United Kingdom

Details

  • Service: Advisory, Transactions & Restructuring
  • Industry: Financial Services
  • Type: KPMG information
  • Date: 05/06/2014

Client Money Resolution – notice of settlement proposal 

This update is notice that the Administrators propose to enter into a settlement agreement between the Client Money Pool (“CMP”) and the firm’s General Estate pursuant to the Client Money Resolution Application.

 

An executive summary and descriptions of the background, negotiations, proposed settlement terms, impact of the settlement, and procedure down to the approval hearing on 3 July 2014 are set out below.

Executive summary

 

As explained more fully below, the Administrators have negotiated a proposed settlement agreement between the CMP and the General Estate. 

 

The proposed settlement will have a substantial beneficial impact on both the General Estate and the CMP. This is demonstrated by the Administrators’ Indicative Impact Statement (PDF 173 KB).


The proposed settlement was reached in accordance with directions from the Court, which included provision that the CMP and the General Estate be represented by separate teams.


The proposed settlement involves the General Estate paying $41.2 million to the CMP:


(a) in full and final settlement of all tracing, breach of trust and other claims between the estates; and

(b) in exchange for an assignment of all of the CMP’s outstanding receivables.
The $41.2 million figure is net of the CMP’s contribution to the costs of the two estates for the period from 1 May 2014 to the closure of the CMP.


The proposed settlement would accelerate distributions from both estates by several years and would avoid the very substantial costs that would be involved in determining the outstanding issues between the two estates by way of litigation and a tracing exercise.


The cost, certainty and timing benefits are so great that the Administrators consider that it is in the interests of every client and creditor of MFG UK that the settlement be approved and implemented.


There will be a hearing before the English High Court on 3 July 2014 at which the Administrators will seek permission, on behalf of both the CMP and the General Estate, to enter into the proposed settlement. 


Any creditor or client who would like further information should contact the Administrators on the details set out at the bottom of this update.


Any creditor or client who would like to object to the settlement must file their objection at Court as soon as possible and in any event by 4.30 pm on 26 June 2014.  Further details of the Court procedure and timetable are set out below.


Background


The background to the application was set out in the updates dated 8 April 2014, 29 April 2014 and 2 May 2014.


The Administrators are seeking to make a final distribution of client money and close the CMP as soon as practicable.  The benefits to clients and creditors of a prompt final distribution and closure of the CMP include faster payment and reduced costs. The firm’s General Estate creditors will also benefit from a prompt closure of the CMP, as it is only when the CMP has closed that the General Estate’s liability for any shortfall in the CMP will crystallise.  Until then, the General Estate bears an FX risk by virtue of the fact that the CMP is denominated in US Dollars and the General Estate is denominated in Sterling.


In order to make a final distribution of client money and close the CMP, the Administrators and MFG UK (as trustee of the CMP) must:


(a) resolve the value of the CMP’s tracing and other claims into the General Estate, which arise from failures by the firm to segregate sufficient client money;

(b) sell or otherwise realise all of the CMP’s remaining non-cash assets;

(c) resolve the value that the CMP must pay towards the costs of the two estates from 1 May 2014 to closure
of the CMP;

(d) resolve the question of how to deal with clients who are shown in MFG UK’s records as having client money claims, but who have not submitted claims for payment; and

(e) resolve all outstanding claims against the CMP.


Point (a) could be resolved by litigation or by settlement.  The overriding benefit of a settlement is that it would avoid the substantial cost and delay that would be caused by litigation and a full tracing exercise. 
The estates are closely linked and as such the outcome of any litigation arising out of the purport

ed failure by MFG UK to segregate sufficient client money would impact both estates.  If, for instance, the CMP were to lose any litigation and be ordered to pay the General Estate’s costs, the consequent reduction in assets in the CMP would result in higher Shortfall Claims and Parallel Claims into the General Estate.

 
(A Parallel Claim is a client’s unsecured claim for the difference between the value of its contractual right against MFG UK and the value of its distributions from the CMP.  A Shortfall Claim is a client’s unsecured claim for breach of CASS 7 or other breach of trust.  For most clients, their Shortfall Claim is subsumed within their Parallel Claim.  The only clients with separate Shortfall Claims are those whose client money claims have a greater value than their contractual rights against MFG UK (‘Decreased Clients’).  Further information about Shortfall Claims and Parallel Claims is available from the Administrators’ website).

