MF Global Singapore Pte Ltd (in creditors' voluntary liquidation) and others v Vintage Bullion DMCC (in its own capacity and as representative of the customers of the first plaintiff) and another matter

CourtHigh Court (Singapore)
JudgeHoo Sheau Peng JC
Judgment Date25 June 2015
Neutral Citation[2015] SGHC 162
Citation[2015] SGHC 162
Subject MatterConstruction of statute,Companies,Express trusts,Commodity Trading Act,Financial and securities markets,Statutory Interpretation,Certainties,Winding up,Trusts,Regulatory requirements,Market conduct,Securities and Futures Act
Docket NumberOriginating Summons No 289 and 578 of 2013
Published date11 August 2016
Plaintiff CounselAndre Yeap SC, Danny Ong, Sheila Ng, Ong Kar Wei (Rajah & Tann Singapore LLP)
Defendant CounselThio Shen Yi SC, Kelvin Koh (TSMP Law Corporation), Manoj Pillay Sandrasegara, Joy Tan, Lionel Leo, Muhammad Nizam, Stephanie Yeo (WongPartnership LLP)
Hearing Date04 December 2014,02 December 2014,10 February 2015,03 December 2014
Hoo Sheau Peng JC: Introduction

The two applications before me are brought under s 310 of the Companies Act (Cap 50, 2006 Rev Ed) (“Companies Act”) for the court to determine questions arising out of the winding up of MF Global Singapore Pte Ltd (“MFGS”). Originating Summons No 289 of 2013 (“OS 289”) was commenced by MFGS and the joint and several liquidators, Mr Chay Fook Yuen, Mr Bob Yap Cheng Ghee (“Mr Yap”) and Mr Tay Puay Cheng (collectively, “the Liquidators”), against Vintage Bullion DMCC (“Vintage”) in its own capacity and as representative of 57 other customers of MFGS (collectively, “the LFX and Bullion customers”). As Vintage disagreed with the Liquidators’ framing of the issues in OS 289, Vintage lodged Originating Summons No 578 of 2013 (“OS 578”) in its own capacity against MFGS.

Essentially, the central issues in both OS 289 and OS 578 are the same, and concern the treatment of certain forms of profits made by the LFX and Bullion customers under leveraged foreign exchange (“LFX transactions”) and leveraged commodity transactions (“Bullion transactions”) conducted by MFGS. In relation to these forms of profits, Vintage asserts proprietary claims, while MFGS argues that Vintage only has unsecured claims. In the latter scenario, the LFX and Bullion customers would stand as unsecured creditors, and would have to prove these unsecured debts in MFGS’ winding up. Parties thus agreed for both applications to be heard at the same time.

While Vintage was appointed, pursuant to an order of court dated 16 July 2013 in OS 289, to represent the LFX and Bullion customers who have claims for these forms of profits arising out of LFX and Bullion transactions, the order provided that Vintage was “not required to keep any [of the other customers] informed of these proceedings or to advance an argument or to take any instructions from any of them”. For the avoidance of doubt, any decision made in respect of Vintage in this judgment will apply equally to the LFX and Bullion customers who have equivalent claims against MFGS.

Facts MFGS and its model of business

I now set out the facts (with key terms highlighted in bold italics). MFGS was, at all material times, a member and clearing member of the Singapore Exchange Securities Trading Limited, the Singapore Exchange Derivatives Trading Limited, and the Singapore Exchange Derivatives Clearing Limited. MFGS was also a holder of a Capital Markets Services licence (“CMS licence”), issued by the Monetary Authority of Singapore (“MAS”), authorised to carry out the following regulated activities under the Securities and Futures Act (Cap 289, 2006 Rev Ed) (“SFA”): dealing in securities; trading in futures contracts; leveraged foreign exchange trading; securities financing; and providing custodial services for securities.

In the ordinary course of business, MFGS offered a range of over-the-counter LFX and Bullion products which included: cash-settled over-the-counter LFX spot contracts; cash-settled over-the-counter LFX forward contracts; cash-settled over-the-counter LFX non-deliverable forward contracts; over-the-counter LFX option contracts; and cash-settled over-the-counter Bullion spot contracts.

The above over-the-counter products were not traded on any exchange, and involved transactions where the investor would buy or sell currencies or commodities in a bid to profit from fluctuations in exchange rates between two different currencies, or fluctuations in the prices of commodities without physical delivery of the currencies or commodities involved.

