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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Deutsche Bank AG v Sebastian Holdings Inc (Rev 1)  EWHC 3463 (Comm) (08 November 2013)
Cite as:  EWHC 3463 (Comm)
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| Deutsche Bank AG
|- and -
|Sebastian Holdings Inc.
David Railton QC, Simon Birt, Thomas Plewman SC, Oliver Jones and Max Schaefer (instructed by Travers Smith) for the Defendant
Hearing dates: 22nd, 23rd, 25th, 26th, 29th, 30th April,
1st, 2nd, 3rd, 7th, 8th, 9th, 10th, 14th, 15th, 16th, 20th, 21st, 22nd, 23rd May,
4th, 5th, 6th, 10th, 11th, 12th, 13th, 14th, 17th, 18th, 19th, 20th, 24th, 25th, 26th, 27th June,
1st, 2nd, 3rd, 4th, 8th, 9th, 15th, 16th July,
2nd August 2013
Crown Copyright ©
|2||The Key Issues|
|3||The Bank Audit Report|
|4||The New York Action|
|5||The Law of the Case|
|6||The Key Witnesses|
|7||The Contractual Documents|
|7(a)||The Principles of New York Law applicable to the construction of contracts and the implication of terms therein|
|7(b)||The Said Letter of Authority|
|7(c)||The Nature of FX Prime Brokerage and the Expert Evidence thereon|
|7(d)||The Foreign Exchange Prime Brokerage Agreement (the "FXPBA")|
|7(e)||The FX ISDA, the Schedule and the CSA|
|7(f)||The Pledge Agreement|
|7(g||The Limited Power of Attorney|
|8(e)||Paragraphs 38(4) and (4A)|
|8(j)||A further Implied Term of the FX ISDA|
|9||The Principles of the New York Law of Tort|
|9(a)||Concurrent duties of care and the Economic Loss Rule|
|10||The Alleged Oral Agreements|
|10(a)||The Capital Limitation Agreement|
|10(b)||The Pledged Account Limit (PAL)|
|10(c)||The Oral Agreements as to the types of trade|
|10(d)||Convention, Acquiescence and Rectification|
|10(e)||The Collateral Warning Agreement|
|11||The Meaning of Currency Options and Structured Options, the Said Letter of Authority and the FXPBA|
|11(a)||The Expert Evidence|
|11(b)||Clause 2(iii) of the FXPBA|
|12||The VaR Parameters|
|12(a)||The Changed Parameters|
|12(b)||The Computer Models|
|13||The problems created by the OCTs and the EDTs for DBAG's systems|
|14||Mr Said's Evidence on Affidavits, Depositions and in his Timeline|
|15||Mr Said's Agreement to the Non Reporting of the EDTs, MTMs and Margin calculations which included them|
|15(a)||The 5th May 2008 telephone call between Messrs Quezada, Walsh and Said|
|15(b)||The 22nd July telephone conversation between Messrs Walsh and Said|
|15(c)||The 8th September meeting between Messrs Quezada, Spokoyny and Said|
|16||The History of Mr Said's Trading and Mr Vik's knowledge thereof|
|17||The 2008 Agreements|
|17(a)||The Equities PBA|
|17(a)(i)||The First Issue of Construction|
|17(a)(ii)||The Second Issue of Construction|
|17(a)(iii)||The Third Issue of Construction|
|17(a)(iv)||The Fourth Issue of Construction|
|17(b)||The Listed F&O Agreement|
|17(c)||The Master Netting Agreement|
|19||Mr Vik's FX Trading with DBAG and its collateralisation|
|19(a)||The Course of Events in 2007-2008 relating to Mr Vik's FX trading|
|19(b)||The Pattern of Mr Vik's FX trading|
|19(c)||The 3rd September email|
|19(d)||Agreement, estoppel by convention, acquiescence and waiver|
|20||Mr Vik's F&O transactions and their collateralisation|
|21||The DBS Counterparty Issue|
|22||The Alleged Misrepresentations|
|22(a)||The first implied representation at the meeting of 7th May 2008|
|22(b)||The second alleged misrepresentation arising from emails relating to the withdrawal of cash from the FX account|
|22(c)||The third alleged misrepresentation on 6th October 2008|
|22(d)||The fourth alleged misrepresentation at the 7th October 2008 meeting|
|23||The GEM Terms and Conditions of Use|
|24||Inducement of Breach of Contract|
|25||The FX Margin Calls|
|25(a)||The Ninth Argument|
|25(b)||The First Argument|
|25(c)||The Second Argument|
|25(d)||The Third Argument|
|25(e)||The Fourth Argument|
|25(f)||The Alleged Events of Default or Potential Events of Default|
|25(g)||The Fifth Argument|
|25(h)||The Sixth Argument|
|25(i)||The Seventh Argument|
|25(j)||The Eighth Argument|
|26||The Equities Margin Call|
|27||Termination of the Contracts|
|28||Wrongful Transfers from SHI's accounts|
|29||FX Close Out|
|30||Equities Close Out|
|30(a)||The American Shipping Shares|
|30(b)||The Floatel Shares|
|30(c)||The Scorpion Shares|
|30(d)||The Seajacks Shares|
|30(e)||The Standard Drilling Shares|
|30(f)||The Thule Shares|
|30(g)||The Yantai Shares|
|31||The Covenant of Good Faith and Fair Dealing|
|33||SHI's Damages Counterclaim|
|33(a)||SHI's Available Funds|
|33(b)||Mr Vik's trading in September and October 2008 and the losses claimed in respect of the forced close out|
|33(c)||The hiatus and the starting fund for the Hypothetical Portfolio|
|33(d)||The Hypothetical Portfolio|
|33(e)||Bars to Recovery|
|34||DBAG's alleged duty to account|
|36||The nature of DBAG and SHI's trading|
|1||Extracts from ISDA Master Agreement and Schedule|
|2||FXPB Organisational Chart|
|3||The margin figures for Mr Said's FX Trading as calculated by the Forensic Accountants|
|4||DBAG's ARCS Monte Carlo VaR Methodology
Mr Justice Cooke:
i) The first is said to have limited Mr Said to trading "vanilla options" only, which are said to be straightforward options involving nothing more than a put or call or a series of put or call options.
ii) The second is said to have limited Mr Said to concluding transactions which did not give rise to losses in excess of US$35m. This is also expressed as an agreed trading limit of US$35m or an agreement restricting DBAG's recourse to that sum (the Capital Limitation Agreement).
2. The Key Issues
3. The Bank Audit Report
4. The New York Action
5. The Law of the Case
6. The Key Witnesses
i) He knew the basis upon which banks operated and how margin was ordinarily required to support such trading. He could readily have expected that, as DBAG calculated the margin requirements for Mr Said's FX trading, if and when the requirement rose to US$35 million, Mr Said and SHI would be notified and asked to put up further collateral or reduce positions so as to bring margin down within the US$35 million provided. According to the bank's promotional documents relating to its systems, MTM valuation was meant to take place about every 15 minutes of the day so that the scope for collateral requirements to exceed the US$35 million figure by much before notification was very limited if all trades were being booked, valued and margined correctly.
ii) On October 13th Mr Vik was faced with a margin call for approximately US$98.8 million. The following day there was a further call for about US$202 million. This was followed by a call for US$125 million (approximately) the next day which was rolled into a margin call the following day of US$175 million and on 17th October an additional call was made of nearly US$35 million. Since Mr Vik had already decided the previous weekend to close down transactions as opposed to just putting up additional margin, these figures included large premium figures for the closing out of transactions, but, on the face of it, without some knowledge of what was going on, he might have expected margin calls to be limited to a reasonably small excess over and above US$35 million, even given the extraordinary state of the markets in October 2008, following the collapse of Lehman Brothers in September and the events which followed.
iii) Mr Vik was given a clear idea of the likely total of calls on 16th October in a telephone conversation with Mr Gunewardena and others. Mr Vik paid all the FXPBA margin calls and only refused to come up with more cash when told of the bank's accounting errors (amounting to some US$430 million) and/or when faced with the GPF margin call which he maintains he did not receive.
7. The Contractual Documents
7(a) The Principles of New York Law applicable to the construction of contracts and the implication of terms therein
7(b) The Said Letter of Authority
"We, the undersigned, the directors of Sebastian Holdings Inc., (the "Company") hereby authorize Mr. Klaus Said, Vik Brothers, 10 Ashton Drive, Greenwich, CT 06831 (the "Agent"), to trade on behalf of the Company for the purpose of executing spot, tom next and forward foreign exchange transactions and currency options (herein, 'FX and Options Transactions") with Deutsche Bank AG ("DBAG"). We hereby authorize the Agent to sign and deliver on our behalf and in our name any documentation related to the execution of any such FX and Options Transaction, including, without limitation, ISDA master agreements, schedules, confirmations, credit support annexes, security interests or other credit support documentation (herein, as amended from time to time, "Documentation").
We hereby recognize and agree that Deutsche Bank AG ("DBAG") will rely upon this letter in connection with FX and Options Transactions. We further hereby agree that we will be subject to the terms and obligations of, and liabilities contained in, any FX or Options Transaction or related Documentation executed by the Agent on our behalf to the same extent as if we were directly executing such FX or Options Transaction or were directly the signatory of any such Documentation. We further hereby recognize and agree that DBAG shall have no duty to inquire as to the nature of the relationship between us and the Agent nor as to any restrictions upon the activities of the Agent in connection with the Agent's execution of FX and Options Transactions on our behalf."
7(c) The nature of FX Prime Brokerage and the Expert Evidence thereon
"23. FXPB is essentially a clearing function (although others may refer to it as a credit intermediation function) offered by a bank to its clients to facilitate a client's trading activities on an agency basis. The bank permits the client to use the bank's interbank credit lines, enabling the client to trade directly with several executing brokers but consolidating all positions and risk with the bank (which acts as the FX Prime Broker).
24. In summary, the process of FXPB operates as follows:
(a) a client enters into a trade with an executing broker in the name of the FX Prime Broker;
(b) contemporaneously the client enters into an equal and offsetting transaction with the FX Prime Broker (these transactions are known as "give up" trades) and by so doing the bank takes a credit risk on the client in respect of which the client usually posts collateral with the bank;
(c) the service enables the client to post a single pool of collateral with the FX Prime Broker rather than posting collateral with each executing broker with whom the client wishes to trade. This provides a valuable benefit to the client, not just because a single pool is more convenient but, because utilizing a single pool posted with the FX Prime Broker usually allows the client to trade against a lower amount of collateral, while still being in a position to negotiate terms and conditions with a number of different executing brokers. The amount of collateral posted is a matter for negotiation by the client with the FX Prime Broker (and all sorts of factors are relevant to this, including commercial considerations); and
(d) the FXPB service is therefore a highly client demand-driven service. In exchange for the authority to trade in its name, the FX Prime Broker typically charges the client a fee per transaction.
25. The basic steps of the "give-up" process are as follows:
(a) the client selects the FX trade it wishes to enter into. The sales/trading team at the executing broker negotiates the terms and conditions of the FX trade with the client (and may provide advice in this respect) and executes the FX trade on behalf of the client;
(b) after the trade has been executed, the client notifies the FX Prime Broker of the trade details. The client provides this notification using automated or manual systems put in place with the bank;
(c) the executing broker communicates the trade details to the FX Prime Broker;
(d) the FX Prime Broker confirms matching details between the executing broker and the client. If there are any mismatches, the FX Prime Broker advises both the client and the executing broker of those mismatches;
(e) the FX Prime Broker also enters into an equal and offsetting trade with the client so that its net exposure is zero and inputs the back-to-back trades; and
(f) the FX Prime Broker clears and settles the trade on the settlement date.
26. The diagram below highlights the key steps in an FX Prime Brokerage give-up transaction:
27. It is apparent from the description I set out above that the FX Prime Broker is not providing any advisory service to the client: the FX Prime Broker does not even know what trades the client has entered into until the client informs it.
28. Rather, FXPB is a low-profit margin operationally-focused business where revenues are generated by the bank charging transaction fees for trades done with other executing brokers. It is a service business that takes no market risk and differs from FX trading, which is a business that revolves around taking market risk. The service is often offered to enhance the overall FX franchise and increase the amount of trading done with the bank directly. The FXPB department within a bank is operationally-focused group which may have its own sales function and has minimal interaction in its daily operational functions with FX Sales or Trading. FXPB tends to physically sit in a different part of the bank due to confidentiality issues.
29. It is useful to compare and contrast the functions of the other various separate, but sometimes overlapping, departments involved in the FX businesses for a bank, all of which reported to the head of the FX division:
(a) FX Trading: This is an internal proprietary-focused department, which allows banks to express a view on the FX markets which is translated into market risk in the hope of being profitable on a trade-by-trade basis. This internally-focused group can generate and execute ideas through its own research team or can participate in the trade flow of clients brought to them by the FX Sales Department, and provide liquidity to a client by enabling it to transact in the product, quantity, and direction it needs. It will make a market on a proposed client trade and if they win the trade, will take on the proprietary risk of that position.
(b) FX Sales: This is a bank-offered service that manages, sources, and communicates with clients about trading opportunities. FX Sales communicates with FX Trading, which sets a price level when a client wants to execute an instrument. This group is responsible for getting the client to transact with the bank, based on its service orientation and ability to work with its FX Trading group to offer competitive pricing and liquidity on FX instruments. This FX Sales function should not be confused with any sales function which exclusively promotes the FXPB product itself."
"30. Further, and as I explain below, there was no one-size-fits-all FXPB service. On the contrary, in the relevant period from November 2006 to November 2008, the FXPB service offered by banks acting as prime brokers varied from bank to bank and from client to client. This is because the FXPB service offered by a bank to a client would differ from client to client and take into account the client's characteristics and set up.
31. FXPB was first conceived in 1994. A convenient summary of the evolution of the FXPB market is set out in a document that was presented to institutions in 2005 by the Federal Reserve (the Product Overview and Best Practice Recommendations) as follows:
"Prime brokerage emerged in the early 1990s with the use of semi-formalized "give-up" arrangements initiated by a few financial institutions. The product gained momentum in the late 1990s when several banks entered the prime brokerage business with dedicated market and sales efforts as well as tighter and more formal operational controls, procedures and processes. This focus laid the foundation for a rapid expansion of the client base."
32. FXPB, as it is now known, was commonly called "FX Clearing"
at this point. It was only in the 2000's that it became commonly known as FXPB.
33. By 1998, there were three institutions that offered the FXPB/FX Clearing product as a designated offering: ABN-AMRO, AIG and Deutsche Bank/Bankers Trust. These institutions offered a dedicated FXPB team (separate from FX Trading and Sales), a senior FXPB relationship point, and carved out "give-up" lines that were exclusive for the client's use. Every bank has a line of credit with other banks. The FX Prime Broker would use a portion of these credit lines between the banks for the client's exclusive use to trade FX transactions.
34. By 2004, the number of FXPB service providers had grown to more than 20 institutions, including banks, investment banks, insurance companies, and niche broker-dealers, which provided some form of FXPB offering to more than 500 clients. The product had evolved from simple FX spot, FX forwards, and short dated swaps "give-ups" to include more complex transactions.
35. By 2008, more than 25 entities offered some sort of FXPB. This list included US and European commercial banks, investment banks, insurance companies, retail FX firms, small broker dealers and some corporate entities. Every firm that offered FXPB seemed to have a different product offering. The nature of their offering correlated with the firm's core client base, technology and operational robustness, research focus and overall credit rating. The main users of FXPB services were hedge funds that actively traded FX as an asset class for their portfolio. Other users of FXPB emerged over the period 1994-2008 and typically included small commercial banks, small broker-dealers, high frequency traders, European and Asian private banks, large and small corporations and retail-focused web-based FX trading firms.