 
Point (b) above can be resolved by the sale by the CMP to the General Estate of all remaining non-cash assets.  This, as well as the division of costs between the two estates (point (c) above) can readily be included in any settlement.

Because of the potential benefits of a settlement to all concerned, on 7 April 2014 the Administrators issued the Client Money Resolution Application at the High Court to fix a procedure for negotiating and, subject to the Court’s further permission, entering into a settlement between the CMP and the General Estate.  The application also proposed a way of dealing with clients who are shown in MFG UK’s records as having client money claims, but who have not submitted claims for payment (point (d) above).


The negotiation procedure


On 1 May 2014, the Court granted an order approving the procedure for negotiating a settlement between the CMP and the General Estate.  A copy of the order is available in the update dated 2 May 2014.


Under the procedure detailed in the order, Richard Fleming was appointed as the CMP Administrator (to represent the CMP) and Richard Heis was appointed as the General Estate Administrator (to represent the General Estate), with separate legal advisers, with a view to negotiating a settlement.


In order to set the parameters for the negotiation, on 20 May 2014 the General Estate Administrator and the CMP Administrator exchanged position papers.  The General Estate Administrator’s position paper is available here (PDF 2.05 MB) and the CMP Administrator’s position paper is available here (PDF 124 KB).  The CMP Administrator subsequently served a reply to the General Estate Administrator’s position paper, and the reply is available here (PDF 319 KB).


In summary, the General Estate Administrator’s position was:


(a) There should be a final reconciliation of the CMP as at the PPE, such that sums payable between the two estates should be netted, resulting in a single net payable of $9,439,071 from the General Estate to the CMP.  Alternatively, the CMP has a claim for damages for breach of trust, and the claim would be calculated in much the same way as a final reconciliation, resulting in the same net payable to the CMP.

(b) The General Estate should pay $29,865,662 for an assignment of all outstanding receivables due to the CMP.  This value included discounts for the costs of recovery and for early payment.

(c) The General Estate should be given credit of $12,842,406 for the netting of a CMP liability against a General Estate asset in a proposed settlement with a third party.

(d) The CMP should pay $6,815,535 towards the costs of the two estates for the period from 1 May 2014 to the closure of the CMP (which was notionally anticipated to be on 30 November 2014 if a settlement were approved).

(e) The CMP should pay $11,627,248 to compensate the General Estate for the fact that costs would no longer be split between the two estates following the accelerated closure of the CMP.

(f) On a net basis, taking account all of the above, the General Estate should make a payment of $8,019,544 to the CMP in full and final settlement of all claims between the two estates and in exchange for the CMP’s outstanding receivables.

 

The CMP Administrator’s position, in summary, was:

(a) There should not be a final reconciliation of the CMP as at the PPE.  Instead, the General Estate is subject to tracing and/or unsecured breach of trust claims for all funds which the firm should have segregated but did not, without any credit being given for sums due from the CMP to the General Estate.  As such, the General Estate should pay $51,471,843 to the CMP. 

(b) The General Estate should pay $32,549,998 for an assignment of all outstanding receivables due to the CMP.  This value did not include any discounts for costs of recovery or for early payment.

(c) The General Estate should be given credit of $12,842,406 for the netting of a CMP liability against a General Estate asset in a proposed settlement with a third party.

(d) The CMP should contribute towards the costs of the two estates for the period from 1 May 2014 to the closure of the CMP, the quantum of which would be confirmed during the negotiation.

(e) The CMP should not pay anything to compensate the General Estate for the fact that costs would no longer be split between the two estates following the accelerated closure of the CMP.

(f) On a net basis, taking account all of the above, the General Estate should make a payment of $71,179,435 to the CMP in full and final settlement of all claims between the two estates and in exchange for the CMP’s outstanding receivables.


On 22 May 2014, there was a meeting between the lawyers for the two sides to discuss and test the legal arguments in support of the respective parties’ positions.  On 23 May 2014 there was then a meeting between the two sides to negotiate a commercial settlement.  The General Estate Administrator and the CMP Administrator agreed a settlement, subject to the permission of the Court for the General Estate Administrator, on the one hand, and the CMP Administrator, on the other hand, to enter into the settlement.


