In its recent decision in LBI EHF v Raiffeisen Bank International AG [2018],[1]the Court of Appeal confirmed that a non-defaulting party enjoys wide discretion under the default valuation provisions in the 2000 edition Global Master Repurchase Agreement (the “GMRA”) when it comes to determining the “fair market value” of securities, especially in a market that is illiquid or distressed. The only limitation on the non-defaulting party is that it should always act rationally and not arbitrarily or perversely.


Landsbanki Islands (“LBI”), an Icelandic bank, had entered into a number of “repo” trades with Raiffeisen Bank International (“Raiffeisen”), an Austrian bank. Under these types of transactions, one party, in this case LBI, sells a portfolio of bonds to the other, in this case Raiffeisen, agreeing to repurchase them at a predetermined price at a later date. Repo trades function as a form of secured lending, with the bonds acting as the security, with the agreed repurchase price including an amount by way of interest. As is commonly done, the trades were governed by a GMRA.

On 7 October 2008, as financial markets were still suffering from the fallout of the Lehman Brothers bankruptcy, LBI went into receivership. In turn, this constituted an event of default under paragraph 10 of the GMRA, and Raiffeisen served default notices on LBI the next day.

Once the default notices had been served, the GMRA provided that LBI had to pay Raiffeisen the agreed repurchase price, less the “Default Market Value of Equivalent Securities”.

The applicable GMRA provision on how to determine “Default Market Value of Equivalent Securities” was paragraph 10(e)(ii), which provides that it shall be “an amount equal to their Net Value at the Default Valuation Time” (in this case, 15 October 2008). “Net Value” is then defined as “the amount which, in the reasonable opinion of the non-Defaulting Party, represents their fair market value, having regard to such pricing sources and methods…. as the non-Defaulting Party considers appropriate”.

On the face of it, therefore, this provision confers a wide discretion on the non- defaulting party, in this case Raiffeisen, to determine “fair market value” in the manner of its choosing. Raiffeisen wished to use, as the basis of its valuation, market quotations obtained for equivalent securities at the default valuation time, when the repo market was still experiencing distressed conditions following the Lehman Brothers collapse.

LBI disagreed with Raiffeisen’s determination of fair market value, and subsequently commenced proceedings against Raiffeisen.


LBI argued before the High Court that, despite the broad contractual wording in the GMRA, Raiffeisen’s discretion to determine “fair market value” should nevertheless be limited in a number of ways. As “fair market value” is not defined in the GMRA, the judge had to decide what the meaning of the expression was.

The High Court ruled against LBI. On appeal to the Court of Appeal, LBI’s central remaining argument was that the phrase “fair market value” implied that there must be “a willing buyer, willing seller, knowledge of the asset in question and a lack of compulsion”. This meant that Raiffeisen was not permitted to have regard to quotations obtained for equivalent securities whilst the market was experiencing distressed or illiquid conditions. This method would produce an unduly low value, and would amount to simply determining “market value”, rather than “fair market value” as required by the GMRA.

In support of this argument, LBI referred to a number of Commonwealth authorities on the meaning of “fair market value” in other agreements, which supported the notion that the word “fair” meant that the market price used in a valuation must have some “element of consistency which precludes the existence of a transient boom or sudden panic”, and must be realistic.

Raiffeisen countered that, in contrast to the context of the Commonwealth authorities, the discretion conferred by the GMRA expressly extended to the “pricing sources and methods” used in the valuation. To place a prohibition against using quotations obtained during distressed or illiquid market conditions would place a significant restriction on this discretion, and one that was fundamentally inconsistent with the language of the GMRA provision.

The Court of Appeal ruled in favour of Raiffeisen. The Commonwealth cases to which LBI referred were dismissed as being largely unhelpful since they involved different factual contexts. The restriction on Raiffeisen’s discretion sought by LBI did not appear to be within the express terms of the GMRA, nor was there any basis for its implication. In particular, the Court of Appeal stated that implying such restrictions would be contrary to the express language of the provision, in particular the wide discretion conferred on a counterparty over the “pricing sources and methods”.

The only implied restriction on any counterparty’s,(i.e. Raiffeisen’s) discretion is therefore the usual stance taken when determining whether contractual discretions are “fair”, which is that the decision maker must not act rationally, arbitrarily or perversely.[2]

The Court of Appeal declined to provide any further clarification of the meaning of the word “fair” in regards to the phrase “fair market value” in a GMRA. It noted that as the GMRA is used in respect of a wide variety of financial instruments, there was a danger that providing a definition which worked in the context of repo trades might inadvertently hinder the phrase’s utility in other contexts.


As the GMRA is of extensive use within financial markets and repo transactions, this decision provides some welcome further clarity on the scope of a non-defaulting party’s discretion when determining “fair market value” under the GMRA’s default valuation provisions, at least with respect to the specific context of repo transactions.

For more information on or any guidance or advice on drafting GMRAs, Cleveland & Co external in-house counsel, your specialist outsourced legal team are here to help.




[1]LBI EHF v Raiffeisen Bank International AG [2018] EWCA Civ 719

[2]Socimer Bank v Standard Bank[2008] Civ 116