36. Although I am not a compliance expert, I had a broad understanding of the regulatory framework in New York. My experience was that as more banks offered FXPB, the Federal Reserve and the Office of the Comptroller of the Currency started taking a more proactive interest by asking more questions about the business in FXPB starting in early 2001. These regulators were interested as FXPB was situated within the banking (rather than securities or broker dealer) entities of banks.
37. In or about 2005, the Product Overview and Best Practice Recommendations were presented by the Federal Reserve addressing the role and structure of FXPB. This overview did not constitute binding or enforceable guidelines. Rather, the document emphasized that the recommended best practices "were intended as goals rather than binding rules".
38. Other regulatory bodies like FINRA, the SEC, the NYSE and the CFTC had no direct authority over establishing or enforcing regulations with respect to the FXPB product specifically, or licensing professionals involved in offering the product, and I never came across such regulators in my FXPB practice.
39. Given the absence of formal regulation or binding guidelines, there was substantial variance in arrangements which clients negotiated with the various banks individually, which led to big differences in the operational processes of the participants involved.
40. However by 2006 there were some key facets to executing "give-up" transactions with FX Prime Brokers, which had similar characteristics or practices across industry participants. Some of these included:
(a) Use of Client Documentation: Prior to trading through an FX Prime Broker, the client would typically sign a prime brokerage agreement outlining the terms and legal structure of the service, which may include a list of approved "give-up brokers" and associated financial limits with each broker, and other items like permitted currencies. Other documents that were customarily used included an ISDA Master Agreement (ISDA) and Credit Support Annex (CSA). While documentation was put into place to set out the terms of the relationship with an FX Prime Broker, the actual content and terms of these documents varied greatly from bank to bank and client to client, reflecting substantial variation in the business model used by each bank and applied to each client.
(b) Use of Bank to Bank Documentation: The FX Prime Broker negotiated a "give-up" agreement with the executing brokers [referred to in this action usually as a Counterparty Agreement].
(c) Formalized access to specific banks' credit lines by each FXPB client: The FX Prime Broker allowed the client to use its interbank lines of credit so that it could transact contracts with numerous executing brokers as specified in the "give-up" agreement. Very often, an FXPB arrangement would require the client to post collateral with the FX Prime Broker as a safeguard against the total risk of the client's trading positions, for the bank's protection.
(d) Trade confirmation timing: It was market practice for there to be a period of time in which an executing bank would confirm a trade with the FX Prime Broker for a transaction. The FX Prime Broker would not be regarded as having a trade until both parties had reported the trade. After the suggested period had elapsed, it was common practice for an FX Prime Broker to reach out to the party that had not reported for confirmation. If neither party had reported the trade, it was impossible for an FX Prime Broker to know a trade had been executed. Reporting methods included: Reuters 3000 Machine (FX chat and communication system), fax, phone, File Transfer Protocol file (FTP) or email. Some banks who were on the Triana platform offered this system to their clients. By 2006, it was commonplace to receive an FTP file that was straight through processed from the client into the bank's internal FX booking systems for all FX spots, vanilla options and forwards. These FX spots, vanilla options and forwards generally represented more than 90 per cent of all transactions done by clients and, due to the degree of automation, the FXPB team had minimal manual involvement.
(e) Clearing and settlement functions: The FX Prime Broker would be solely responsible for matching, reconciling, and inputting the trades into the bank's internal systems. Matching a trade is meant to ensure that the client and the executing broker have exactly the same trade details. If a trade is matched properly, the FX Prime Broker then inputs an equal and opposite transaction between itself and the client to ensure the FX Prime Broker ends up with a flat position. While the FX Prime Broker takes credit risk by the provision of a credit line which gives the clients access to the FX markets, the ending net position for the FX Prime Broker is flat, reflecting the complete offset between the client trade and give-up received. If a trade was matched it would have then been settled in accordance with its terms.
(f) Reporting: Typically, some basic reporting of the trades executed would be provided by the FX Prime Broker to the client on a daily basis. The type, method and detail of reporting would vary between institutions and clients. As I have already explained, the FXPB service provided would differ from client to client and that was particularly true of any reporting arrangements made. Any reporting in the context of an FXPB service was primarily to provide a record of the trades the client had selected and executed in the name of the FX Prime Broker.
(g) Access to client information: Customarily, FXPB staff sat on a different floor and used different systems (with restricted access for FXPB staff) to the FX sales/trading department. This ensured a separation of duties for operational control, and confidentiality to preserve the integrity of client information (so that only FXPB had access to clients' position information). The effect of this was that sales and traders had no access to clients' position information, aside from what was traded directly with the bank.
(h) Client interaction: FXPB professionals were solely responsible for the client-facing operational aspects of the FX client relationship. FXPB would not customarily be involved when clients sought advice or research from FX sales coverage.
41. Even though there was some consistency with regard to the broad roles and functions of FXPB providers, each FXPB facility was typically very different from the next. The lack of regulation and any specific regulatory guidance resulted in substantial variances in the FXPB service provided to different clients by different banks.
42. Most FXPB facilities would take into account a client's existing operational and trading infrastructure. One client might do their "forward rolls" (which is taking a currency position from a near date to a date further in the future) at the end of the day, another client might do them at 12pm EST and another might do them trade by trade.
43. Operationally, the process conducted by FXPB for a client was not standardized due to the diversity of each client's trading strategies. One client might have preferred to receive trade confirmations via fax, another by telephone, another by website, and another by FTP file.
44. In addition, the size of a client's operation and the client's level of sophistication and customization needs typically informed the FXPB process. For example, larger clients who had a technology infrastructure and strong operational support were more streamlined tended to use automated processes to interact with their FX Prime Broker. Smaller clients with fewer resources tended to use more manual processes, both in operations processes internally and how they interacted with the FX Prime Broker. However the provision of the Triana system by some FXPBs enabled clients to automate the process for certain types of vanilla trades.
45. A broad range of documents for creating an FXPB facility were or could be used. These documents were the sole source of governance of the relationship between the FX Prime Broker and the client, in the absence of any specific regulations that were applicable to FXPB. Furthermore, there was no Exchange/Central Clearing Counterparty or regulatory margin policies that existed for FXPB. The use of specific documents was a function of a bank's policies in addition to both the type of client and the nature of their proposed trading activities. Those documents could include (though these were not necessarily always used) an FXPB agreement, ISDA, CSA, give-up documents, Collateral Agreement, and Trader authorization list.
46. Since the actual provisions in these documents were not required by the terms of an exchange (as was the case in futures markets), there was great flexibility in the language and customization of these bilateral documents. The ISDA and give-up documents were fairly industry standard, but these and the other documents were always subject to negotiations based on the bank's unique credit or risk characteristics and the client's priorities, needs, and negotiating power."
"51. The role of an FX Prime Broker was understood in the market to be to facilitate the clearing of client-traded products which were approved in the documentation. The FX Prime Broker was not understood to play, and in my experience did not play, any role in assessing or advising on the market risk or possible gains or losses from those transactions. Indeed, customarily the FX Prime Broker would only know about the transaction after it had been executed by the client. …
52. As providers of a clearing service whose primary function is to match and settle trades, it was not customary for FX Prime Brokers to offer risk management services to clients, even though I became aware some FX Prime Brokers offered limited portfolio metrics. By "portfolio metrics" I mean data such as volatility estimates about the underlying currencies in a client's portfolio. If an FX Prime Broker did offer any limited portfolio metrics, those would only be to aid the client's own risk management and not intended as a risk management service. Some FXPB clients outsourced their risk management (although many utilized their own proprietary risk systems) and there were a number of outside vendors who offered third party risk management software, such as Risk Metrics, SunGard, Algorithmics and others. The provision of risk management was not, however, customarily a service provided by FX Prime Brokers even as an add-on feature available for an additional fee."
7(d) The Foreign Exchange Prime Brokerage Agreement (the "FXPBA")
"This Agreement describes the arrangement pursuant to which Deutsche Bank AG London ("DBAG") authorizes Sebastian Holdings, Inc. ("Agent"), to act as its agent in executing spot, tom next, deliverable and non-deliverable, forward foreign exchange transactions with a maximum tenor of 24 months ("FX Transactions"), gold, silver, platinum and palladium ("Precious Metals") spot and forward transactions with a maximum tenor of 24 months which provide for settlement without physical delivery of metal ("Precious Metals Transactions"), and currency and Precious Metals options with a maximum tenor of 24 months and which provide, in the case of Precious Metals options, for settlement without physical delivery of metal ("Options") (collectively, the "Counterparty Transactions") with the Counterparties listed in Annex A hereto (each, a "Counterparty") and on the terms set forth in Annex B hereto. Capitalized terms not defined herein shall have the meanings assigned to them in the 1998 FX and Currency Option Definitions (as published by the International Swaps and Derivatives Association, Inc., the Emerging Markets Traders Association and The Foreign Exchange Committee)."
"1. This authority is expressly limited for each Counterparty in that (a) for any Settlement Date the Net Daily Settlement Amount for such Counterparty may not exceed the Settlement Limit as specified in Annex A hereto and (b) the Counterparty Net Open Position may not exceed at any time the Maximum Counterparty Net Open Position as specified in Annex A hereto. The Settlement Limit and the Maximum Counterparty Net Open Position shall apply to all Counterparty Transactions entered into between DBAG and the Counterparty branch specified in Annex B."
""Structured Option" means any option other than one which is a (i) put or call that does not have special features, or (ii) single barrier option."
"Prior to entering into any Counterparty Transactions, DBAG shall have executed a Counterparty Agreement with such Counterparty. Agent [i.e. SHI] shall promptly communicate trade details of each Counterparty Transaction by notifying via facsimile or other electronic means an area of DBAG separate from trading and marketing personnel. Each Counterparty Transaction between DBAG and a Counterparty shall be confirmed and settled in accordance with the terms of the applicable master agreement between DBAG and the Counterparty (a "Counterparty Master Agreement")."
"4. In connection with entering into each Counterparty Transaction, DBAG shall contemporaneously therewith enter into an equal and offsetting transaction or transactions with, at the discretion of Agent (i) Agent (each, an "Agent Transaction") or (ii) one or more of the give up parties listed in Annex C hereto …"
As previously mentioned there were no such parties specified in Annex C so that every Counterparty transaction concluded by SHI gave rise to an Agent transaction between DBAG and SHI.
"Each Agent Transaction shall be an FX transaction precious metals transaction or option under, and subject to and governed by, the applicable ISDA Master Agreement or other master agreement between Deutsche Bank AG and the Agent, including the Credit Support Annex which is a part thereof (the "Agent Master Agreement''). Agent shall be required to post collateral with respect to its obligations under the Agent Master Agreement (including the Agent Transactions) in accordance with terms and provisions of the Credit Support Annex. DBAG and Agent agree that any breach of this Agreement by Agent shall constitute an Event of Default under the Agent Master Agreement.
Each Agent Transaction and each Give Up Transaction shall be subject to and settled in accordance with any market practice … applicable to, or adopted by, DBAG and the Counterparty in connection with the Counterparty Transaction for which it is offsetting notwithstanding any provision in a confirmation for an Agent Transaction or Give Up Transaction that may be to the contrary."
"2. Agent acknowledges and agrees that it shall monitor the Net Daily Settlement Amount and the Counterparty Net Open Position for each Counterparty and that DBAG shall not be responsible for any Counterparty Transaction executed by Agent on behalf of DBAG unless (i) giving effect to such Counterparty Transaction does not cause the Settlement Limit or the Maximum Counterparty Net Open Position to be exceeded (without DBAG's prior written consent or recorded verbal consent (confirmed by fax immediately thereafter)); (ii) such Counterparty Transaction meets the criteria set forth in Annex B and (iii) if such Counterparty Transaction is a Structured Option, DBAG shall have approved the particular Structured Option transaction proposed by Agent, including the Counterparty and principal amount of such Structured Option, and such approval shall have been effective when the Structured Option was executed by Agent (an "Accepted Transaction"). DBAG agrees to provide Agent with a summary of the outstanding trades and the net exposure with respect to each Counterparty, up to two times on each Business Day during which there are Counterparty Transactions outstanding. Each Accepted Transaction shall be valid and binding upon DBAG, enforceable against DBAG in accordance with its terms. The dealing arrangement with respect to each Counterparty shall be set forth in a Foreign Exchange Prime Brokerage Counterparty Agreement (a "Counterparty Agreement"). Each such Counterparty Agreement is substantially in the form of a template which DBAG will send you on your request."
7(e) The FX ISDA, the Schedule and the CSA
"The FX ISDA
5. Events of Default and Termination Events
(a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party:-
(i) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the first Local Business Day after notice of such failure is given to the party;
(iii) Credit Support Default.
(1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed;
(3) the party or such Credit Support Provider disaffirms; disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document;
6. Early Termination
(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party'") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions.
(l) "Additional Termination Event'' will apply. The following shall constitute Additional Termination Events …
(iii) Failure to Provide Additional Collateral. If Party A [DBAG] shall for any reason deem that there is/are insufficient Eligible Assets held pursuant to the terms of the Credit Support Document [defined in the Schedule as the Pledge Agreement] and available to satisfy Party B's [SHI's] present or future obligations under this agreement or Party B's present or future obligations under any other agreement or arrangement between Party B and Party A or its affiliates, Party B shall within two Local Business Day's notice thereof deliver additional collateral assets of such type specified by Party A (which collateral assets shall be delivered and secured pursuant to any existing Credit Support Document or other arrangement in a form satisfactory to Party A in its sole discretion) in an amount as may be required by Party A. If Party B fails to deliver such additional collateral assets, such failure shall constitute an Additional Termination Event with respect to Party B and Party B shall be the sole Affected Party and all Transactions shall be Affected Transactions.
Part 5 Other Provisions
10. Credit Support Balance
All payments required to be made by Party A in respect of any FX Transaction or Currency Option Transaction under this Agreement (except for payments required to be made under the Credit Support Annex or Section 6(e)) shall be made by way of credit to the Credit Support Balance of the relevant amount and Party A's obligation to make such payment shall be satisfied and discharged in full."
"The Credit Support Annex (The CSA)
Paragraph 2. Credit Support Obligations
(a) Delivery Amount. Subject to Paragraphs 3 and 4, upon a demand made by the Transferee on or promptly following a Valuation Date, if the Delivery Amount for that Valuation Date equals or exceeds the Transferor's Minimum Transfer Amount, then the Transferor will transfer to the Transferee Eligible Credit Support having a Value as of the date of transfer at least equal to the applicable Delivery Amount (rounded pursuant to Paragraph 11(b)(iii)(D)). Unless otherwise specified in Paragraph ll(b), the "Delivery Amount" applicable to the Transferor for any Valuation Date will equal the amount by which:
(i) the Credit Support Amount
(ii) the Value as of that Valuation Date of the Transferor's Credit Support Balance (adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such Valuation Date).
Paragraph 3. Transfers, Calculations and Exchanges
(a) Transfers. All transfers under this Annex of any Eligible Credit Support, Equivalent Credit Support, Interest Amount or Equivalent Distributions shall be made in accordance with. the instructions of the Transferee or Transferor, as applicable, and shall be made:
(i) in the case of cash, by transfer into one or more bank accounts specified by the recipient; …
Subject to Paragraph 4 and unless otherwise specified, if a demand for the transfer of Eligible Credit Support or Equivalent Credit Support is received by the Notification Time, then the relevant transfer will be made not later than the close of business on the Settlement Day relating to the date such demand is received; if a demand is received after the Notification Time, then the relevant transfer will be made not later than the close of business on the Settlement Day relating to the day after the date such demand is received.
(b) Calculations. All calculations of Value and Exposure for purposes of Paragraphs 2 and 4(a) will be made by the relevant Valuation Agent as of the relevant Valuation Time.