During the course of the meetings, the CMP Administrator acknowledged that certain elements of the claim stated in his position paper with respect to point (a) above were not recoverable and that the maximum value of the CMP’s tracing and/or unsecured breach of trust claims was approximately $44 million, plus an additional amount in respect of the costs incurred by the CMP as a consequence of the breach of trust.


Terms of the proposed settlement


The proposed settlement is as follows:
(a) The General Estate will pay $31,029,303 to the CMP in discharge of all tracing and other claims against the General Estate.

(b) The General Estate will pay $29,865,662 (ie the discounted amount) for an assignment of all outstanding receivables due to the CMP. 

(c) The General Estate will be given credit of $12,842,406 for the netting of a CMP liability against a General Estate asset in a proposed settlement with a third party.

(d) The CMP will pay $6,815,535 towards the costs of the two estates for the period from 1 May 2014 to the closure of the CMP, even if the CMP closes later than 30 November 2014.

(e) The CMP will not pay anything to compensate the General Estate for the fact that costs would no longer be split between the two estates following the closure of the CMP.

(f) On a net basis, taking account all of the above, the General Estate will make a payment of $41,237,024 to the CMP in full and final settlement of all claims between the two estates and in exchange for the CMP’s outstanding receivables.


By paying $31,029,303 to the CMP in discharge of all tracing and other claims into the General Estate, the intention is to compensate the CMP in full for any breaches of trust and, in so doing, to eliminate all Shortfall Claims into the General Estate, such that the only unsecured claims that clients will have will be Parallel Claims.


As noted above, the agreed figures take account of credits given to the General Estate in respect of netting in the third party settlement (approximately $12.8 million – point (c) above) and in respect of certain other proposed settlements (approximately $14.4 million – within the figure at point (b) above).  These credits assume that those settlements will in fact be signed and/or that the netting will be achieved in some other way. In the event that there is no such netting, or the netting is in a lesser amount, the General Estate will make a payment to the CMP to put the estates in the position they would have been in if no credit or a reduced credit (as appropriate) had been taken into account in the settlement calculation.


The General Estate Administrator and the CMP Administrator have each taken separate legal advice and, as described below, have analysed the impact of the proposed settlement on their respective estates.  The General Estate Administrator has concluded that the proposed settlement is in the best interests of the General Estate and will result in a better outcome for the firm’s creditors than if the settlement were not entered into.  Similarly, the CMP Administrator has concluded that the proposed settlement is in the best interests of the CMP and will result in a better outcome for the firm’s clients than if it were not entered into.


Impact of the proposed settlement


The proposed settlement will have a substantial beneficial impact on both the General Estate and the CMP.  This is demonstrated by the Administrators’ Indicative Impact Statement (PDF 173 KB). 


The figures on page 6 of the Indicative Impact Statement show that, if the proposed settlement is implemented:

(a) The CMP should be able to make aggregate distributions of 90.6c in the $, which is considerably better than: (i) the illustrative range of 84.9c to 86.2c in the $ in the “non-settlement scenario”, which takes account of the potential costs of litigation and of a tracing exercise; and (ii) the range of 85.5c to 86.7c in the $ in the Administrators’ 31 March 2014 scenario, where there is no litigation or tracing exercise, but where the benefits of swift resolution from the settlement are excluded.

(b) The General Estate should be able to make aggregate distributions of between 91.2p and 104.8p in the £, which is equal to or better than: (i) the illustrative range of 90.2p to 103.2p in the £ in the “non-settlement scenario”; and (ii) the range of 91.2p and 104.4p in the £ in the Administrators’ 31 March 2014scenario.
By improving (and accelerating) the likely aggregate distributions from both estates, the proposed settlement would benefit all clients and all creditors, although there is one class of clients (‘Decreased Clients’) whose benefit from this requires further explanation.


Decreased Clients are clients whose client money claims (which are based on their positions’ ‘PPE value’) have a greater value than their associated contractual rights against MFG UK (which are based on their positions’ subsequent close-out value).  These clients have separate breach of trust claims known as Shortfall Claims, which arise from MFG UK’s failure to segregate sufficient money for clients.  (Further information about Shortfall Claims is available from the Administrators’ website.


As explained above, the proposed settlement would involve the General Estate making a payment to the CMP to cure the breach of trust, and this would have the effect of eliminating all Shortfall Claims.  This means that the proposed settlement would improve Decreased Clients’ recoveries from the CMP, but would do away with their ability to recover anything from the General Estate with respect to the remaining shortfall.  Nevertheless, the Administrators consider that the proposed settlement would result in such a substantial increase in the value and speed of distributions from the CMP that Decreased Clients will be in a better position than they would have been in without a settlement.


