IS Prime v. ThinkMarkets: UK high court sides with ThinkMarkets in $15m lawsuit

Rick Steves

Think Markets said it was a common-sense decision. IS Prime reminded that this ruling only relates to a subsection of IS Prime’s claims against Think Markets.

Deputy Judge Richard Salter QC of the England and Wales High Court has ruled in favor of Think Markets in the $15 million lawsuit brought forth by IS Prime.

IS Prime Limited filed the case against three entities belonging to Think Markets – TF Global Markets (UK), TF GLobal Markets (AUS), and Think Capital Limited – over an exclusivity agreement that was promised to IS Prime by Think Markets following the acquisition of ThinkLiquidity LLC’s assets by ISAM in 2017.

The plaintiff claimed Think Markets breached the agreement and caused a loss of approximately $15 million. The defendants alleged it was the other way around.

Exclusive agreement breached amid MiFID II

The exclusivity agreement said that Think had to ensure each of its affiliates would trade any available products exclusively with IS Prime.

In exchange, IS Prime would provide a matched principal brokerage in relation to swap transactions: swaps on equity and commodity indices and potentially other products.

In The Terms of Business, the contract said If we [IS Prime] give you notice of an amendment to the Trading Conditions, from the time of any subsequent transaction that you enter into with us you will be deemed to accept the revised Trading Conditions as issued to you.”

On 8 December 2017, IS Prime sent an email titled “Changes to ISAM Capital Markets Index Swap offering”, in which the Prime Brokerage informed Think Markets that “ISAM Capital Markets [was] moving its index swap business from London to Hong Kong. This decision has been taken as a response to growing regulatory complexity and uncertainty in Europe as a result of MiFID II.”

The decision took effect on 18 December 2017, with all index swap transactions being entered with IS Prime Hong Kong Limited instead of IS Prime Ltd in London.

IS Prime’s Best Execution Report for 2017 dating from April 2018, “Index Swap MiFID II RTS 28 Disclosures” admitted that IS Prime offered a different execution service in respect of Index Swaps prior to December 2017.

Moving from London to Hong Kong posed risks

In the eyes of the prime brokerage, trading in index swaps continued to be “offered” by IS Prime, even after ISAM Capital Markets moved its index swap business from London to Hong Kong.

“[F]ollowing the change in the venue of execution for index swap trading to Hong Kong, [IS Prime] continued to provide the regulated service of ‘Arranging’ in relation to the trading of index swaps by its clients (including being able to accept orders for such trades to be executed by [IS Prime Hong Kong] as the sole venue), and to perform a number of critical functions in relation to its clients’ trading of index swaps”, said Matthew Leverton, who is a partner in the firm of solicitors acting for IS Prime.

Jonathan Brewer, Managing Partner at IS Prime, testified: “[IS Prime] did not make any statement in December 2017 to the effect that index swaps were no longer offered by [IS Prime]. [IS Prime] continued to offer index swaps from that time, albeit on terms that it would act and receive client orders as an arranger and that the sole venue of execution would be via its affiliate, IS Prime Hong Kong Limited.

“After the execution of index swap trading moved to Hong Kong, [IS Prime] continued to perform a regulated activity in relation to the relevant trading activity. Specifically, [IS Prime] was (and is) ‘arranging (bringing about) deals in investments’ and ‘making arrangements with a view to transactions in investments’ in that it was making arrangements which enabled and facilitated the trading of index swaps and, where requested, receiving and transmitting trading orders on behalf of a client to [IS Prime Hong Kong] .. In conjunction with undertaking this regulated activity, [IS Prime] continued (and continues) to hold client money for clients trading index swaps with [IS Prime Hong Kong].

“In practice, [IS Prime’s] activity in relation to index swaps involves performing a variety of services which for convenience could be divided into three categories: (i) client-facing or client relationship services relating to the trading of index swaps .. (ii) providing the means by which index swaps trading could be effected .. and (iii) holding and reconciling client money in relation to the trading of index swaps.”