Paragraph 11. Elections and Variables
(b) Credit Support Obligations
(C) "Credit Support Amount means, for any Valuation Time, (i) the Transferee's Exposure for that Valuation Time plus (ii) the aggregate of all Independent Amount applicable to the Transferor, if any, minus (iii) the Transferor's Threshold; provided, however, that the Credit Support Amount will be deemed to be zero whenever the calculation of the Credit Support Amount yields an amount less than zero.
(h) Other Provisions
(ii) Provisions relating to the Allocated Portion, the Eligible Assets and the Pledged Accounts
Party A may from time to time notify Party B of the Allocated Portion orally or in writing or electronically by email or other similar electronic messaging system or internet based reporting system.
On a Valuation Date, the Credit Support Balance shall be the Allocated Portion as of such Valuation Date (and the definition of "Credit Support Balance" shall be construed accordingly).
Where a transfer obligation arises under Paragraph 2(a) any Eligible Credit Support transferable by the Transferor pursuant thereto shall be transferred into the Pledged Account. (For the avoidance of doubt, the Transferee acknowledges that, notwithstanding Paragraph 5(a) and (b), any Eligible Credit Support so transferred by the Transferor into the Pledged Account will thereafter be held subject to the security created by, and in accordance with the terms of the Credit Support Document.)
The following definitions shall be inserted into the appropriate place in Paragraph 10:
"Allocated Portion" means such amount of the assets standing to the credit of the Pledged Account as is calculated by Party A in its sole discretion and notified by Party A to Party B to constitute the "Allocated Portion" as of such Valuation Date.
"Eligible Assets" means any assets which (i) would be eligible for transfer into the Pledged Account and (ii) would constitute satisfactory collateral pursuant to the terms of the Credit Support Document.
"Pledged Account" means all accounts containing Eligible Assets and which are subject to the terms of the Credit Support Document.
(v) Additional Termination Events
The following shall constitute an additional Termination Event with respect to Party B (for which purpose Party B shall be the sole Affected Party):
The Net Collateral Value is equal to or less than the Value at Risk multiplied by the Close-Out Ratio.
The above Additional Termination Event shall apply irrespective of whether or not Eligible Credit Support has been requested by Party A, or is being delivered to Party A pursuant to the terms of this Annex. For purposes of determining whether such an Additional Termination Event has occurred at the discretion of Party A, Exposure, Net Collateral Value and Value at Risk may be calculated at any time on any calendar day, and if such day is not a Valuation Date, the Value of Posted Credit Support may at the discretion of Party A be calculated based on the Value on the preceding Valuation Date.
Furthermore, Party A may use foreign exchange rates as of the close of business on the Local Business Day preceding any calendar day on which Exposure and Value at Risk are calculated when the calculation of such amounts is otherwise determined as of a time on such day.
Notwithstanding any provision of this Agreement that may be to the contrary, if the Additional Termination Event specified in this Credit Support Annex shall occur with respect to party B, Party A shall be entitled to designate an Early Termination Date with respect to all Transactions with immediate effect. Without limiting such right, Party A agrees to use reasonable efforts to deliver to Party B notice of such designation in accordance with Section 12 of this Agreement."
7(f) The Pledge Agreement
7(g) The Limited Power of Attorney
8. Implied Terms
"38. Under New York law, on the true construction of the FX PB Agreement in the light of the aforesaid factual background and/or as an implied term, it was a term of the FX PB Agreement that:
(1) The Bank would obtain from each Counterparty, retain and/or provide to SHI on demand and/or within a reasonable period of time after each trade a confirmation in writing of each FX Transaction that accurately recorded each FX Transaction.
(2) The Bank would ensure that each FX Transaction was booked, valued and recorded accurately in SHI's account (i.e., trading book) with the Bank relating to such FX trades ("the FX Account"). Alternatively, the Bank would exercise reasonable care to ensure that each FX Transaction was booked, valued and recorded accurately in the FX account.
(3) The Bank would ensure that each FX Transaction was performed by the Bank and the Counterparty strictly in accordance with the terms of such confirmation.
(3A) No equal and offsetting transaction is capable of arising under clause 4 unless the transaction entered into with the Counterparty was within the scope of the relevant Counterparty Master Agreement as defined in clause 3.
(4) The Bank would allocate capital in the Pledged Account in respect of each FX Transaction in accordance with the FX ISDA Agreement and would carry out complete and accurate calculations of the capital required in order to allocate capital appropriately and would notify SHI of the capital requirements of its FX trading when calculated, alternatively would take reasonable care to ensure that calculations of the capital required were carried out completely and accurately, and to notify SHI of the capital requirements of its FX trading when calculated.
(4A) The Bank would inform SHI of any inability or failure to:
(i) book and/or to record and/or value accurately or at all SHI's transactions in the FX Account of SHI or in its reporting systems, and/or
(ii) carry out any, or any complete or accurate, calculations of the capital required in order to allocate capital appropriately, and/or failure to allocate capital in the Pledged Account properly or at all.
(4B) The Bank would ensure that, in circumstances when it was proposed to enter into a high risk product directly between SHI (through Mr. Said) and the Bank, particularly a leveraged derivative (such as the Exotic Derivatives Transactions, as referred to below), Mr Vik understood the risk level of the product; alternatively the Bank would take reasonable care to ensure that, in such circumstances, Mr Vik understood the risk level of the product. Such a term is to be implied from the fact that it was at all material times the usual custom and practice of an investment bank (such as the Bank) to have a policy or policies providing that, in respect of high risk products, in particular leveraged derivatives (which would include transactions such as the Exotic Derivatives Transactions), that it was proposed to trade directly between the client and the bank, the bank would ensure before entering into the transaction that an appropriate individual in the client organisation other than the usual trading contact understood the risk level of the product. This would typically involve an explanation of the risk level of the product being given to an appropriate individual in the client organisation other than the usual trading contact, unless the bank knew, by reference to previous trading, the client's risk tolerance or other relevant facts, that the said appropriate individual already understood the risk.
(4C) The Bank would not allow any trading in a product not approved through the appropriate New Product Approval Processes. Such a term is to be implied from the fact that it was at all material times the usual custom and practice of an investment bank (and SHI understands that it was also a policy and practice of the Bank) not to allow any trading in a product not approved through appropriate New Product Approval Processes.
(4D) The Bank would not enter into any transaction with SHI, or accept any transaction under the FX PB Agreement (alternatively, the Bank would not accept under the FX PB Agreement any Structured Option (by refusing to give its approval pursuant to clause 2(iii) of the FX PB Agreement)) which the FX Prime Brokerage division was unable to book, value and record accurately in the FX Account or in its reporting systems and in respect of which it was unable to carry out any, or any complete or accurate, calculations of the capital required to support such trading and to report accurately to SHI such capital requirements (or, alternatively, in circumstances where it was unable to do any one or more of these tasks). Alternatively, the Bank would take reasonable care to ensure that transactions were not entered into in the said circumstances.
(5) The Bank was subject to a duty to act in good faith and a duty of fair dealing in the course of its performance such that the Bank was required not to do anything which would have the effect of depriving or injuring the right of SHI to receive any of the intended benefits for which it bargained under the FX PB Agreement; such term being implied as a matter of New York law as the governing law of the FX PB Agreement."
8(a) Paragraph 38(1)
8(b) Paragraph 38(2)
8(c) Paragraph 38(3)
8(d) Paragraph 38(3A)
38(e) Paragraphs 38(4) and (4A)
"Except to the extent that liability under any applicable law or regulation cannot be excluded and to the extent of its own wilful misconduct or gross negligence, Deutsche Bank is not liable for loss or damage of any kind whatsoever arising as a result of (1) information published on the Website or (2) any errors or omissions from the Website, including any made in computing or disseminating valuations, and under no circumstances shall Deutsche Bank be liable for any damages whatsoever, whether direct, indirect, punitive special or consequential, that are directly or indirectly attributable to the use of, or the inability to use, the Website, even if advised of the possibility of such damages or if such damages were foreseeable."
8(f) Paragraph 38(4B)
8(g) Paragraph 38(4C)
8(h) Paragraph 38(4D)
8(i) Paragraph 38(5)
8(j) A Further Implied Term of the FX ISDA
9. The Principles of the New York law of Tort
"38A. Further or alternatively, the Bank owed a duty of care in tort to SHI in the following respects:
(1) A duty to take reasonable care to ensure that each FX Transaction was booked, valued and recorded accurately in the FX Account.
(2) A duty to take reasonable care to ensure that calculations of the capital required to support SHI's FX trading were carried out completely and accurately, and to notify SHI of the capital requirements of its FX trading when calculated.
(3) A duty to take reasonable care to ensure that information communicated to SHI in relation to its FX trades and its accounts was in all material respects accurate and complete.
(4) A duty to take reasonable care to inform SHI of any inability or failure to:
(i) book and/or to record and/or value accurately or at all SHI's transactions in the FX Account of SHI or in its reporting systems, and/or
(ii) carry out any, or any complete or accurate, calculations of the capital required in order to allocate capital appropriately, and/or failure to allocate capital in the Pledged Account properly or at all.
(5) A duty to take reasonable care to ensure that, in circumstances when it was proposed to enter into a high risk product directly between SHI (through Mr. Said) and the Bank, particularly a leveraged derivative (such as the Exotic Derivatives Transactions, as referred as referred to below), Mr Vik understood the risk level of the product.
(6) A duty to take reasonable care not to enter into any transaction with SHI, or accept any transaction under the FX PB Agreement, (alternatively, not to accept under the FX PB Agreement any Structured Option (by refusing to give its approval pursuant to clause 2(iii) of the FX PB Agreement)) which the FX Prime Brokerage division was unable to book, value and record accurately in the FX Account or in its reporting systems and in respect of which it was unable to carry out any, or any complete or accurate, calculations of the capital required to support such trading and to report accurately to SHI such capital requirements (or, alternatively, in circumstances where it was unable to do any one or more of these tasks).
38B. The said duty of care arose out of the facts and circumstances pleaded at paragraphs 3 to 14, 16 to 21 and 38(4B) above, in particular SHI relies upon the following matters:
(1) The Bank's presentation of itself with key values and priorities in relation to risk management and monitoring of risk and in the provision of customised solutions to clients, as set out at paragraphs 5 and 6 above.
(2) The fact (as pleaded at paragraphs 7 and 14 above) that, as the Bank knew, SHI did not have employees or front, middle or back office operations dealing with its investments and so would be reliant upon the Bank for such services, including in particular the services set out in paragraph 7 above.
(3) The Bank at all times held itself out to SHI as being able to provide the prime brokerage service required by SHI, as set out at paragraph 19 above, and was aware that SHI did not have access to the data, models and systems referred to at paragraph 19 above; and the discussion and agreement (pleaded at paragraph 20(2) above) that FX trading would be facilitated by the provision of prime brokerage services.
(4) The way in which SHI managed its risk, as set out at paragraphs 9, 10, 12, 14 and 17 above, including the parties' reasonable expectations as pleaded at paragraph 10 above, and SHI's requirements as pleaded at paragraph 17 above (which were discussed with representatives of the Bank, as pleaded at paragraph 18 above).
(5) That SHI never requested nor agreed to any "trading on credit" with the Bank in relation to FX trading, as set out at paragraphs 11 and 12 above, the standard practice (pleaded at paragraph 12 above) to ensure that the amount of capital due in respect of any trades was always in place on a timely basis, and the discussion and agreement (pleaded at paragraph 20(1) above) that SHI's FX trading would be supported by capital and not by credit.
(6) SHI was always treated by the Bank as a Private Wealth Management client, as set out at paragraphs 4 and 14 above.
(7) It was discussed and agreed, as pleaded at paragraphs 20(3) and (5) above, that Mr Said's FX trading would be limited as there set out, the amount of capital to be provided by SHI to support SHI's FX trading was discussed and agreed as pleaded at paragraph 20(4) above, and the Bank and SHI discussed the matters relating to Mr Said's FX trading pleaded at paragraphs 20(6) and (7) above.
(8) The essential purpose of the FX prime brokerage agreement, as pleaded at paragraph 21 above.
(9) The custom and practice pleaded at paragraph 38(4B) above.
38C. In the premises, the said duty of care arose on the basis:
(1) that the Bank assumed responsibility to SHI for:
a. booking, valuing and recording accurately each FX Transaction in the FX Account;
b. carrying out calculations of the capital required to support SHI's FX trading completely and accurately;
c. communicating to SHI information in relation to its FX trade and its accounts that was in all material respects accurate and complete;
d. informing SHI of any inability or failure to (i) book and/or record and/or value accurately or at all SHI's transactions in the FX Account of SHI or in its reporting systems, and/or (ii) carry out any, or any complete or accurate, calculations of the capital required in order to allocate capital appropriately, and/or failure to allocate capital in the Pledged Account properly or at all; and
e. in circumstances when it was proposed to enter into a high risk product directly between SHI (through Mr. Said) and the Bank, particularly a leveraged derivative (such as the Exotic Derivatives Transactions, as referred to below), ensuring that Mr Vik understood the risk level of the product;
f. not entering into any transaction with SHI, or accepting any transaction under the FX PB Agreement, (alternatively, not accepting under the FX PB Agreement any Structured Option) which the FX Prime Brokerage division was unable to book, value and record accurately in the FX Account or in its reporting systems and in respect of which it was unable to carry out any, or any complete or accurate, calculations of the capital required to support such trading and to report accurately to SHI such capital requirements (or, alternatively, in circumstances where it was unable to do any one or more of these tasks).
(2) that (i) it was reasonably foreseeable that if it did not take reasonable care in the respects set out in paragraph 38A above, SHI may suffer loss, (ii) there was a relationship of proximity between the Bank and SHI, and (iii) it was in all the circumstances fair, just and reasonable that the Bank owed the duties of care set out in those paragraphs.
38D. Further or alternatively, the Bank owed a duty of care in tort to SHI (which arose out of the facts and circumstances pleaded at paragraphs 2 to 14 and 16 to 21 and in particular those pleaded at paragraph 20(3A) above, and paragraphs 44A, 45, 62 and 66A below) to inform Mr Vik on behalf of SHI whenever the collateral requirements of SHI's trading with the Bank were approaching the upper limit of the collateral then available for that trading. The said duty of care arose on the basis:
(1) that the Bank assumed responsibility to SHI for informing Mr Vik on behalf of SHI whenever the collateral requirements of SHI's trading with the Bank were approaching the upper limit of the collateral then available for that trading; and/or
(2) that (i) it was reasonably foreseeable that if it did not take reasonable care in the respects set out in this paragraph, SHI may suffer loss, (ii) there was a relationship of proximity between the Bank and SHI, and (iii) it was in all the circumstances fair, just and reasonable that the Bank owed the duties of care set out in those paragraphs."
9(a) Concurrent duties of care and the Economic Loss Rule
"It is a well established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated … This legal duty must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract."
" A tort may arise from the breach of a legal duty independent of the contract, but merely alleging that the breach of a contract duty arose from a lack of due care will not transform a simple breach of contract into a tort. …
 A legal duty independent of contractual obligations may be imposed by law as an incident to the parties' relationship. Professionals, common carriers and bailees, for example, may be subject to tort liability for failure to exercise reasonable care, irrespective of their contractual duties. …. In these instances, it is policy, not the parties' contract, that gives rise to a duty of care.
 In disentangling tort and contract claims, we have also considered the nature of the injury, the manner in which the injury occurred and the resulting harm … In Bellevue, we rejected plaintiff's attempt to ground in tort a claim that defendants supplied defective floor tiles, noting that the injury (delamination of tiles) was not personal injury or property damage; there was no abrupt, cataclysmic occurrence; and the harm was simply replacement cost of the product. Thus, where plaintiff is essentially seeking enforcement of the bargain, the action should proceed under a contract theory."
