THE SWISS FRANC FLASH CRASH REVISITED: BLACK SWAN MARKET EVENTS, EU LAW AND FOREX CONTRACTS

Target Rich International Limited v Forex Capital Markets Limited [2020] EWHC 1544 (Comm)

Speed Read Summary

This summer, the High Court handed down judgment, dismissing Target Rich International Ltd’s (TRI) claim for compensation and damages in relation to trades it had placed through Forex Capital Markets Limited’s (FXCM) online forex trading platform.

The claim involved a detailed analysis of a foreign exchange dealing contract and the way the foreign exchange market operates generally.  The claimant made much of European law decisions to argue that previous decisions of the English courts were wrong as a matter of law because they did not comply with provisions of European legislation – in particular the Markets in Financial Instruments Directive – and decisions of the Court of Justice of the European Union.

The High Court declined to accept those arguments, in the process offering a helpful summary of the status quo on the incorporation of contractual terms, and the firm line the courts take when considering cases of financial loss caused by market volatility.   The Court has also confirmed the line of case law holding that there is no direct right of action in respect of the COBS rules (or a co-extensive duty of care in tort).

The Court of Appeal has recently upheld the High Court’s decision, declining TRI’s application for permission to appeal.

Facts of the Case

TRI was the claimant.  It is an offshore investment vehicle that sought to trade in the forex market.

The defendant, Forex Capital Markets Limited (FXCM), operated as the provider of an online forex trading platform, through which TRI traded various currency pairs, including the Euro (EUR)/Swiss Franc (CHF) pair.

In 2012, TRI operated a series of accounts with FXCM in which they traded various currency pairs.  One of these was the EUR/CHF pair.

Prior to 15 January 2015, the Swiss National Bank had imposed a cap on the value of the Swiss Franc as against the Euro. However, the Swiss National Bank removed the cap on 15 January 2015 in a surprise announcement that spooked the EUR/CHF market.  During the morning following the SNB’s announcement that day, the “Swiss Flash Crash” ensued: a brief period of volatility where the value of the Swiss Franc rose against the Euro until it levelled off and steadied as afternoon approached.

TRI’s open EUR/CHF positions suffered heavy losses during the flash crash.  TRI speculated EUR would appreciate against CHF.  The effect of the SNB’s removal of the CHF cap was that in fact EUR prices relative to CHF decreased markedly.  The positions therefore became loss-making very quickly on the morning of 15 January 2015.

On that morning, following the SNB announcement, market volatility triggered the following

  • TRI had put in place a “stop loss order” (SLO) in the contract with FXCM, which acted as a way to limit losses on their EUR/CHF positions.
  • The order was that TRI’s open positions would be automatically closed out in the event that the Euro/Swiss Franc rate reached 1.17911 (the “stop loss price”).
  • The SLOs were triggered shortly after the SNB announcement went live.
  • The SLOs were filled by around 1:30pm that day, when EUR/CHF rates had settled at around EUR 1.03.
  • The result therefore was that all TRI’s trades made losses.

What the Parties Argued

TRI brought a claim against FXCM, stating that FXCM had acted negligently and in breach of contract by failing to execute the SLOs immediately.  TRI sought damages for the amount they lost by reason of FXCM’s later execution, which was at disadvantageous exchange rates.

The claim incorporated the following:

  • That the contract between TRI and FXCM contained express and implied terms that FXCM abide by specific instructions given by TRI to FXCM”. TRI claimed that the “stop loss price” was a specific instruction and as such, an express contractual term of the contract which FXCM had breached.
  • Included in the implied terms in FXCM’s contract were, it was argued, the COBS rules contained in the Conduct of Business Sourcebook (COBS) which, via s138 Financial Services and Markets Act 2000, implements Markets in Financial Instruments Directive 2004/39/EC (MiFID).
  • The SLO price was a specific instruction and express contractual term.
  • FXCM owed concurrent duties in tort to execute the SLO.
  • FXCM acted in breach of contract and/or tort in failing to execute TRI’s SLO at the SLO price.
  • TRI therefore suffered loss and damage it would not have suffered were the SLOs at the SLO price.

FXCM argued in defence:

  • That it had not been contractually bound to execute the SLOs and if it had, then all it had to do was close TRI’s positions at the next available market rate.
  • It denied the incorporation/implication of COBS.
  • It denied negligence, specifically that it had a duty of care and;
  • Even if it had acted in breach of a term in the contract (which it denied), it was protected by a force majeure clause (e. a clause that alters parties’ obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents those obligations being fulfilled). The extraordinary event in this case was the flash crash.

The Judge’s Decision

Mr Adrian Beltrami QC, as Judge, ruled that FXCM had not acted negligently and had not breached its contract with TRI by not executing TRI’s SLO at the SLO price.

The Judge’s decision consisted of points including the following:

  • The Court held that COBS and other regulatory obligations do not automatically confer private law rights, and that their existence did not give rise to a duty of care. This holds the line of authority on that point including in Green & Rowley v. The Royal Bank of Scotland plc [2012] EWHC 3661 QB.
  • Because the COBS rules are not implied into contracts as a matter of law, FXCM owed TRI no duty of care to comply with them.
  • The COBS rules could not be implied into the contract as a matter of fact either, whether or not by reference to the so-called officious bystander test.
  • The Judge found that the SLO price was set at a “level of great specificity” to five decimal points. But he found nothing in the contractual documents to support TRI’s case that the SLO imposed an obligation on FXCM “to take its own position at the stop loss price, and so engage in a substantively different sort of business, namely as a market maker, whether or not the corresponding price was available in the market”.
  • The Court also held that if the defendant had owed obligations in tort (which it did not) then there would also have been no breach as the force majeure clause was effective.

*The Briefing Note reflects the position as at the date of publication. The information in this Briefing Note is not intended to amount to legal advice to any person on a specific matter or case. You are advised to obtain specific, personal advice from us about your case or matter and not rely on this Briefing Note.

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