In CFH Clearing Limited v. Merrill Lynch International [2019] EWHC 963 (Comm), the High Court has dealt with the issue of whether or not a bank was obliged to reprice or cancel foreign exchange spot trades entered into at a time of severe market disruption, in accordance with what was claimed to be “market practice”.


CFH Clearing suffered serious losses in a large number of automated FX trades entered into during the ‘Swiss flash crash’ of 2015. After the event, a number of banking counterparties agreed to limit CFH Clearing’s losses to a market-recognised ‘official low’. However, Merrill Lynch did not enter into such an agreement with CFH Clearing, which in turn then sued Merrill Lynch to recover the losses it suffered over and above the market cap.


The swaps entered into by CFH Clearing with Merrill Lynch were governed by a 2002 ISDA Master

Agreement, an FX Confirmation Agreement, and also by Merrill Lynch’s terms of business.

The High Court granted summary judgment in respect of all claims, holding that there was no real prospect of the claim succeeding and there was no other compelling reason for the claim to proceed to a trial.

On appeal, CFH Clearing advanced breach of contract claims based solely on Clause 7 of Merrill Lynch’s terms of business. Such document stated in relevant part that: “… all transactions are subject to all applicable laws, rules, regulations however so applying and, where relevant, the market practice of any exchange, market, trading venue and/or any clearing house and including the FSA Rules…”

CFH Clearing argued that Clause 7 of Merrill Lynch’s terms of business incorporated FX market practice into the terms of its agreement with Merrill Lynch. Specifically, CFH Clearing claimed that Merrill Lynch was in breach of the FX market practice to adjust or cancel deals, when extreme events (such as the Swiss flash crash) occurred, which caused those deals to occur at prices outside the normal market range. In essence, CFH Clearing argued that Merrill Lynch’s terms of business imported into the FX transactions a contractual obligation to comply with “market practice”. As a result, such obligation required the bank to re-price the transactions at the EBS low, or otherwise cancel them.

This contention was denied by Merrill Lynch, whose position was that market practice was too vague and uncertain to be incorporated as a contractual term. Besides, the bank claimed that the purpose of Clause 7 of its terms of business was simply to ensure neither party was obliged to act in a way which breached any laws, rules or regulations.

CFH Clearing also argued that Merrill Lynch was in breach of its obligations under its best execution policy. This included a duty to produce a fair result and to take all necessary steps to obtain the best possible results for its client which, in this case, meant complying with market practice.

CFH Clearing also brought a claim in tort. Such claim alleged that Merrill Lynch had assumed a duty to take reasonable care in order to ensure the trades were priced correctly and, where orders were wrongly priced due to market turbulence, to retrospectively reprice them.

The Court of Appeal dismissed the appeal, finding that there was no arguable basis for holding that such an agreement had been made by the parties. The term “subject to” did not incorporate “market practice” into the contract; rather it meant that neither party was required to act contrary to such market practice (in which case it would be relieved of its contractual obligations).

The starting point for the contractual analysis was that the parties had agreed that their FX transactions would be governed by a standard ISDA Master Agreement. Besides, the parties had negotiated the specific terms of the Schedule and had incorporated the 1998 FX Definitions, which would have permitted them to provide for market disruption. The transactions were therefore governed by a detailed contract on industry standard terms, which reflected market practice and was tailored by the parties for their specific business relationship. The Court of Appeal also referred to Briggs J in Lomas & Ors v JFB Firth Rixson Inc & Ors [2010] EWHC 3372. On this occasion, the Court observed that the ISDA Master Agreement is probably the most important standard market agreement used in the financial world. Hence, it remained obvious that it should be interpreted in a manner that met the objectives of clarity, certainty, and predictability, so that the very large number of parties using it should know where they stand. The contention that the parties had agreed to incorporate some general “market practice”, not reflected in the ISDA Agreement and overriding its provisions, was to be treated with considerable caution.