"A tort obligation is a duty imposed by law to avoid causing injury to others. It is "apart from and independent of promises made and therefore apart from the manifested intention of the parties" to a contract … Thus defendant may be liable in tort when it has breached a duty of reasonable care distinct from its contractual obligations or when it has engaged in tortious conduct separate and apart from its failure to fulfil its contractual obligations."
A tort claim can only arise for breach of a contractual obligation where the very nature of that contractual obligation and a public interest in seeing it performed with reasonable care require it, in accordance with the decision in Sommer.
"Finally, we conclude that the complaint did not allege conduct that would give rise to separate liability in tort. Here, the allegations that a breach of contract occurred as a result of gross negligence does not give rise to a duty independent of the contractual relationship (see Clark-Fitzpatrick …; c.f. Sommer [the plaintiff's breach of contract claim against the defendant fire alarm company may also sound in tort where the defendant's alleged failure to act with due care affected a significant public interest independent of its contractual obligations])."
9(b) Negligent Misrepresentation
10. The Alleged Oral Agreements
i) Mr Said's trading account would be segregated from SHI's non-FX trading accounts.
ii) SHI's exposure would be limited to US$35 million and DBAG would have no recourse against SHI in respect of Mr Said's trading beyond that.
iii) The collateral for Mr Said's trading would take the form of a pledge to DBAG in a separate and segregated account with DBS.
iv) DBS would provide DBAG with a guarantee of US$35 million to support Mr Said's trading.
v) DBAG's recourse against SHI in relation to SHI's FX trading (whether through Mr Said or anyone else) would be limited to the amount of capital secured in favour of DBAG in the separate and segregated account, including built-up profits made on FX trading (the PAL).
vi) Mr Said would be permitted to trade only "plain vanilla" FX transactions in the nature, essentially, of FX forwards and options.
vii) Mr Said's trading would be monitored and reports made through the prime brokerage arrangements, effectively creating a "back office".
viii) The collateral for SHI's FX trading would be managed and Mr Vik would be told whenever the collateral requirements were approaching the limit.
ix) If the collateral in the separate and segregated account became insufficient trading could not continue.
x) There would be a new FX ISDA Master Agreement which would reflect the above points and would govern Mr Said's FX trading and any other FX trading in which SHI might engage.
i) There was discussion of the Said Letter of Authority and what it permitted Mr Said to do.
a) Mr Meidal told him that the provision stating that DBAG had no duty to enquire as to the nature of the relationship between SHI and Mr Said or as to any restriction upon his activities did not extend to limitations set out in the Letter itself.
b) Mr Meidal told him that Mr Said was restricted to trading in spot, tom next, forward foreign exchange transactions and currency options.
ii) There was discussion about the Structured Options wording in the FXPBA;
a) Mr Meidal said that this referred to options with a condition in them.
b) Mr Meidal said that it provided an additional protection to SHI as Mr Said would need permission from DBAG to conduct such trades.
c) Mr Meidal assured him that DBAG would be vigilant and diligent in relation to monitoring Mr Said's trading.
i) It is inconsistent with the written contracts which Mr Vik signed with DBAG.
ii) It is inconsistent with, as well as being unsupported by, any contemporary documents.
iii) It is inconsistent with Mr Said's evidence on deposition.
iv) It is internally inconsistent and has developed incrementally in the pleadings, in deposition and in witness statements.
v) It is implausible as the long list of items agreed, as set out above, itself suggests. For there to be agreements on all such matters, without any documentary support in the shape of email exchanges between Mr Vik, Mr Said and DBAG, is inherently unlikely.
vi) It is inconsistent with Mr Brügelmann's evidence, inasmuch as he knew nothing of any such agreements, and would have been expected to know of them, if Mr Meidal had committed DBAG in the manner suggested. Nor did any members of DBS CRM (Credit Department) nor any members of DBAG's FXPB department have any knowledge of any such arrangement, which, if made, they should undoubtedly have been aware of, as it would have impacted on their roles.
vii) It is inconsistent with the parties' conduct after November 2006 and in particular the actions and inaction of Mr Vik in paying the margin calls without protest and closing out Mr Said's trading with substantial premium, way in excess of US$35m.
viii) The oral agreements alleged following execution of the written contract are improbable because of the lack of rationale for them and give rise to the suggestion by DBAG that they are a fabrication with a view to avoiding any argument based upon the entire agreement Clause and the "no oral modification" Clause in section 9(a) and (b) of the FX ISDA.
i) First the capital for his trading would be US$35 million and no more and that was the maximum amount that SHI could therefore lose.
ii) Secondly Mr Said would only enter into plain vanilla trades such as FX forwards and options, although he could combine them in any way he saw fit, provided that the other limits of the remit were complied with.
iii) Thirdly trading would take place in a separate segregated account and be separately collateralised from SHI's other non-FX trading.
iv) Fourthly, his remuneration would be 10% of his net realised profits.
"Alex – I would like to propose that in addition to my role of sourcing opportunities in the currency (and other macro) markets for you I also be able to trade a (obviously much smaller) portfolio directly. We had talked about that briefly before I started and as I look at the markets I think it makes a lot of sense. There will be opportunities that are of the kind you like – pretty long term and with genuine home run potential and I will continue to spend a lot time finding and analysing them. But – there is good money in exploiting smaller and somewhat more medium term (a few months, 3-5%) type opportunities. But – to get to those you have to be nimble, quick and a little flexible. Also – they do not not often make it onto your radar screen if you are busy with other things.
I think I can do both. In practical terms DB is all but ready with their prime broker set-up and I have pushed them pretty hard on the collateral side where they have now agreed to what I would consider very favourable terms. You do not need to move assets around for we can determine an amount that stays invested as it is, but is earmarked as collateral for "my" account (it cannot be pledged for anything else). Let me suggest that you allocate between 25 and 50mm$ of assets for this – big enough to make a difference to your bottom line over time if I am successful, but small enough not to go overboard – I want to grow into this. I would envisage keeping you closely in the loop on what I do and of course results (daily, weekly, as you wish) and of building a somewhat more diversified portfolio than the core bets we might put on for you at times, which by nature will be very concentrated. …
Can we discuss this please?"
10(a) The Capital Limitation Agreement
"i) The collateral which can support Mr Said's FX transactions is limited to the US$35 million limit. The Bank shall not permit Mr Said (on behalf of SHI) to enter into any FX Transaction if that FX Transaction would cause the Value at Risk for transactions entered into by Mr Said on behalf of SHI multiplied by the Independent Amount Ratio plus the Bank's Exposure in respect of transactions entered into by Mr Said on behalf of SHI to exceed the US$35 million limit. If the Value at Risk multiplied by the Independent Amount Ratio plus the Bank's Exposure is, at any time, greater than the US$35 million limit the Bank will ensure that sufficient open FX transactions are closed out such that the Value at Risk multiplied by the Independent Amount Ratio plus the Bank's Exposure falls below the US$35 million limit. The US$35 million limit is (i) US$35 million, minus (ii) any net realised losses on transactions entered into by Mr Said on behalf of SHI (net realised losses being realised losses on transactions entered into by Mr Said on behalf of SHI less any amount of realised profit Mr Said had made on behalf of SHI that remained available to be used as collateral in support of his transactions (but not such as to increase the limit above US$35 million).
ii) SHI's liability to the Bank in respect of FX transactions entered into through Mr Said is limited to the sum of US$35 million and the Bank's recourse against SHI with respect to FX transactions entered into through Mr Said is limited to US$35 million."
i) To pay sums due on trades under the Trade Confirmations on the due date under Clause 2(a) of the FX ISDA.
ii) To pay interest on sums due under Clause 2(e).
iii) To pay the Delivery Amount on demand made by DBAG under Paragraph 2(a) of the FX CSA.
iv) To provide additional collateral under Part 1(l)(iii) of the FX Schedule.
v) To pay interest under paragraph 9(a) of the FX CSA.
i) The Said Letter of Authority set out the authority given to him by SHI to trade in FX and Options Transactions with DBAG but without any financial limit expressed.
ii) The Said Letter of Authority authorised Mr Said to sign and deliver various types of documentation including ISDA Master Agreements, CSA and security interests and other credit support documentation, again without any financial limit.
iii) The Said Letter of Authority expressly exempted DBAG from any duty to enquire further as to any restrictions upon Mr Said's activities.
iv) Justice Kapnick held that the Said Letter of Authority constituted a complete defence to SHI's allegations relating to unauthorised trades.
v) The FXPBA which governs SHI's authority to enter into Counterparty Transactions on behalf of DBAG and thereby committed DBAG to conclude Agent Transactions with SHI on an identical basis, identified types of transactions which SHI was authorised to conclude but imposed no financial limits by reference to any collateral required.
vi) The FXPBA made provision for financial limits in the shape of the Net Daily Settlement amount and the maximum Counterparty Net Open Position but nothing by reference to the capital allocated by SHI. The contractual limits referred to were capable of amendment by DBAG on twenty business days' notice.
vii) Paragraph 5 of Annex B of the FXPBA envisaged the possibility of a Ceiling Limit in the FX ISDA, but none appeared there.
viii) The FXPBA specifically provided for the posting of collateral by SHI with respect to its obligations under the FX ISDA, in accordance with the CSA, as opposed to making any reference to a limited liability of US$35 million.
ix) Clause 9(a) of the FX ISDA contains an entire agreement Clause which, as a matter of English law which governs it, takes effect as a binding agreement that the full contractual terms are to be found in it and nowhere else (see Inntrepreneur Pub Co v East Crown Limited  2 Lloyds Rep 611 at paragraph 7).
x) There are a series of provisions in the FX ISDA, Schedule and CSA which entitle DBAG to demand additional collateral, as set out earlier in this judgment and three provisions which entitle DBAG to terminate on the basis of inadequate provision of collateral, including paragraph 11(h)(v) of the CSA which provides for an additional termination event irrespective of whether or not additional margin has been requested. These provisions are directly inconsistent with any restriction on SHI's exposure to the sum of US$35 million or to Mr Said's authority to conclude trades which breach that limit.
"As per the legal documents we sent to you, we are suggesting to open a new sub-account for Sebastian Holdings. Klaus would have a Limited Power over this account. We propose that the collateral for the PB FX line would be booked on this new account as well as other potential trades made by Klaus, including the two existing Argentin[e]an bond positions. The reason is to clearly separate Klaus' P&L from other trades.
Klaus assumes that he needs approx. USD 75 million, USD 35 million for the FX line and USD 40 million for other trades mainly in fixed income (incl. the existing Argentin[e]an bond positions).
Please confirm if you agree to transfer USD 75 million or alternatively the entire balance held in the existing sub-account to the new-sub account."
i) He referred to the figure of US$35 million which SHI had agreed to allocate for his trading, stating there that DBAG understood that his trading had to be separate and isolated from SHI's assets and that SHI was only willing to expose a specific sum in respect of it.
ii) He said that all the trades he did were based on the US$35 million pledged amount and that he understood at all times, as did the bank, that his trading was limited to the specific amount of collateral and no more.
i) He went on to say that all he was saying in his affidavit was his trading was limited to the specific amount of collateral "which of course is always the case. You can only trade to the degree of your collateral".
ii) He then spoke of what would have occurred had DBAG reported that the collateral requirements of his trades exceeded US$35 million and the accrued profits and said that in those circumstances he could not have continued to trade, whatever he had wanted to do. "That's the definition of a collateral call. You either put in collateral, you put in more money or you cut positions. So that would have been impossible. If I think back, however, to the general interaction, the general approach that Alex and I had towards this trading, what I think I would likely have done is thought real carefully how strongly I felt about the positions. If I felt very very strongly, which on some of them may have been possible, may have, I would have gone to Alex to ask and he would have been the arbiter".
iii) When asked subsequently in the deposition about whether he would have been in the EDTs when the "perfect storm" of October 2008 occurred, if DBAG had correctly reported collateral positions earlier, he said that he would have been in those trades if Mr Vik had agreed to add substantial amounts of collateral, which, given the amounts involved, he was doubtful about.
iv) Yet again, later he said that if there were MTM losses of US$40 or US$50 or US$60 million, he would probably have run with that because he was comfortable that they were only marked to market losses, the market was stable and he had made money elsewhere. If he had seen US$150 or US$200 million, that would have been no longer manageable, but with accurate reporting he would have gone to Mr Vik to see if he wanted to add more collateral.
10(b) The Pledged Account Limit (the PAL)
10(c) The Oral Agreements as to the types of trade
"Frankly a PB agreement where I can only do spot and simple options is of no use to me and that was discussed at the outset of our discussions."
Mr Quezada's recollection, as set out in his deposition, was that this was discussed at the time when the account was first set up and Mr Said had said that he would trade exotics at some point.
10(d) Common Understanding, Mutual Assumption, Estoppel by Convention, Acquiescence and Rectification
10(e) The Collateral Warning Agreement
11. The Meaning of Currency Options and Structured Options, the Said Letter of Authority and the FXPBA
"Section 1.5. Currency Option Transaction "Currency Option Transaction" means a transaction entitling Buyer, upon exercise, to purchase from Seller at the Strike Price a specified quantity of Call Currency and to sell to Seller at the Strike Price a specified quantity of Put Currency.
Section 1.12. FX Transaction "FX Transaction" means a transaction providing for the purchase of an agreed amount in one currency by one party to such transaction in exchange for the sale by it of an agreed amount in another currency to the other party to such transaction."
"Currency options can take many different forms. There are "plain vanilla" options where one party (the "buyer") pays a premium to the other (the "seller") in order to have the right at expiration or during a specified period to exercise the option into a spot foreign exchange transaction for a specified currency pair. There are also "structured" options, which have different features that allow the option holder to achieve different results, the most common of which are known as "barrier options" (i.e., knock-in and knock-out options) and "binary options" (i.e., one touch and no touch options). These structured options look at the spot exchange rate for a specified currency at expiration or during a specified period in order to establish whether the option is exercised or the option holder is entitled to a specified payment."
"2.16.1. In a TFP, the investor agrees to buy a specified amount of a currency at an agreed rate (the strike price) on a number of dates ("fixing dates") which can be daily, weekly or monthly, depending on the contract.
2.16.2 On each fixing date a settlement amount is determined. The settlement amount for a purchased TFP is calculated as (spot – strike) x notional per fixing date. If this amount is positive, i.e. spot is greater than strike, it is a gain to the TFP investor. Otherwise it is a loss (i.e. a gain to the TFP seller).
2.16.3 The positive and negative amounts accrue with each fixing date and are typically cash settled on the final settlement date. The terms of the trade do not contain any cap on the investor's potential losses).
2.16.4 If the sum of positive settlement amounts reaches or exceeds the pre-specified target profit, the TFP terminates. The sum of positive settlement amounts (which is capped by the target profit in the SHI set of transactions) and the sum of negative settlement amounts are either paid by the seller and buyer respectively on the settlement date or are cash settled by the payment of a net amount by either the seller (if positive amounts exceed negative amounts) or the buyer (if the opposite is the case).
2.16.5 As long as the sum of positive settlement amounts stays below the target profit, the trade continues to exist and settlement amounts continue to be determined and accrued. As is the case when the TFP terminates due to the target profit being met, the accrued positive and negative settlement amounts are paid or cash settled on the settlement date.
2.16.6 The investor in a TFP faces a limited upside (gain is capped at target profit) and a potentially unlimited loss. Typically the TFPs are "zero-cost" structures with a strike price that allows investors to buy the notional amount at a better-than-market outright forward rate.
