19 April 2017
Reporter: Drew Nicol

Failed Icelandic bank loses collateral valuation dispute

The UK High Court ruled that the non-defaulting party, Raiffeisen Zentralbank Österreich, had the right to determine the fair market value of the collateral at dispute

Defunct Icelandic bank Landsbanki Islands has lost a legal challenge disputing the method used to value collateral that funded its securities lending and repo transactions around the time of its defaulted in 2008.

The UK High Court ruled in late March that the non-defaulting party, in this case Raiffeisen Zentralbank Österreich (RZB), had the right to determine the fair market value of the collateral at dispute.

When Iceland’s government seized control of Landsbanki, then the second largest bank in the country, in October 2008, it was engaged in 11 repo trades and three securities lending trades with Austrian banking group RZB.

The dispute related to the interpretation of the term ‘fair market value’ as stated in the 2000 editions of the global master securities lending agreement (GMSLA) and the global master repo agreement (GMRA)

RZB argued before the UK High Court that the overall collateral bucket, which included corporate bonds from Wells Fargo, Countrywide and Morgan Stanley, was worth €74.7 million.

This figure was contested by Landsbanki, which argued that the hyper-stressed market conditions of the time made a determination of fair market value difficult.

Issue was also raised regarding whether default notices were effectively served by RZB on 8 October 2008, a day after Landsbanki admitted it was unable to facilitate a margin call.

In ruling on the case, Justice Robin Knowles dismissed Landsbanki’s interpretation of the GMSLA and GMRA collateral rules and concluded that despite correct pricing under such conditions being difficult, the non-defaulting party had the right to do so.

Justice Knowles explained: “I am unable to treat as irrational an assessment of fair market value based on the information RZB did have in the present case and without more. I do not rule out that the position may be different in the circumstances of other cases.”

“There is no doubt that the information available in the present case was imperfect, and it is to be noted that it includes the Bloomberg or BGN prices ," Justice Knowles continued.

"However, the circumstances at that time were imperfect. Any assessment of fair market value would have been imperfect but the non-defaulting party was nonetheless entitled to make one.”

Justice Knowles also ruled that although Landsbanki was unable to produce proof of receipt of default notices and the onus for proving that such a notice was sent is on the sender, “it is more likely than not that the faxes were collected”.

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