Stephen Elam, a partner in the firm of solicitors acting for Think Markets, argued that there were risks and potential adverse consequences for a brokerage firm in the position of Think Markets agreeing to execute trades with a counterparty in Hong Kong which is not regulated (and where the trades themselves are not regulated products).

“Linked to this is monitoring risk. It would have been harder for the Defendants to monitor an unregulated HK counterparty than it would a FCA-regulated firm in a ‘home’ jurisdiction”, he stated, adding that the increased risks associated with IS Prime Hong Kong as a trading counterparty (by comparison with IS Prime) included additional credit risk.

IS Prime’s Jonathan Brewer said those risks were overstated and those matters were not raised at the time. Had Think done so, these elements of additional risk could readily have been addressed, he said.

Deputy Judge ruled index swaps no longer available

In his decision, Deputy Judge Richard Salter QC first questioned whether it is right to rule the dispute between IS Prime and Think Markets in summary judgment, as requested by the defendants. Given that the issues which arise on this application are issues of contractual interpretation, these were suitable for summary determination.

“I have accordingly come to the conclusion that the claim by IS Prime, insofar as it relates to the trading of index swaps after 18 December 2017, has no real prospect of succeeding. IS Prime has no real prospect of overcoming the defence pleaded in paragraph 28(3) of the Amended Reply to Defence to Counterclaim. There is no other compelling reason why the matter should be disposed of at trial. I will therefore give summary judgment under CPR Part 24 in favour of Think on that issue.”

The Deputy Judge explained his ruling: in commercial and contractual context, index swaps were no longer an “Available Product” after 18 December 2017.

“In my judgment, the necessary statement is to be found in the Client Communication Letter, which says in unequivocal terms that “as of Monday 18 December 2017, all index swap transactions will be entered with IS Prime Hong Kong Limited instead of IS Prime Limited in London”.

“That statement is not conditional upon any action by Think. Nor does it contain any offer on the part of IS Prime to continue on the same terms as before, if Think does not want to change. It is simply a statement of what is going to happen.

“In my judgment, a reasonable commercial party in the position of Think would have interpreted that as a statement that, from 18 December 2017, IS Prime would not itself trade that class of product. That is so, notwithstanding the accompanying request to Think to sign up to new terms with IS Prime and IS Prime Hong Kong. Any other interpretation would, in my view, fly in the face of commercial common sense.”

Market understanding of Matched Principal Brokerage

The High Court also decided it will look into the expression “or offered” in the phrase “of a class that is traded or offered or to be traded or offered by IS Prime at the time of entering into this document” in connection to the market understanding of “matched principal brokerage services”. The court will await expert evidence before ruling that issue.

Deputy Judge Richard Salter QC reminded that the Terms of Business states that “we act as principal” and “will not act as your agent to carry out Transactions on your behalf”.

“In that context, it seems to me to be quite unlikely that the parties would have intended, simply by use of the words “or offered”, to expand the exclusivity obligations agreed under the Liquidity Addendum to transactions in which IS Prime did not act as principal, but merely as agent or arranger. A much more likely interpretation is that those words were intended to cover classes of products which IS Prime was prepared to trade, even if it did not in fact do so. That, in my judgment, is the natural meaning of these words in their context.”

Comments from IS Prime and Think Markets

A spokesperson for Think Markets said the company was very pleased with the Court’s findings. “It is a common sense decision that reflects precisely how the relationship between the parties was supposed to work”.

A source at IS Prime reminded that this ruling only relates to a subsection of IS Prime’s claims against Think Markets. “This is a small part of a much wider set of legal actions. As the litigation is ongoing, it is not appropriate to provide further comments at this stage.”

The High Court invited the parties to agree the terms of a Minute of Order giving effect to this judgment and dealing with all consequential matters. If not, the Deputy Judge will either give a ruling by email or direct a short further hearing by video conference.


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