2.16.7 At inception, the strike price of a TFP transaction is typically in the money (in that the strike is better than the outright forward rate). The investor hopes the TFP will remain in the money and the target profit will be reached within a short period of time.
2.16.8 However, if the FX rate was to move below the strike price (and stayed below) soon after inception, the likelihood of achieving the target profit becomes low. In this scenario, the investor would accumulate losses.
2.16.9 It is possible that the investor will not make a profit even if the target profit is reached. This is because the sum of the negative amounts may exceed the sum of positive amounts on the date when the target profit is reached and the transaction terminates. A TFP is therefore a means by which an investor can express a combination of a directional and low volatility view, as if the market moves in his favour the trade will terminate early and he will receive a profit."
"2.17.1 In a pivot TFP, the payment by each party is by reference to three prices (the "low strike price", the "high strike price" and a "pivot"), instead of just one, as in a TFP. A pivot TFP pays out to an investor if the FX rate remains within a particular range and close to a pre- determined pivot.
2.17.2 The investor receives a settlement amount if the FX rate is between the high strike price and the low strike price and has to pay a settlement amount if the FX rate is outside of this range (see diagram below).
2.17.3 As in a TFP, the positive amounts and negative amounts (to the investor) accrue throughout the life of the transaction and if the sum of the positive amounts reaches the target profit, the transaction terminates.
2.17.4 In a pivot TFP, the settlement amounts are determined by reference to the pivot. On each fixing date, if the fixing is above the pivot, the settlement amount is calculated as (high strike – spot) x notional per fixing date. If the FX rate is below the pivot, the settlement amount is calculated as (spot – low strike) x notional per fixing date.
2.17.9 … The terms of the trade contain no cap on the amount of the investor's losses which are dependent upon the amount of the average fixing, while the profit is capped at the target profit. A pivot TFP is therefore a means for an investor to express a view on the volatility of the FX rate. Here, the investor benefits if the FX rate fixings are close to the pivot, however it doesn't matter if the FX rate fixings are above or below the pivot. An investor in the pivot TFP depicted above would be of the view that the volatility of USDJPY would remain low and the trade would terminate early as the target profit would be reached.
2.17.10 If this view was incorrect and the FX rate moved beyond the high or low strike prices, so the trade did not terminate early the likelihood of achieving the target profit would become low. In this scenario, the investor would accumulate losses. This would place the investor in a similar position to being out-of the money on a "sold" vanilla option on each fixing date."
11(a) The Expert Evidence
i) The question is one of market understanding not analysis of the constituent elements in any transaction.
ii) An option transaction can plainly include any number of different terms and conditions above and beyond a straightforward put or call option, without ceasing to be an option.
iii) The FXPBA specifically refers to Structured Options as having "special features" other than a "single barrier". Barrier options with more than one barrier are self-evidently possible candidates as Structured Options.
iv) A currency option does not cease to be such if it appears in the same instrument as another currency option. Even Professor Wystup was prepared to some extent to recognise that combining two currency options in one transaction could not negate their character as options.
v) A non-negative pay-off is not a constituent element or essential criterion for an option. The sale of an option when the market has moved inevitably involves a loss, if exercised.
vi) The authority given to Mr Said and SHI was to trade in currency options in the plural and Structured Options are plainly regarded as a class of such options under the FXPBA for which DBAG's prior consent is required. It cannot therefore be said that Mr Said's authority did not extend to trading currency options in combination or as part of a structure with special features, terms and conditions. To the contrary, this is exactly what appears to have been envisaged.
vii) The trade confirmations specifically referred to the ISDA Definitions effectively providing that these transactions be treated as governed by ISDA terms.
viii) If the market regards EDTs and OCTs as currency options, structured options or exotic options, no questions of decomposability arise. The reason however that they are accepted in the market as being currency options is because their pay-off characteristics derive from the combination of options, combined with the target knock out feature and the acceptance that each option is taken to be exercised when it is in the money.
ix) Once this is recognised, it is clear that there is optionality within the transactions albeit that the exercise of in the money options is taken as read in each situation, whether on the part of the investor or the bank.
x) There is no difficulty about the FX rate being "the underlying" for any of the EDTs or OCTs (save for the correlation swaps). The transactions are entirely sensitive to the movement of the FX rate in question.
xi) As Professor Wystup recognises, all zero cost options have negative MTM at inception since otherwise a bank would make a loss at once. The absence of premium accounts for this and it cannot be a requirement of an option that premium be paid.
xii) The EDTs and OCTs were traded with various counterparty banks as currency options and the evidence of Mr Said, in his depositions, and indeed in the email exchanges with Mr Vik and others, shows that this is how he considered them too.
11(b) Clause 2(iii) of the FXPBA
12. The VaR Parameters
i) the difficulties which the ARCS VaR system had in coping with complex trades which included the EDTs and many of the OCTs and
ii) the problems which arose in respect of the MTM on vanilla trades as reported in GEM as a result of feed issues from ARCS VaR.
12(a) The Changed Parameters
12(b) The Computer Models
i) market data extractions/transformation (used to generate the data to be used by the Monte Carlo engine),
ii) the Monte Carlo simulation engine (used to generate one thousand paths for the FX spot rates used by the pricing engine),
iii) the Pricing engine (using the trade data, pricing functions and simulated risk factors),
iv) the P&L vector construction module (which took the difference in MTM between the MTM of the trade value under one of the one thousand Monte Carlo scenarios and the original value of the trade (i.e. the current actual MTM of the trade)),
v) the VaR calculation module.
The component parts of the methodology are illustrated in Annex 4.
"a. The existence of jumps in the (Monte Carlo based) Disclosed Methodology. Jumps do not form part of the historical simulation used by Dr Drudge to calculate VaR. The jumps have the effect of increasing the VaR results where specific currency pairs are included within the portfolio.
b. Differences in the historical time period used to generate predictions of potential future losses. The Disclosed Methodology uses a shorter period of historical data (90 business days) than the Prism Methodology does (250 business days). Mr Millar and Dr Drudge agree that generally where a shorter period of historical data is used, more recent changes in market data have greater impact on the VaR results.
c. Differences in the way that potential losses over a five day period are computed between the Disclosed Methodology and the Prism Methodology. The Prism Methodology calculates losses over a one day period and then scales these figures to five days whereas the Disclosed Methodology uses an estimate of the variation in the underlying variables over a five day period and uses these to calculate losses over this period. In the case of SHI's FX portfolio the risk profile is such that the effect of using a five day computational method increased the VaR results.
d. Differences in the treatment of potential changes in implied volatility. The Disclosed Methodology does not stress implied volatility, but the Prism Methodology does. Including such a stress within the methodology should generally have the effect of increasing the VaR results under the Prism Methodology."
"2.9.1 Mr Millar and Dr Drudge agree that implied volatility is a factor affecting valuation of TPFs, particularly at deal inception. In addition, when considering the impact of stressing the implied volatility parameter at an individual trade level, Mr Millar and Dr Drudge agree that there can be a significant impact on the overall VaR calculation for the individual trade, as explained in further detail in paragraph 2.9.4 below. However Mr Millar and Dr Drudge also agree that the impact of stressing the implied volatility parameter at portfolio level will not always be material, depending on the particular constituent trades contained in the portfolio and market conditions, as set out below.
2.9.2 Mr Millar and Dr Drudge agree that their VaR results indicate that the approach set out in the Disclosed Methodology which does not include the simulation of changes in implied volatility contains other features, as set out above in paragraph 2.8.2, which result in higher VaR calculations than Dr Drudge produces using the Prism Methodology when applied to SHI's FX portfolio. The Prism Methodology does include the simulation of changes in implied volatility.
2.9.3 On this basis Mr Millar and Dr Drudge agree that when applied to SHI's FX portfolio (for example as produced for each of the Alternative Scenarios by Mr Millar), the Disclosed Methodology does not produce unreasonably low VaR results as a result of not simulating changes in implied volatility. Mr Millar and Dr Drudge's area of disagreement regarding commercially reasonable VaR estimates is detailed in section 3.
2.9.4 When considering the theoretical impact of stressing the implied volatility parameter at portfolio level, Mr Millar and Dr Drudge agree that the following factors are likely to be relevant:
a. The relative sensitivities of the individual trades to other risk factors being stressed by the model, in this case FX spot rates, driven by the current economics of the trade in the portfolio. For example a TPF that is out of the money would be much less sensitive to movements in implied volatility in comparison to a TPF that is not out of the money, for example a TPF that had been recently traded.
b. The relative variability of each risk factor. For example if as a consequence of a particularly quiet historical observation period implied volatility was not expected to move very much then it would not be expected that VaR would be highly affected, and conversely if implied volatility had experienced large moves over the historical observation period, this would have a greater impact on the VaR.
c. The degree of diversification across all of the trades in the portfolio and how this generally decreases the marginal impact that risk factors have at trade-level. For example whereas the valuation and risk of a certain trade might be strongly affected by a certain risk factor (i.e, an FX spot rate or implied volatility), if the proportion of trades in the portfolio affected by that risk factor is small, then at portfolio level the risk factor may not be significant at all.
d. The inter-relationship between these aspects of the VaR methodology. For example in the case of EDTs the impact of including jumps in an FX spot rate may mean that, as the sensitivity to implied volatility decreases the more the trade is out of the money, and as VaR scenarios are likely to include jumps, the number of VaR scenarios where implied volatility would have a significant impact may be minimal for currency pairs where the Disclosed Methodology prescribes jumps.
2.9.5 As a result of this, the potential impact of shifting the implied volatility parameter on VaR results over time at the level of any particular portfolio will depend on the trades which constitute that portfolio over time. See the comments made by Dr Drudge below in relation to his conclusions regarding commercial reasonableness following examination of the VaR results."
"Q. The terminological or definitional difference, can I suggest, between you is that you are saying it may be the ninety-fifth worst output of this model or this disclosed methodology, but because it reflects within the assumptions used in the disclosed methodology more extreme assumptions for size and frequency of particular emerging market currency spot rates changing, it is not the ninety-fifth worst outcome during a normal market period?
A. Yes, I think that … I think that is about right. Ultimately you can put anything into the 95th percentile if you choose to, right."
i) DBAG's ARCS system had jumps in it and that was not commercially unreasonable and represented a genuine attempt by DBAG to take account of events which could properly be taken into account in assessing a five or ten day VaR at 95% confidence level. Mr Millar was therefore right to include them in his DM model.
ii) Although Dr Drudge considered that jumps were inappropriate because they catered for occasions falling within the 5% of occasions outside the 95% VaR, that is a restrictive approach with regard to the calculation of the 95% confidence level. There is much latitude given in the assumptions to be fed into a 95% VaR calculation and it is not uncommon to see such approximations made as a matter of reverse engineering in order to take into account events which fall outside the period of historical data which feed into the engine, but are recognised as being events which can and do occur (in the case of the BRL in 1998, 2002 and 2008). There is nothing objectionable about building in such events into the 95th percentile as opposed to treating them as an additional add-on outside the VaR calculation.
iii) Jumps cater not only for extreme events but also for other factors such as the difficulty in closing out positions or liquidating portfolios where there are levels of less extreme stress. Jumps attempt to capture that as well as the more extreme situation.
iv) The DM, which does not include the simulation of changes in implied volatility, has other features which take this into account in one way or another, namely the jumps, the use of a ninety day historical data period and the computing of potential loss over a five day time period as opposed to scaling up the outputs of a one day period. The jumps, in particular, compensate for the absence of implied volatility in relation to currencies other than Tier 1 currencies.
v) Backtesting shows that, for the SHI portfolio, the DM produced results closer to the actual than the PM, in particular in September and October 2008. There was no systematic under-estimate or over-estimate of VaR.
vi) In consequence, I conclude that the calculations produced by Mr Millar's DM model represent VaR, calculated in accordance with the methodology which DBAG customarily used with its counterparties and that the results were commercially reasonable and therefore represent DBAG's contractual entitlement to margin in the relevant periods (subject only to any minor alterations necessary to take account of the Dual Currency Range Trade).
13. The problems created by the OCTs and the EDTs for DBAG's systems
297. Although some simpler trades could be processed either automatically or semi-automatically after being entered by the client in TRM, complex trades (such as the EDTs and OCTs at issue in this litigation) had to be booked manually in RMS. Of course, for that approach to do any good, such bookings had then to flow through into the relevant systems to ensure that they were valued, margined and reported. In theory, the initial manual entry of trades proceeded as follows:
(1) For "indirect" trades, i.e. those traded by Mr Said with third-party banks, FX PB (usually Mr Walsh) would book both legs onto the system. Where Mr Walsh was unfamiliar with a trade type, his general practice was to try to book it in the first instance and then ask for help if he had problems (but to ask first if he really had no idea). He would often book a trade as "pending" and then ask someone to check it. Trades saved as pending would be visible to other users but not flow through [DBAG's] systems, and so not appear in GEM.
(2) For "direct" trades, i.e. those entered into with [DBAG's] trading desk:
(a) Simple trades were booked into RMS by the salesman (such as Mr Geisker). Complex trades were booked into RMS by the trader (such as Mr Chin), who then sent the salesman an email containing its basic details, from which Mr Geisker would then create a Generic Sales Ticket.
(b) In the usual scheme of things, trades booked by the desk to be given up to SHI's FX PB account would be booked as a pair of offsetting trades between the trading desk and FX PB, although sometimes when FX PB could not book a trade it would ask the desk to book a trade directly to the client account.
298. Confirmations of options and complex trades (for both the client and the counterparty) were generated by the FX Options Operations team. Evidence on that process was given in particular by Mr Manrique. As he explained, once a trade had been booked in RMS it moved through a series of queues, through which many simple trades moved automatically, but complex trades such as OCTs and EDTs had to be manually processed. Until a trade passed the relevant check at each stage, it did not move on to the next queue. The procedure was designed to check that each trade was properly booked in [DBAG's] systems, confirmed and processed.
(1) First, trades entered the "New Queue", where they remained until their RMS bookings had been verified by Mr Manrique's team.
(2) After being so verified, trades moved into the "Production Queue", where they remained until confirmations had been produced for them. Generally speaking, the more complex the option, the more manual was the production of the relevant confirmation.
(3) After their confirmations had been generated, trades entered the "Dispatch Queue". All confirmations other than those automatically generated for some vanilla put and call options were checked by a second member of the team (i.e., other than the person who had produced the confirmation).
(4) After confirmations had been sent, trades entered the "Return Queue" until they had been confirmed by the counterparty/client.
299. These queues were monitored regularly by Mr Manrique's team, and in particular his manager, Ms Oglivie, in order to identify and escalate trades – generally only exotics – that had become stuck, and were thus not being properly handled. Trades that had not been booked into RMS at all, of course, had no way of making it onto Mr Manrique's radar.
300. If a trade knocked out, it was the job of the person who had booked the trade (whether within the trading desk or FX PB) to change its status on RMS. That led to it being placed in the "Knock-Out Queue." A similar process occurred when a trade settled, although Mr Manrique was uncertain how far the triggering of settlement and calculation of the amount took place manually. In each case it was then the job of FX Operations to ensure that both parties agreed on the outcome.
Valuation and margining
301. VaR, on an FX PB client's portfolio, was calculated (or at least was meant to be calculated) in a system known as ARCS, which took a feed of open positions from RMS and in turn fed the VaR calculated on that portfolio to GEM, which reported the figure it received and included it in its margin calculations.
302. The system that calculated MTM valuations of a client's individual trades depended on the client's margin basis:
(1) NOP-based clients' positions were valued directly in GEM, which could value and margin only a very limited set of trades: spots, forwards, non-deliverable forwards, swaps, Euro options and single-barrier Euro options. Of those, only the latter (termed Knockout Currency Options in the experts' lists) fall within the sets of trade types referred to in this litigation as OCTs (and then at the simplest end).
