accordance with the statutory scheme of priorities ordinarily applicable.

The answer was less clear in cases subject to the client money rules created by the Financial Services Authority (‘FSA’) in exercise of their legislative power under the Financial Services and Markets Act 2000 (‘FSMA’). These rules, enacted in various guises since their creation under the Financial Services Act 1986, impose a statutory ‘trust’ on money that is ‘client money’ and specify how such money is to be distributed upon failure of a firm. A number of questions flow from this basic scheme. When is money client money? What more, if anything, is required for the statutory trust to bite? In what circumstances, if any, might the protection so conferred be lost? How is client money subject to the statutory trust but outside the client money distribution rules to be distributed?

Sir Andrew Park has now provided answers to these questions, and others, in Re Global Trader Europe Limited (in liquidation) [2009] EWHC 602 (Ch). The case is the first to construe the client money rules in force prior to the implementation of the Markets in Financial Instruments Directive (‘MiFID’) on 1 November 2007 (‘CASS 4’) and the first to consider the successor rules enacted in the light of that directive (‘CASS 7’).

This article summarises the judge’s conclusions and dicta and considers their likely application in future cases.

Facts

Global Trader Europe Limited (in liquidation) (‘GTE’) was a derivatives broker and carried on business for clients wishing to enter into spread bet transactions (‘SBT’) and contracts for difference (‘CFD’). These transactions enabled clients to speculate on the movement of a particular commodity or index for so long as the transaction remained ‘open’.

GTE did not mediate between its clients and third parties as a traditional broker but contracted with its clients as principal and entered into corresponding hedges with third parties (paragraphs 17 and 21). For this reason, the firm required each client –

(1) - to open an ‘account’ on its standard terms and conditions prior to the placement of any trade in order that a running ledger account could be kept of the balance owed to or by GTE by or to its client; and

(2) - to make a payment of margin to cover potential losses and honour further margin calls in the event that the initial margin proved insufficient (paragraph 20).

In this way, GTE aimed to profit from fees and commissions and maintain a market neutral position by hedging each client trade or ‘bundle’ of client trades. The firm was therefore only exposed to market risk indirectly. A client might fail to provide margin or to satisfy a call for margin with the consequence that GTE would have to shoulder loss arising from a hedged transaction from its own reserves.

GTE did suffer such a loss and, in the event, its own reserves proved to be insufficient (paragraph 21). The FSA intervened in its business and placed a restriction on new trading activity. The firm was subsequently placed into administration on 15 February 2008 and entered creditors’ voluntary liquidation on 17 June 2008, as no buyer for the business was found.