Lehman Brothers Financial SA (LEHNQ)

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The English High Court selected the "Loss" ISDA calculation method for Enasarco's derivative claim against Lehman Brothers Finance SA (LBF).
The specific ISDA provisions selected in the agreement between Enasarco (via an issuer entity named ARIC) and LBF were the Second Method and the "Loss" methodology.
Key points regarding the court's decision on the "Loss" calculation:
The court upheld Enasarco's calculation of "Loss" based on the cost of a replacement transaction, which was determined several months after the early termination date.
It was determined that the "Loss" calculation should reflect the market conditions at the time the calculation was actually made, not hypothetically on the early termination date itself.
The non-defaulting party (Enasarco) was required to determine the "Loss" "reasonably and in good faith," a standard the court found Enasarco had met.
The court rejected LBF's argument that "Market Quotation" should be used (which was the default method if not otherwise specified, but was specifically excluded/overridden by the "Loss" election here), and confirmed that the "Loss" method did not require obtaining quotations from a counterparty with the same balance sheet and rating as the defaulting LBF.

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In the Fondazione Enasarco v Lehman Brothers Finance SA (2015) case, the English High Court found that Enasarco's calculation of loss using the Loss methodology (Second Method) under the 1992 ISDA Master Agreement, referencing market quotations for a replacement transaction, was valid, even though the agreement specified "Market Quotation," as the transaction confirmation controlled and pointed to Loss, which aims for the same economic outcome. The court affirmed Enasarco's reasonable, good-faith determination of loss, rejecting Lehman's arguments for hypothetical pricing and focusing on real market conditions at the time of calculation.
Key Takeaways on the Calculation Method:
Contractual Framework: The parties used a 1992 ISDA Master Agreement, but the specific transaction confirmation elected the Loss methodology (Second Method) for early termination payments, overriding the general "Market Quotation" in the Master.
Loss Methodology Applied: Enasarco calculated its loss by seeking a replacement transaction, finding market quotations, and determining the economic difference, as permitted by the Loss definition.
Reasonableness Test: The court applied the "Wednesbury reasonableness" test, finding that Enasarco's actions, though facing difficult market conditions, were within the bounds of what a reasonable party would do, making the calculation hard to challenge.
Rejection of Lehman's Arguments: The court dismissed Lehman's attempts to:
Use hypothetical pricing instead of real quotes.
Demand quotes from counterparties with identical balance sheets/ratings, finding the ISDA definition didn't require this.
Adjust calculations for market liquidity drops between termination and calculation.
In essence, the court validated the use of the Loss method when specified in the confirmation and upheld the non-defaulting party's (Enasarco's) right to a reasonable determination of loss based on prevailing market realities, despite extreme market volatility.