(2) For clients margined, like SHI, according to VaR, MTM valuations of individual trades were provided (or at least were meant to be provided) by ARCS. ARCS could value a wider range of trade types than GEM, but still only a limited set. That fact was known within FX PB, although knowledge of precisely which trades ARCS could handle was rather more patchy, as the events described below demonstrate.
303. ARCS's trade-type limitations applied to its calculation of VaR as well as to that of MTM on individual trades. [DBAG] admits that it failed to report accurate MTM valuations of, and ARCS was unable accurately to margin, the trades known in this litigation as EDTs and OCTs."
"343. Setting aside the valuation issues experienced by Mr Said throughout the duration of the FX PB relationship, described in more detail below, Web Reporting was designed to, and did, report the relevant trade details for swaps, forwards, cash trades, and vanilla and single barrier options (known in the experts' lists in this litigation as Knockout Currency Options). As to more exotic options, however, the position was considerably more complicated.
(1) There were certain trade types that could be booked in RMS but did not feed through to GEM, and thus did not appear in GEM reports or Web Reporting at all. As would become clear in October 2008, these certainly included the DBA Security trade types used to book EDTs by [DBAG's] trading desk, but also, for example, correlation swaps, which do not appear in any of the 2012 Reports.
(2) Other exotic trade types did feed through to GEM after a fashion. However:
(a) GEM and Web Reporting could not properly report the trade details for those trades, not least in that their reports did not include fields for all of the relevant information.
(b) Further, at least some such trades did not (when booked and open) appear in the relevant reports with any regularity. For example, as described in more detail in section D14, trades booked as "Resurrecting Fader Options" only appeared at random intervals in the Open P&L report used by Mr Said.
(c) Yet further, at least some such trades, when they appeared at all, were ascribed an MTM value of "N/A", or zero; and when, conversely, an MTM value was reported, it was for at least some such trade types not remotely accurate.
344. The evidence in respect of the problems to which these system failures gave rise in the course of Mr Said's trading is discussed further below. However, it is important to note that, even now, the nature and even extent of some of those problems remains a considerable mystery. For example, while (halfway through the trial) [DBAG] produced a letter from Deloitte that purported to address the zeroing out of the Available CMV Amount in historical reports, no explanation has been given of why (as further described below) certain trades would pop up in Mr Said's Open P&L reports at apparently random intervals. Even more fundamentally, as noted above, there is very little reliable evidence of quite what data (or even simply which trades) were included in the reports available to Mr Said in any given report on any given date, and it does not seem that the 2012 Reports in particular can be relied on for that purpose. [Deloitte's maintained that zero appeared wherever there was a timing issue with the feed from ARCS to GEM on MTM whereas n/a appeared where there was no feed at all from ARCS VaR to GEM.]
346. Daily monitoring of the collateral position on Mr Said's FX PB account was the responsibility of the CMV team. The team, which was distributed across three time zones to ensure 24-hour monitoring, used GEM for that purpose, and was thus plainly reliant on the trades having been booked properly into RMS and fed properly into GEM. As Mr Gehlfuss explained:
(1) The Net Equity figure calculated by GEM was automatically compared to three multiples of (what was intended to be) the VaR on Mr Said's portfolio:
(a) a "maintain level" of 200% of VaR, corresponding to the Independent Amount Ratio of 200% defined in ¶11(h)(i)(B) of the FX CSA;
(b) a "call level" of 150% of VaR; and
(c) a "close-out level" of 100% of VaR, corresponding to the Close-Out Ratio of 100% defined in ¶11(h)(i)(A) of the FX CSA.
(2) The result of this automatic comparison was displayed using a "traffic-light system" where "green" indicated the client had provided sufficient collateral to cover their exposure (i.e. greater than the maintain level); "yellow" indicate the collateral was below the maintain level but above the call level; "amber" indicated below call level but above close out level; and "red" was below the close-out level.
347. Should the Net Equity drop below the call level, CMV would, in line with the policy of full collateralisation, issue a margin call to the people specified in the relevant "Notes" field for the client in GEM: in the case of SHI, Mr Said and Mr Vik, copying various Bank/DB Suisse employees. Other than consulting with DB Suisse CRM as to whether the TPMC[A] could be increased, the issuance of such a call was a purely mechanical exercise devoid of any qualitative judgment."
"Note that Sebastian Holdings is on VaR and all their positions are valued and risk managed for margin purposes out of [ARCS] [V]aR."
He then incorporated the 30th November list of the trades that ARCS VaR could cover and then set out three points. In the first he asked how the Trade Desk currently margined the trades done by SHI with it, or for similar hedge fund clients. He spoke of the need to sit down with Credit to determine consistent/proper haircuts. The second point was to ask how valuations were being handled for SHI whilst the third point said that "[f]or starters" access was needed to "the book" from the PB side, by which was meant DB Analytics, as used by the Trade Desk.
"418. The following table summarises the degree to which each category of OCTs seems to have appeared in (1) the Open P&L report on Web Reporting and (2) the manual P&L spreadsheets sent to Mr Said, and whether MTM valuations were included. Where "partial" appears in the final column, that indicates that MTM values did generally appear in spreadsheets whose options section was based on the MTS Sebastian account, but not those based on the P&L Reporting account.
419. Of course, DBAG admits that those MTMs that were reported for OCTs other than Knock-Out Currency Options were not accurate.
|Trade type||Open P&L reports||Manual spreadsheets||Manual spreadsheets||Manual spreadsheets|
|Knock-Out Currency Opt||regular||yes||regular||yes|
|Knock-Out Timing Opt||sporadic||yes||regular||yes|
|Digital Currency Opt||regular||yes||regular||partial|
|Fw Setting Currency Opt||regular||yes||regular||yes|
|Double Knockout Opt||never||—||never||—|
|Dual Currency Range Digital Opt||never||—||never||—|
14. Mr Said's Evidence in Affidavits, on Deposition and in his Timeline
i) Throughout 2007 Mr Said described his trading as successful with the build up of a positive profit figure which increased the margin amount available and the size of positions that could be taken. Mr Said considered the position heavily over-collateralised although, when Mr Vik withdrew US$30 million in cash from the account on 9th October 2007, available margin reduced once more. Overall profit for the fourteen months' trading in 2006 and 2007 was, he said, about US$45 million so there was excess margin left in the account from built up profit even after that withdrawal of cash. He regarded the profit earned by his trading as increasing the margin available to him.
ii) In 2007 Mr Said said he did several non-standard Structured Options, as defined in the FXPBA. He described the term Structured Options as "basically a catch-all of options" that the automated deal capture and MTM system of DBAG could not handle and which was subject to case by case approval by DBAG as Prime Broker. These were, after brief explanation, he said, accepted for give-up by DBAG. Mr Said said that he could not recall whether they had any major margin implications but he thought not because the margin situation was extremely benign throughout 2007 (and really until October 2008).
iii) In 2008 Mr Said said he did more Structured Options and in February 2008 was shown by CS the Pivot Accrual structures. He found two which had very favourable risk reward ratios (a very high probability of knocking out early in most market scenarios given the short average life) and explained the transactions to DBAG, saying that they did not really involve exchange of cash flows until unwind, knock out or maturity. DBAG thought about it for a day or so and then said they were happy to accept these structures for give up and gave their approval for these Structured Options under the FXPBA.
iv) Over the course of the year Mr Said said he did a meaningful number of these on a rolling basis and the market for much of the year was as he expected it to be – full of sharp moves, sometimes somewhat random, with plenty of volatility but ultimately no massive powerful trend. The portfolio performed very well despite the Bear Sterns crisis in March and the last big dollar weakening with the result that in early October realised profit on the option portfolio amounted to about US$65 million, having been around US$82 million in August but deteriorating since because of the weakening of the NOK.
v) The Timeline continued:
"DB as PB accepted all the trades as I did them and processed the knockouts and payments as they occurred. I did not receive mark to market on these structures form [sic] them however and I did not notice an appreciable impact of the options on the required margin calculations. The options also either did not show up at all in the online P+L or were there, but with non-sensical P+L numbers. There were some discussions with DB about their ability to handle these – I wanted to make sure they were in a position to support them so I initiated the conversation with Rafael Quezada. DB's position I recall (from memory of phone calls) as follows:
- we can support these structures
- we want to support these structures
- we should be able to mark them to market
- But only our trading desk can and they don't like doing it for deals not done with them.
- They asked me quite directly to do some of these deals with the DB desk (which has not distinguished itself in terms of pricing whenever I gave them a chance) to "create some goodwill so we can work with the trading desk on the other structures. DB actually improved their pricing and I did several transactions with them.
That seemed to settle any residual issues DB might have had with booking or handling these options.
In terms of margin impact – it is not clear to me exactly how much INITIAL margin one of these structures should attract. But it seems form [sic] following the margin daily that DB may not have attributed any. In terms of variation margin – many of the options knocked out quickly and benignly without ever developing much mark to marked [sic] value – but some definitely did (I recall the very first euro Norwegian Krona option went right to the top of its ban and stayed there for a while before – as had been my view, retracing and knocking out with good profit. Again – from memory, I do not recall an impact on the margin calculation – and looking at it now, there should have been given the option must have a decent size MTM loss for a while which should have meaningfully decreased the margin capacity. It is true that there was built-up profit in the account which would have meaningfully INCREASED the margin capacity (see above). DB pointed this out on a call to me. However, much as he did in 2007, Alex did in the summer (I believe in July) withdraw 66mm$ from the account (a move I suggested to him given the cash was lying idle) which would have been substantially all the built up profit. Therefore in terms of margin capacity, we should have been back to the 35mm$ we started with (or in the general neighbourhood).
The portfolio of these options was actually very similar through-out much of 2008 – primarily eur/chf, $cad and eur nok with some currencies like aud/nzd eur/stg, eur$, $ yen stg/chf and $/brl added on occasion.
Throughout 2008 there were no margin calls form [sic] DB nor was MTM from the options represented in the P+L."
vi) It is relatively clear from this summary that although Mr Said refers to a settlement of any residual issues DB might have had with "booking or handling these options" following his discussion with Mr Quezada, there is a gap in his logic as to how this could be the case since only the Trade Desk was able to mark the transaction to market and it did not like doing it for indirect trades given up to DBAG as Prime Broker. Mr Said stated that although it was not clear exactly how much initial margin these options should attract, he appreciated, from following the margin daily, that DBAG might not have attributed any at all. He did not also recall any impact on the margin calculation at all when there should have been variation margin by reference to changing MTM. He said that there were no margin calls "nor was MTM from the options represented in the P&L" (by which he meant the reports of MTM).
vii) Mr Said then referred to DBAG's request in August of 2008 for a meeting to discuss margin in New York. He appreciated that the original terms were "simply too generous". Discussions culminated in a confirmation on October 6th that new margin terms would only raise the required margin from US$21 million to US$40 million that day. In discussing this Mr Said said that "during our meeting on September 8th in NY they did reference the structures and said they were having some issues incorporating them into the margin calculation but would get to it shortly". It is thus apparent that Mr Said knew that the Structured Options did not yet appear in the margin calculations.
viii) The Said Timeline continued:
"The portfolio of options (still) did alright through September and early October (all but three accruing positive every day) with the exception of the 4 $ brl structures (really part of one trade but spread over time). $ brl had started to move up steadily and in the first week of October the move suddenly accelerated. I was aware that we were looking at negative accruals and what had to be a decent MTM loss (I believe I wrote to Alex about these options and the strategy given the illiquidity of the market). DB did not, to my knowledge react to any of this, nor was any negative MTM incorporated in the margin calculation.
What happened next, I believe in early October (week of Oct 6th I think) was that Morgan Stanley, which had dealt with three of the four structures in question, apparently approached DB about separately margining these. Suddenly I got several calls form [sic] DB now asking about these options and did I have a MTM on them or could I get it from the counterparts. I think I told them I was pretty busy managing our risk in difficult markets and I wanted them to get the mtms – as they had initially said they could and would. This went on throughout the week of Oct 6 while I was discussing with Alex how to proceed on these options which were clearly showing a meaningful loss – but it was also not clear to me that cutting them out here was necessarily the right approach. Brl weakened steadily throughout the week, but we did not receive any margin calls from DB."
Again it is clear from this that Mr Said appreciated that MTM on these Structured Options was not incorporated into the margin calculation and that it was only the approach from MS seeking separate margin from DBAG that led to the latter asking Mr Said for MTM or asking him to get it from the counterparty banks, though the matter was left on the basis that DBAG would get those figures from the counterparty banks themselves. During this week Mr Said was discussing matters with Mr Vik (as the emails show).
ix) Mr Said went on in the Timeline to refer to the margin calls saying that it appeared to him that it was only then that DB "had pieced together a picture of what they thought the MTM exposure was on all these structures". He then referred to the market as being in "full blown crisis mode – extreme stress" and "a perfect storm" that "hit most of our positions". He referred to DBAG's first margin call as wrong because the bank clearly did not have the right MTM numbers, (including some positive exposures which made no sense) and the figures were too low given the market moves. He then referred to the collapse of currency markets that week and the multiplication of margin calls from DBAG where he said that the numbers they based their calls on were "extremely spurious – some accurate, some way off".
"8. The structure of the collateral was also discussed. I explained to the Bank (and I understand that Mr Vik did as well) and the Bank understood that my trading had to be separate and isolated from other Sebastian Holdings' assets and that Sebastian Holdings was only willing to expose a specific sum for my trading. The Bank recommended and agreed that this would be accomplished by Sebastian Holdings, in connection with the opening of the New York FX PB Account, pledging as collateral the equivalent sum of $35,000,000 in a newly opened separate account of Sebastian Holdings with the Bank in Geneva, Switzerland and that the Bank in Switzerland would issue a guarantee against such account, in such amount to the New York FX PB Account to support the FX trading in New York. This would also create a system of checks and balances for Sebastian Holdings as, for instance, Thomas Brugelmann could monitor the risk in the New York FX PB Account from the balance in the pledged account.
9. All of the trades I did in the New York FX PB Account were based on the $35,000,000 pledged by Sebastian Holdings in the Geneva account in Switzerland and the guarantee issued by the Bank in Switzerland to the New York FX PB Account. I understood at all times, as did the Bank, that my trading was limited to the specific amount of collateral and no more. Indeed, on two separate occasions, Sebastian Holdings transferred funds out of my account as such funds were not used to support my trading. There was never any discussion or agreement that any of Sebastian Holdings other accounts or assets would be available as collateral for my FX trading. In fact, in October 2008, Rafael Quezada of the Bank requested that I ask Sebastian Holdings to increase the pledge. From earlier communication with Mr Vik, I did not think that Sebastian Holdings would consider increasing the pledge and I never made such request of Mr Vik."
"15. Throughout my FX trading, I had continuing discussions with the Bank about its obligation to provide accurate reporting, either as part of the Bank's website to which I alone, not Mr. Vik, had access, or the daily reports that Bank personnel, including Matt Walsh, would periodically send only to me by e-mail. Several things should be noted: first, I often checked the "available" collateral on the Bank's website and found that I never got close to the limits. At no time before October 2008 did the Bank inform me that the Bank had failed to include any trades in the collateral calculations. At no time did I ever agree that the Bank had no duty to provide accurate reports. To the contrary, I was constantly assured, particularly by Quezada, that the Bank had a "good system" and that the Bank was capable of providing accurate reporting. Quezada and others at the Bank understood the Bank's obligations to provide accurate reporting and that such reporting was critical to monitor risk.