By way of explanation of the figures, so far as the General Estate is concerned:


(a) Although the payment to the CMP would mean that the General Estate would have less cash available to pay creditors, the payment would eliminate all Shortfall Claims and would reduce the value of Parallel Claims against the General Estate, so the notional impact on the General Estate would be a very great deal less than a reduction in assets of $41.2 million.  Further, the settlement would avoid the risk of having to pay a substantially larger sum to the CMP if the CMP’s claims were litigated, and the General Estate lost. 

(b) The earlier closure of the CMP would remove the continuing FX risk to which the General Estate is exposed by reason of the CMP, and client money claims, being denominated in USD, while the funds in the General Estate, and provable debts, are denominated in GBP.

From the perspective of the CMP:

(a) Although the CMP will receive less than the full amount of its possible claim for breach of trust, it avoids the risk of recovering substantially less, if it litigated its claims and lost.

(b) The agreed settlement amount of the breach of trust claim will be paid in full, notwithstanding that the CMP’s personal claim for breach of trust would only rank for payment of a dividend in the General Estate, which may be at a rate less than 100p in the £.

(c) The amount which the CMP is ‘giving up’ in respect of the breach of trust claim is offset by: (i) the saving in the amount of overall administrative costs which the CMP would be required to bear, if the CMP remained open for the estimated further two years (or more) while the claims were investigated and litigated; and (ii) the costs of litigation, including the irrecoverable portion of costs if the CMP won and the risk of incurring all the costs of litigation if the CMP lost.


In addition, so far as all clients and creditors are concerned:


(a) the reduction in costs resulting from the accelerated closure of the CMP and the avoidance of litigation and a tracing exercise will be a substantial benefit to all clients and creditors; and

(b) the accelerated final distribution of client money and closure of the CMP will also be a substantial benefit to all clients and creditors, as it will facilitate earlier payments out of the two estates. 


Procedure down to approval hearing on 3 July 2014


The Administrators have discussed the proposed settlement with a group of creditors and clients, including those on the creditors’ committee.  As at the time of preparation of this update, no creditors or clients have objected to the proposed settlement. 


The remaining steps in seeking approval for the proposed settlement, per the order dated 1 May 2014.


(a) The CMP Administrator and General Estate Administrator shall file any additional evidence by 4.30 pm on 19 June 2014.

(b) Any creditor or client of MFG UK who wishes to be represented at the Substantive Hearing must file and serve notice identifying the Order they will seek, together with any evidence in support, as soon as possible and in any event by 4.30 pm on 26 June 2014.

(c) The General Estate Administrator shall lodge an Application bundle at Court by 4.30 pm on 30 June 2014.

(d) The General Estate Administrator, the CMP Administrator and any creditor or client of MFG UK wishing to be represented at the Substantive Hearing shall lodge and exchange skeleton arguments by 4.30 pm on 30 June 2014.

(e) There will then be a substantive hearing on 3 July 2014 at which the CMP Administrator and the General Estate

 

Administrator intend to seek the Court’s permission to enter into the settlement.

If any creditors or clients have any concerns about the proposed settlement, the Administrators strongly encourage them to contact the Administrators as soon as possible.


Allocated but unclaimed’ clients


In order to resolve and close the CMP, the Administrators also need to deal with those clients who are shown in MFG UK’s records as being entitled to make client money claims, but who have not claimed.
The Administrators are applying for a direction that they no longer need to make provision in the CMP for those ‘allocated but unclaimed’ clients, and can accordingly distribute the funds to other clients. This part of the application will also be dealt with at the 3 July hearing.


Further information


All further notices in relation to the Client Money Resolution Application will be given by way of advertisement on the MFG UK pages of the KPMG website only (www.kpmg.co.uk/mfglobaluk  and will not be sent to clients or creditors.


Hard copies of all documentation are available by request and free of charge by contacting a member of the Administrators' staff by email at mfglobalclaims@kpmg.co.uk or by telephone on +44 (0) 20 7785 0308.
 
 

 

MF Global UK Special Administration

Contact information

For all non-press enquiries on MF Global UK Limited please email the following:

 

Claim queries 

mfglobalclaims@kpmg.co.uk