The Court of Appeal found it difficult to see how a “market practice” overriding the ISDA Agreement’s standard terms could be derived from the International Code of Conduct and Practice for the Financial Markets. Indeed, such Code recognises that Master Agreements should be entered into to reflect market practices and to provide for exceptional circumstances. However, CFH Clearing’s argument focused only on one provision of that Code, whilst ignoring the more fundamental recognition there that legal certainty (including as to market practices and exceptional circumstances) should be ensured by adopting a Master Agreement.

Furthermore, the Court of Appeal considered that the alleged “market practice” was far too vague and uncertain to be incorporated as a contract term. It was not clear what obligation arose with regard to re-pricing (there being no reference in the Code to the “authenticated market price” or the “official low”), and when a party must re-price and when it must cancel. In the Court of Appeal’s opinion, the inclusion of those two very different routes would give rise, at best, to an unenforceable agreement. The fact that the other liquidity providers “readily” complied with the alleged practice was deemed by the Court of Appeal to be rationalisation after the event. The court also observed that the circumstances and the terms of the relevant contracts with those counterparties were unknown to the court proceeding, and therefore not relevant.

The court had some doubts also as to whether Merrill Lynch’s best execution policy had been incorporated as a contractual term. However, even if such policy had been incorporated, the court rejected CFH Clearing’s case on this issue. There had been no problem with the execution of the trades, which had been executed promptly and at the price prevailing in the market. In the court’s view, there was no real prospect of establishing that the policy would extend to a requirement to retrospectively adjust the pricing of the trades, nor to cancel them, where the price of the trades executed had been affected by market turbulence.

As per the claim in tort, it was unclear on what basis a duty would arise. CFH Clearing accepted that Merrill Lynch was not a fiduciary, and this was borne out by Merrill Lynch’s standard terms of business and by the express representations made by the parties under the ISDA agreement. Therefore, the court held that there was no real prospect of establishing a duty of care, on the basis of the relationship between the two “arm’s length” professional parties.

In any event, the court did not find a breach of any duty to ensure the trades were correctly priced, as alleged by CFH Clearing. The “mispricing” had been caused by market turbulence, and Merrill Lynch had carried out the orders placed by CFH Clearing at the then current prices. In the circumstances, it was unclear how a claim that Merrill Lynch had failed to ensure the transactions were priced correctly could be sustained. As the court noted, the real complaint arose from the fact that Merrill Lynch has executed the trades as instructed by CFH Clearing. Then, CFH Clearing sought to change or unwind the contract.

Finally, the Court of Appeal also firmly rejected the suggestion that the unusual and important nature of the market events was itself a compelling reason that the matter should be allowed to proceed to trial. The Court of Appeal remarked that there was no reason for CFH Clearing not be held to its bargain on the basis that it: (a) was a sophisticated commercial party who had entered into automatic transactions at the next available price without specifying a limit; and (b) had negotiated and agreed with the bank the ISDA Agreement, an agreement in which it could have, but did not, provide for market disruption.


The judgment is also noteworthy as the latest in a series of decisions by the English Courts to emphasise the importance of certainty and predictability in the interpretation of ISDA Master agreements more generally.

The Court of Appeal’s judgment represents a welcome endorsement of an important (if not obvious) fact: if contracting parties use ISDA Master documentation, they want their deals to be governed by its terms. In doing so, it is unlikely that parties have intended to agree unspecified terms which contradict the terms of ISDA documentation.

It is unsurprising then that the Court was unwilling to find that the bank should be required to act in accordance with a concept as potentially broad and uncertain as “market practice”, specially when the parties were operating under the comprehensive and widely used provisions of an ISDA agreement.

Banks therefore will also be reassured that any best execution policies derived from the Conduct of Business rules are unlikely to impose an obligation on them to cancel a trade or reprice it where the price has been affected by market turbulence.

The message to parties is clear: if you want to vary the terms of ISDA Master Agreements, then make sure you do so explicitly.

To read the ruling please see: CFH Clearing Ltd v MLI [2020] EWCA Civ 1064.

For more information, and any guidance or advice on drafting and negotiating your terms of business and ISDA agreements, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.