16. Indeed, I always made it clear to Quezada that the Bank should only "take in" the structured accrued pivot trades, which I started doing in 2008, if they could handle them and accurately value and put them into collateral calculations. Quezada assured me that the Bank was able and happy to accept them and every trade was pre-approved and accepted by the Bank. Indeed, Quezada even asked me to do my best to do a few of these trades with the Bank rather than the other counterparties, which I agreed to do for him on a few occasions. The Bank was clearly eager for me to engage in the pivot trades and the Bank was able to value the pivot trades.
17. I never agreed to conduct pivot trades without their value being reported on the Bank's website. As the Bank well knew I did not have any authority to do so and reporting exposures was a prime obligation of the Bank as it well knew.
18. The Bank was required to include all trades including the pivot trades, in their reporting and all trades, including the pivot trades, were supported only by the $35,000,000 in the pledged account of Sebastian Holdings in Geneva and the corresponding guarantee from the Bank in Geneva to the New York FX PB Account.
19. As this was my understanding as well as that of the Bank, I continued such trades in 2008. I did not notice any appreciable impact on the pledged collateral amount for these trades. The structures either did not show up on the website or sometimes were there but with nonsensical numbers which I pointed out to the Bank on several occasions in my efforts to make sure the reporting was correct. In all events, I engaged in such trades relying on the Bank's obligations to Sebastian Holdings as its prime broker and pursuant to the New York FX PB Agreement.
20. For example, I sent an e-mail to Matt Walsh alerting him that the numbers in the live mtm module relating to two earlier pivot trades did not seem accurate to me and I thought that these inaccurate numbers should be excluded from the real-time reporting system until they were corrected so as not to render all real-time information erroneous. This e-mail related only to those two trades and only about the real-time reporting. It was not an instruction to exclude pivot trades from being valued in the Bank's system. Communications like this were to make sure that, among other things, trades were properly matched and documented and correct information was being used. I again continued to rely on the Bank's assurances that they could value the trades and correctly report their calculations.
21. Never once during the many months of my pivot trades did the Bank ever suggest to me, nor to my knowledge, Mr. Vik, that the trades were in excess of the collateral limitation ($35,000,000) or that there was "inadequate security."
22. While in late August 2008 the Bank, in New York, did ask me, not Mr. Vik, to have discussions take place concerning what eventually resulted in their unilateral change of collateral calculation methodology, never once was I advised by Michael Spokoyny (or anyone else at the Bank) that he was aware of any deficiencies in collateral or what the Bank has come to now allege were "hundreds of millions of dollars of losses."
23. To the contrary, when the Bank and I (not Mr Vik) did meet, pivot trades were raised and I was assured by Spokoyny, as I had been in the past that the Bank was accurately valuing these trades and including them in their collateral calculations. All we discussed and eventually received was the Spokoyny e-mail of October 6, 2008 unilaterally requesting that the methodology for calculating collateral requirements was to be modified with the result that the required collateral in the account of October 6, 2008 was to be increased by $5,000,000 ($35,000,000) to $40,000,000. Because my collateral was limited to $35,000,000, and Sebastian Holdings was not interested in increasing the pledge, this required me to reduce my trading positions. No mention was made of pivot trades or the fact that by that time the Bank may have known about losses amounting to hundreds of millions of dollars, all of which was unknown and unavailable to me and of course to Mr. Vik with whom, prior to mid-October 2008 I did not discuss my pivot trades.
24. I believe that it is only when the Bank thought it was going to receive a request from a counterparty (I believe Morgan Stanley) in October 2008 to post collateral for individual trades because of "mtm" (that is, mark to market calculations) done by such counterparty, that the Bank finally realized that it had to disclose to Sebastian Holdings what the Bank alone knew all along: that the losses had been and were becoming staggering and that the Bank had failed to comply with its calculation and reporting requirements to Sebastian Holdings under the New York FX PB Agreement and the prime brokerage relationship.
25. Even then, the Bank, recognizing and well aware of the $35,000,000 collateral limitation requested it be increased by only $5,000,000 to $40,000,000. The Bank, knowing I (and of course Mr. Vik) had no access to mark to market calculations, was the only party which could accurately calculate and report collateral requirements and it failed to do so.
26. Indeed, when I received the first purported "margin call" from the Bank on October 13, 2008 it was erroneous and the Bank knew that it was erroneous; understated by hundreds of millions of dollars. Had the Bank reported accurately, I would never have entered into the trades and I would have liquidated any trades on an earlier and more timely basis and Sebastian Holdings would have suffered substantially lesser, if any, losses and the wrongful margin calls would not have been satisfied.
27. My trading was supported only by the $35,000,000 guarantee issued by the Bank in Switzerland to the New York FX PB Account and neither the Bank nor any other party provided any other financing to support my trading activities. I did not have any authority to borrow from the Bank nor have I ever done any trades with the Bank on "margin"."
i) Mr Said knew from the GEM website and from the manual spreadsheets supplied to him that the EDTs were not being booked accurately, that where they were being booked they were being booked as "Resurrecting Faders", an inadequate proxy or placeholder for the transactions in question and that in the later stages they were not being booked at all until cash settlement.
ii) Moreover Mr Said had gone to some lengths to tell Mr Quezada and Mr Walsh, in an effort to persuade them to accept the trades as Structured Options under the FXPBA, that DBAG did not have to do anything on the trade – they did not have to keep track of it or provide MTM and that the only time they had to get involved was when the trades knocked out or matured and cash settlements fell to be made.
iii) He regarded margining as a problem for DBAG to work out for itself but inevitably, as an experienced trader, knew that if DBAG could not value the trades on an MTM basis, it could not margin them either.
iv) He knew that the MTMs on EDTs which were booked as Resurrecting Faders were "spurious by tens of millions" on the website and asked for the MTMs to be "zeroed out" or removed from the reports and the manual spreadsheets which Mr Walsh sent him which otherwise showed a comprehensive list of his vanilla trades and the applicable MTM valuations. He also appreciated that margining on the basis of the valuations on the website would lead to numbers which were "chaotic".
15. Mr Said's Agreement to the Non Reporting of the EDTs, MTMs and Margin calculations which included them
15(a) The 5th May 2008 telephone call between Messrs Quezada, Walsh and Said
i) TPFs could not be booked properly in the FXPB systems, though Mr Quezada understood that they could be booked by the DBAG Trade Desk using their system of spreadsheets (DB Analytics). There was difficulty in obtaining the assistance of the Trade Desk in booking because of the need for the Chinese wall between FXPB and the Sales/Trade Desk since the latter should not be aware of trades done by the customer with parties other than DBAG. This was a cause for concern.
ii) Mr Said's immediate response was to say that he understood and accepted that the TPFs would not be PnL'd, by which he meant that he understood and agreed that DBAG would not be able to value the TPFs on a daily basis nor report MTM figures to him. SHI accepts that Mr Said expressly agreed to this. Mr Said explained that he understood that the TPFs were too complex for their MTM values to appear and that he regarded them as accrual trades anyway. that he was not interested in the MTM value in any event.
iii) Mr Said then said that the only issue that DBAG could have would be an issue related to margining. He thus showed that he understood clearly, as was obvious, that a lack of proper MTM valuation would impact upon the margin calculation. A little later he stated that he understood that DBAG would "want to look at that" but that if DBAG was ever concerned about the issue, SHI would over-collateralise.
iv) Mr Quezada's response was to say that margining was an issue and that he and Mr Walsh needed to ensure that the right things were being done "on our side", because these TPFs were novel to them.
v) Mr Said then insisted that there was nothing whatsoever for DBAG to do on the trade "from an admin point of view" leaving margining/VaR on one side. DBAG did not have to keep track of the trade as the counterparty did that and there were no payments for exchanges of currencies with the result that the only time the prime broker got involved was on knock out or maturity. "So in terms of you, Matt, and the rest of the gang doing the right thing on a daily basis, I still take issue with that a little because there are no things to do on a daily basis."
vi) At this point Mr Quezada repeated that the systems used by FXPB to book trades did not cover these trades, as opposed to the Trade Desk with its "accrual spreadsheets and DB Analytics and other tools that they use". In consequence none of the trades fitted on the FXPB "side of the world" so they were "sitting on these trades". Although FXPB knew that the trades were fully offset with the counterparty which gave comfort and that VaR could handle the trades, booking them was a difficulty without the assistance of a quant on the trade side. On that front he was getting no co-operation so that, if he were to take in any more TPFs, he would just be sitting on the trades assuming they were all off-set and everything was fine "and then in 2009 we're all sitting and saying "what happened?"" (a remarkably prescient observation, which could not have escaped Mr Said.)
vii) Mr Said said he did not understand the issue about offsetting trades with a counterparty because there were trade confirmations from both SHI and the counterparty so that DBAG would be able to match them. He understood that DBAG would not know on any given day what the trade was worth on an MTM basis unless the VaR model calculated it and picked up on the point that Mr Quezada had said that it did.
viii) Mr Quezada's response was to say that his "guys" were telling him that it did but that the TPFs would not fit into their books.
ix) Mr Said then enquired as to how it worked on a direct trade with the DBAG Trade Desk.
x) The response of Mr Quezada was that in those circumstances the Trade Desk would manage TPFs outside the system on their own spreadsheets with a hard coded margin supplied by DBAG and separate valuation statements being sent for the TPFs on a trade level – i.e. for individual Transactions.
xi) Mr Said responded that this was not what occurred and that the DBAG Trade Desk did exactly what other counterparty banks did, which was simply to send daily accrual sheets and that he was not receiving MTM valuations for each trade from anyone.
xii) Mr Walsh was asked what was lacking in the booking of the trades and said that there was not a "set trade type" that captured the details of the TPF for booking purposes, which was the same whether the trade was done with the DBAG Trade Desk or with a counterparty. FXPB did not have the "spreadsheets and stuff" that Sales would use to book the trades so the trades could not be incorporated.
xiii) Mr Said said that although he would not be doing TPFs all the time and at that particular time would probably not be doing a new one, it depended on the state of the market. This was an excellent form of trade for his style of trading and he said it was something that he needed to have the ability to do.
xiv) Mr Quezada was responsive to this in an imprecise way but suggested that if a new instrument came across FXPB's desk which "Trading" (the Trade Desk) traded and valued, he might get access to the tools they used but sometimes they responded that they did not "price" these instruments – by which he must have meant that the Trade Desk said that they did not give MTM values.
xv) Mr Said responded that he was happy to assist FXPB in gaining access to "the spreadsheet so you can do it" and to threaten the Trade desk that if they would not assist in this way then he would do all his TPF trades in a private banking account with CS and never offer DBAG another deal of that kind.
xvi) Mr Quezada's response was to say that he liked that approach but would let Mr Said know if it became necessary to use it.
15(b) The 22nd July telephone conversation between Messrs Walsh and Said
i) Mr Walsh explained that the reason for the wrong figures was connected with the manner in which the account was margined using VaR, value at risk. It was not as easy as redirecting a feed.
ii) Mr Walsh said that the P&L sent on the manual spreadsheet was more accurate than the web P&L but it was the web P&L which was being used to margin Mr Said's trades.
iii) Mr Said immediately responded to say that this meant that his trades were being wrongly margined and added that it was in his favour but not by a ton. He said it did not matter because he had a lot of excess collateral. Nonetheless he recognised that, in principle, the trades were being wrongly margined.
iv) He then specifically said that if the trades were being margined "based on those spurious fader numbers", it was "really chaotic", with which Mr Walsh agreed.
v) Mr Said then said there was no reason for DBAG's credit department to be concerned because there was so much money sitting on account and, if there were ever an issue of incorrect margining of the faders, more collateral would be sent. (In fact Mr Vik had just withdrawn about US$75 million from the account, as Mr Said knew.)
vi) Mr Walsh accepted this and said that he could continue to send the manual spreadsheets which he obtained from another account which had been created for Mr Said but was an internal account, to which Mr Said could not gain access. Mr Walsh had to download it to Excel and send it on (referring to the Dummy P&L Reporting account).
i) In a Bloomberg chat on 30th July with Mr Feldmann at MS, Mr Said said that MS would never extend the same leverage terms to him that he had with DBAG. Mr Feldman responded by saying he could only imagine the terms he was getting on margining the Pivot trades. Mr Said responded with a winking emoticon.
ii) In his telephone call with Mr Geisker of the DBAG Trade Desk of 26th August, Mr Said referred to the meeting he was due to have on September 8th with Mr Quezada in the following terms:
"[I] think they have finally figured out a way to actually margin all my Pivot trades and are trying to break the news to me that the freebies are over."
The words used are significant, including the words "actually" and "finally". What they show is that Mr Said had known for a long time that DBAG did not have a way of margining his pivot trades and that he was therefore getting a free ride in respect of collateral on them. A freebie is a freebie and that is what Mr Said knew he had been getting.
iii) There are later references in exchanges to the same effect. It seems that Mr Said may have used the expression free ride at his meeting on 8th September with Mr Quezada and Mr Spokoyny and there is no doubt that he used similar expressions in emails and telephone calls with Mr Vik, Mr Quezada and Mr Walsh; e.g. on 9th October 2008:
- "For the past year [DBAG] gave us a "free ride"… the money we made on almost no capital was just a freebie".
- "We got a sort of free ride for the past 6 months from a mark to market point of … from a collateral point of view".
- "your systems' deficiencies gave us a bit of a freebie in terms of margin."
iv) Mr Said was aware throughout this period that DBAG's margin calculations on the portfolio as a whole either did not include TPFs at all or did so inadequately.
15(c) The 8th September meeting between Messrs Quezada, Spokoyny and Said
i) In order to persuade DBAG, in the persons of Mr Quezada and Mr Walsh, to accept the EDTs as Structured Options, he told them in terms that they did not have to produce MTM figures for these trades and that he did not rely on those figures for his risk management purposes.
ii) He knew that FXPB was unable to book the EDTs as such because DBAG's GEM system could not cope with the trade details of such complex trades.
iii) The sporadic appearance of Resurrecting Faders in GEM and on the manual spreadsheets as placeholders for EDTs gave rise to such nonsense figures for MTM that he asked for them to be removed or zeroed out.
iv) He knew that the MTM figures which appeared on GEM for the EDTs were inaccurate and that they, together with the MTM of the other trades in the portfolio, were the basis for calculating variation margin on the portfolio as a whole.
v) He therefore knew that the variation margin was chaotic, based as it was upon the spurious MTM numbers on GEM.
vi) His observation of the margin figures revealed to him that no Initial Margin was being charged on the EDTs either.
vii) He told Mr Quezada and Mr Walsh that there was nothing for DBAG, as Prime Broker, to do in relation to these EDTs (margining aside) save to settle them on knock out or maturity.
viii) He knew that he had been taken at his word since his observations of the GEM website and the manual spreadsheets produced by Mr Walsh showed that a large number of EDTs were not being booked until knock out.
ix) He regarded margining as a matter for DBAG alone and he did not use GEM (nor the margin figures in it) as a risk management tool.
x) He was at all times desirous of minimising margin and obtaining the maximum leverage against it.
xi) He knew that SHI was getting a free ride on margin, as the market moved against it in the period of 6 months or so prior to October 2008.
16. The History of Mr Said's FX trading and Mr Vik's knowledge thereof
"markets are stuck in ranges and are likely to stay that way with little new truly market moving new information likely to fundamentally change the picture. Implied volatility is overvalued. Consequently I am short vol through options and range trades. This has worked well so far. This week I took in another 4.5mm$ for an expired range trade and a good chunk more is coming early next week. I am replacing trades as they expire – it is still good value. Obviously not without risk at all if we get precipitous moves that do not mean-revert but good risk reward in this directionless market."
He said that the profit thus far that year was US$35 million. Mr Vik in cross-examination said that he did not understand what was meant by betting against higher volatility through his range trades though Mr Said often repeated his view about mean-reverting currencies.
"Klaus: Well…you know… uh the problem is I mean I have to discuss this, I mean, I have discussed it in principle with, with Alex, but I mean what clearly has happened here is that um, you know, I mean we sort of got a free ride on those for the past 6 months… from a mark to market point of… from a collateral point of view, right?
Klaus: Uh, I realize that. Now it coincides unfortunately, this would have come up anyway, it coincides unfortunately with some of them having really moved out of whack, but these things have moved out of whack before and have come good. Now the Brazil is a very particular problem and, you know, I am working on restructuring some of them and so on and so forth, um but we clearly have to… Alex and I have to discuss what we, how we approach this going forward because it will just simply require a lot more capital.
Klaus: Is that fair?
Rafael: Yeah, definitely and I think that, you know, up until, up until now, right, these things, kind of, you know, they sit there and, you know, you worked with us in terms of matching these… pairing these things off with the banks, right, but they, you now, they kind of sit in the place that, you know, we just need to be collectively diligent in terms of ear marking separate collateral on these, right, cause my engine does not capture these things, right?
Rafael: No worries, yeah, so, you know, I mean I thinks it's a… you know those things don't fit nicely within, you know, the VAR calculator, either, right, so…
Klaus: Yeah, yeah, yeah, yeah."
"The issue here is the range structures of which I have done many over the past 6 months. Many have knocked out with big profit, several are outstanding and will produce good profit a few are iffy but manageable and then there are the ones in brl that we discussed.
However - they all have one thing in common - they are great structures if you can trade them and treat them as effectively an accrual product (longer term hold) which is what I have done. The disadvantage - as we have discussed, is that on a mark to market basis they will almost invariable show losses in most circumstances until they knock out. What I do in these trades is buy/sell a currency at the bottom/top of usually very wide ranges. Profit accumulates, losses get deducted (if it does move outside the range) until pre-determined knock out levels on the total profit figure is reached - and the trade goes away.
I am 99.99 pct certain a big euro dollar structure I had will knock out today. I did it with spot at 1.44. Vol was so high that the range I got was 1.33 to 1.55. I did this in 5mm euros per day and the profit cap was 5mm USD. Despite the massive move in eur dollar from 1.44 (where it was when I did) to a low of 1.3450 the trade always accrued. It took longer than I had hoped because of the spot move but today, unless something crazy happens in the next 1 hour it will reach the target. It knocks out. We book 5mm usd.
So that is the good news. The bad news is that what I look at as a range is of course a combination of short options positions (puts and calls, at the moneys and wings) and it is pretty big. If from when I do a trade vol goes up at all (which it has of course in a big way) and spot moves away form the middle (which it invariably will) these trades will show substantial mtm losses very quickly.
Even trades that are not that far from knock out and have not moved too much will show that - I have a nok/sek which is about 65% to knock out and accruing quietly but of course vol has gone up a lot and spot is off the 1.18 center where I did it - and it is showing a meaningful mtm loss (like 8mm $ or so)
I am unconcerned about that - we trade these as accrual products - I manage the risk of course (restructure, hedge spot, overlay new trades for an average etc) but ultimately I look at these as hold to maturity trades. Not only is that my preferred way of trading the structures - it is also the only way. The wide ranges and (in many cases) quick profits come with a cost - you have to take the swings and let moves mean-revert (and of course try to act quickly when you really think it is not coming back - but only then - otherwise you will get chopped up and lose all value and profit.
So far so good and we have discussed all this. Here is the issue:
For the past year Deutsche Bank gave us a free ride on these things because they could not value them properly in their system. That was great while it lasted. They have woken up. We can drag this out for a bit but we have to make two decisions:
1. Unless we want to unwind all the trades (which would be disastrous - both in terms of actual losses as well as foregone profits) we will have to post substantial collateral – I'll run you through the numbers as I have them. Right now only one of the counterparty banks has raised the issue and I am not sure if DB will extend it to all old trades and all new trades but the bank (Morgan Stanley) has of the brazil position we have and that of course on a MTM basis is causing the biggest issue (spot by the way is down to 2.15) but vol is still sky high and that is actually for the mtm just as big an issue. I know you don't like that - I can only say the money we have made on these on almost no capital was just a freebie. I don't know what you can negotiate with the private bank - just pledging, as before, rather than sending cash would of course be the best.
2. Going forward - these are great structures - they way we can trade and hold they are the best way to sell volatility at high levels. But - do you have the stomach for the swings in mtm - which will result in substantial collateral requirements. If you do not than I would have stop doing them - a shame given how useful and profitable they are but it does require capital. One way or the other I still want to put a bunch of new trades on to restructure some of the Brazil - that makes sense and should be net collateral neutral (we are shifting the accumulated mtm loss into other, more liquid currencies.
So that is the issue- not something we can ignore given the trades is on the books. I have so far largely ignored mtm in my trading (not completely - and I am always aware of it) which has been a great advantage for us because we can often buy when others are selling in panic or hold when others have to get out. We were able to do that essentially for free - almost no capital requirement. That will not be the case going forward ... I believe I can continue to make very nice returns - and you get 90% of them. But - it will now require a more "normal" amount of capital. What I am hoping is that you can allocate a meaningful portion of your nok t bills or whatever it may be (which does not produce that much of a return) on a pledge basis to this trading - I think the return has been and on average over the next few years should be worth it - but that is your call.
So we need to discuss!
17. The 2008 Agreements
17(a) The Equities PBA
""Securities" means (i) any bond, debenture, note or certificate (whether in tangible or intangible form) or other instrument or equivalent intangible holding evidencing indebtedness; (ii) any share, interest or participation in the issued share capital of a company including any replacement shares, interests, or participations following a surrender, cancellation, conversion, sub-division or consolidation; (iii) any warrant or future on, or any option or right to subscribe for or purchase any of (i) or (ii) above; and (iv) any other securities or instrument as agreed between the parties from time to time, and includes in each case an interest in a security accruing by virtue of the fact that the security is held through a clearing system, custodian or other intermediary;"
"4.1 On each Business Day the Prime Broker shall in good faith calculate the Margin Requirement in accordance with its procedures and notify the Counterparty thereof.
4.2 In the event that the Margin Requirement on any Business Day is higher than the Margin Requirement on the immediately preceding Business Day, the Counterparty shall on demand:
4.2.1 deposit Securities of a type acceptable to the Prime Broker into the Securities Account; and/or
4.2.2 transfer cash into the Cash Account;
such that the aggregate of the Market Value of any such Securities held in the Securities Account and the face value of any cash held in the Cash Account shall, immediately following such transfer on that Business Day (converted where necessary into United States dollars at the Prime Broker's spot rate for such conversion) equals the Margin Requirement notified by the Prime Broker for the relevant Business Day."
i) The first turns on the definition of "Securities". The authority extended by DBAG to SHI to nominate it as its agent for settlement relates to agreements to purchase or sell "Securities", but this is of no significance as all FX transactions concluded by Mr Vik were made with DBAG directly and none were made with a third party, involving any agency of DBAG. The terms of Clause 4 however provide for the Margin Requirement to be assessed by reference to the Market Value of Securities held in the Securities Account. The question arises as to whether FX transactions are included.
ii) The second issue arises in relation to the wording of Clause 4.2 and what is meant by "the Margin Requirement" where SHI submits that DBAG is restricted to making a demand for additional collateral where the House Margin for any given day is higher than that for the previous day so that, if a margin deficit arises by reason of the diminution in the Market Value of the securities and cash held in the Securities Account and Cash Account, no demand can be made.
iii) A third issue arises as to whether or not DBAG is bound to demand additional margin if circumstances arise to which Clause 4.2 relates.
iv) The fourth issue arises on the construction of Clause 4.7 and the dispute between the parties about cross margining on the GPF account.
17(a)(i) The First Issue of Construction
17(a)(ii) The Second Issue of Construction
17(a)(iii) The Third Issue of Construction
17(a)(iv) The Fourth Issue of Construction
"Notwithstanding any other provision of this Agreement or any other Underlying Agreement, transfer of cash or Securities in compliance with Clause 4.2 shall constitute good discharge of the Underlying Margin Obligations of the Counterparty for the applicable Business Day under each of the Underlying Agreements."
17(b) The Listed F&O Agreement
"10.1 Transactions: This clause applies, except to the extent inconsistent with Applicable Regulations, to transactions in futures and options. In this clause, "Transaction" means the transactions listed in sub-clauses (i)-(iv) of the definition of Transaction.
10.2 Matching trades: In respect of every Transaction made between us subject to the Rules of an Exchange, we shall, unless otherwise agreed in writing in relation to a particular Exchange, act as principal in any Transaction with you, and we shall have made (or arranged to have made through an intermediate broker who may be an Associated Company) on a principal-to-principal basis a matching transaction on the market operated by the relevant Exchange or shall have accepted the designation of such a Transaction."
"12.1 Margin Call: You agree to pay us on demand such sums by way of margin as are required from time to time under the Rules of an Exchange (if applicable) or as we may in our discretion reasonably require for the purpose of protecting ourselves against loss or risk of loss on present, future or contemplated Transactions under this Agreement. You will be required to supplement that payment at anytime when your account with us shows a debit balance or an increase in your Margin Requirement.
12.2 Purpose of Margin: All margin shall be held for the following purposes: for application in respect of Transactions entered into pursuant to this Agreement; to pay to the relevant Exchange or broker any margin due from us to it on such terms as we think fit and in respect of all positions held by us for all our clients (including connected persons); to apply in or towards satisfaction of, or in reimbursement to us of, all costs, damages, losses, liabilities and expenses incurred under or in respect of all and any transactions and all liabilities and expenses (including dealing turns, charges and taxes) incurred as result of the performance by us of our duties or the exercise by us of our rights, powers and/or privileges hereunder (irrespective of the currency in which the same is denominated).
12.3 Transfer: You shall Transfer to us, on demand or within such time as we shall specify, such Acceptable Margin as we may require in accordance with our Margin Requirement.
12.4 Title: You agree that all right, title and interest in and to any Acceptable Margin Transferred hereunder shall pass to us outright, we being obliged to Transfer Equivalent Margin in the following circumstances:
(a) if we determine, in our sole discretion, that our Margin Requirement has been reduced;
(b) provided that none of your obligations to us are then outstanding, upon an assignment or transfer of a party's rights under the Agreement; or
(c) provided that none of your obligations to us are then outstanding, upon termination of the Agreement."
""Master Netting Agreement" means any Master Netting Agreement between you and us in relation to the Prime Brokerage Agreement, as amended or supplemented from time to time. This Agreement shall constitute an Underlying Agreement for the purposes of the Master Netting Agreement;
"Prime Brokerage Agreement" means the Prime Brokerage Agreement between you and us dated [30th January 2008], as amended or supplemented from time to time;
"Specified Agreement" means any master agreement (including, but not limited to, any lSDA Master Agreement as published by the International Swaps and Derivatives Association, Inc and the Prime Brokerage Agreement) between the relevant parties whether already executed at the date of this Agreement or at any time in the future which governs the terms of the transactions entered into between the relevant parties pursuant to any such master agreement, regardless of whether any one or more of such transactions was or were entered into before or after the execution of any such master agreement;
(i) a contract made on an Exchange or pursuant to the Rules of an Exchange;
(ii) a contract which is subject to the Rules of an Exchange; or
(iii) a contract which would (but for its term to maturity only) be a contract made on, or subject to the Rules of an Exchange and which, at the appropriate time, is to be submitted for clearing as a contract made on, or subject to the Rules of an Exchange;
in any of cases (i), (ii) and (iii) being a future, option, contract for differences, spot or forward contract of any kind in relation to any commodity, metal, financial instrument (including any security), Currency, interest rate, index or any combination thereof;
(iv) a transaction entered into between the parties and/or which is matched with any Exchange Contract within paragraph (i), (ii) or (iii) of this definition;
(v) any other transaction, which we both agree shall be a Transaction
17(c) The Master Netting Agreement
19. Mr Vik's FX Trading with DBAG and its collateralisation
"In connection with the opening of the accounts in London in which Said had no role, and again unrelated in any way to the New York FX PB Account or its activities or transactions, and solely for other investment purposes of Sebastian Holdings, the Bank and Sebastian Holdings entered into various agreements, all drafted by the Bank, including another, unrelated prime brokerage agreement dealing solely and exclusively with the London accounts. …"
In other words, the London agreements stood on their own and the New York FXPB Agreement and documents stood on their own, the latter Agreement being exclusively for Mr Said's trading.
i) In the Amendment Agreement it was provided that the following should be added as a preamble to the Schedule to the Equities ISDA of May 8th 2006:
"For the avoidance of doubt, it is intended that this Agreement govern all Transactions other than FX Transactions and Currency Option Transactions. Unless otherwise agreed between the parties, FX Transactions and Currency Option Transactions (as defined in the 1998 FX and Currency Option Definitions, as published by ISDA, the Emerging Markets Traders Association and The Foreign Exchange Committee (the "FX Definitions")) shall be governed by the ISDA Master Agreement dated 22 November 2006 between Party A and Party B (which expressly provides for FX Transactions and Currency Options Transactions to be governed by that Agreement)."
ii) Paragraph 7 of Part 5 of the Schedule to that ISDA was to be deleted and replaced by identical words to those which were to appear in the preamble.
iii) In the Schedule to the FX ISDA of 22nd November 2006, a preamble appeared in the following wording:
"For the avoidance of doubt, it is intended that this agreement shall only govern Foreign Exchange Transactions and Currency Option Transactions (as defined in the 1998 ISDA Definitions as published by the International Swaps and Derivatives Association, Inc. ("ISDA") (the "FX Definitions")) between Party A and Party B.
Unless otherwise agreed between the parties, any Transactions other than Foreign Exchange Transactions and Currency Options Transactions shall be governed by the ISDA Master Agreement dated May 8, 2006 between Party A and Party B."
iv) Paragraph 11 of the Schedule, headed "Scope of Agreement" then provided that the FX ISDA should govern only Foreign Exchange and Currency Options transactions and "unless otherwise agreed between the parties, any other transactions … shall be governed by the Equities ISDA of May 8th 2006."
""Securities" means (i) any bond, debenture, note or certificate (whether in tangible or intangible form) or other instrument or equivalent intangible holding evidencing indebtedness; (i) any share, interest or participation in the issued share capital of a company including any replacement shares, interests, or participations following a surrender, cancellation, conversion, sub-division or consolidation; (ii) any warrant or future on, or any option or right to subscribe for or purchase any of (i) or (ii) above; and (iv) any other securities or instrument as agreed between the parties from time to time, and includes in each case an interest in a security accruing by virtue of the fact that the security is held through a clearing system, custodian or other intermediary; …"
19(a) The Course of Events in 2007-2008 relating to Mr Vik's FX trading
i) Mr Orme-Smith sent to Mr Brügelmann a standard GPF pitch presentation document which explained the benefits of cross-margining on the GPF platform, together with the relevant version of the ROR and an agenda for the meeting which referred to "Global Prime Finance Overview", "Financing, margin, risk" and "Transition & Reporting" as items for discussion. The basis upon which Mr Orme-Smith was proceeding was that all of SHI's portfolio at DBS would move to the GPF platform, including Mr Vik's F&O and FX trading. Mr Brügelmann, at Mr Vik's request, sent on these documents to him prior to the meeting taking place.
ii) In addition, the GPF Risk team prepared a demonstration account to show to Mr Vik. This demonstration account reflected the contents of SHI's portfolio at DBS, as provided by Mr Brügelmann, which included F&O and FX positions as well as a predominantly equity-based portfolio. The summary portfolio included US$700 million worth of European and Asian equities, US$300 million of Norwegian treasury bills, a USD/NOK FX position and various equity index-linked futures. In such circumstances Mr Vik's long NOK positions did not produce any real benefit in cross-margining because they did not have any hedging effect against the other assets.