For the purpose of facilitating trades in LFX or Bullion transactions, customers were required to open and maintain accounts with MFGS. The relationships between the LFX and Bullion customers and MFGS and the trades were governed by the terms and conditions set out in the account opening form and the Master Trading Agreement (“MTA”), which also enclosed a risk disclosure statement (“the Risk Disclosure Statement”).

Once the accounts were opened, customers would typically place with MFGS funds necessary to enable trades to be executed and to maintain open positions on the trades by way of “margin”. The bulk of MFGS’ customers traded on margin (ie, trading by placing a certain percentage of the value of the position concerned with MFGS). The margin required varied depending on the requirements for trading in the product concerned.

MFGS operated a 24-hour dealing and service desk for customers who traded in LFX and Bullion products. Customers could either trade directly with MFGS by calling MFGS’ desk dealers or by utilising an online platform. An order could be placed with MFGS via either platform so long as a customer had sufficient margin to enter into the transaction. If the customer did not meet MFGS’ margin requirements, MFGS would require the customer to satisfy the margin requirements before entering into an LFX or Bullion transaction.

In respect of the LFX and Bullion transactions, MFGS did not act as its customers’ agent. Instead, a customer concluded an LFX or Bullion transaction directly with MFGS which acted as principal on its own behalf. In other words, MFGS was the direct counterparty to any LFX or Bullion transaction which a customer entered into.

To hedge its own exposure, MFGS engaged in hedge transactions with hedge counterparties, being the Union Bank of Switzerland (“UBS”) in respect of the LFX transactions, and Deutsche Bank (“DB”) in respect of the Bullion transactions. MFGS funded these transactions with its own funds.

The margins placed by customers were deposited into MFGS’ bank accounts which MFGS classified as “Customer Segregated Accounts”. The funds placed in these accounts were segregated from MFGS’ own funds, although MFGS maintained some of its own funds in these accounts. According to the Liquidators, the LFX and Bullion customers’ margins were not onward-placed with any other party, or otherwise utilised by MFGS for the purposes of MFGS’ hedge transactions. Although MFGS maintained a number of Customer Segregated Accounts, MFGS did not open a separate bank account for each customer. MFGS, however, accounted distinctly for each customer’s funds in the Customer Segregated Accounts.

The LFX and Bullion transactions, the “Daily FX Activity Statements” and the “Seg Fund Statements”

MFGS employed a back-office operations system to record the daily LFX and Bullion trade activity for each customer. Daily statements of the accounts of the customers (“Daily FX Activity Statements”) were also produced by the system. As a day-to-day chronicle of the relationship between MFGS and a particular customer, the relevant Daily FX Activity Statements are crucial pieces of documentary evidence presented by the parties.

Basically, a Daily FX Activity Statement contained, inter alia, the following sections: (i) the “Trade Confirmation” section; (ii) the “Forward Liquidation” section; (iii) the “Open Positions” section; and (iv) the “Financial Statement” section. In the ordinary course of business, an LFX or Bullion transaction between MFGS and its customer would occur as described below, and would be recorded in the Daily FX Activity Statements as follows: The customer would initiate a position by entering into an initial trade. MFGS would issue a trade confirmation under the “Trade Confirmation” section to its customer in the Daily FX Activity Statement for that particular day. The transaction was thereafter treated as continuing to remain open until a final trade was entered into. In such a case, the customer would be said to have an “open position”. These open positions would be reflected under the “Open Positions” section of the Daily FX Activity Statement. While a position remained open, the “paper” (ie, notional) value of the open position would be determined with reference to the market price of either the underlying currency or reference bullion (“the daily settlement prices”) in respect of the LFX and Bullion transactions respectively (ie, the transactions were marked to the market). If the movement of the underlying currency or reference bullion favoured the customer, the customer would have unrealised profits. However, if it did not, the customer would incur unrealised losses. The “Unrealised Profits” or “Unrealised Losses” would be reflected in the “Financial Statement” section of the Daily FX Activity Statement. If a customer was not able to meet MFGS’ margin requirements, MFGS was entitled, by cl E4 of the MTA, to issue a “margin call”, ie, to require a customer to deposit with MFGS additional margins in order for the position to be maintained. I will discuss the way MFGS calculated a customer’s margin requirements at item (j) below. While the position remained open, the cost of keeping the position open was debited from or credited to the customer based on the total value of the contract. In respect of the LFX transactions, this cost was known as “forex swap”, and in respect of the Bullion transactions, this was termed “spot interest”. When a final trade was entered into, this was known as “closing” the position. When the position was closed, MFGS would issue a trade confirmation under the “Trade Confirmation” section. The trade confirmation would state the price of the trade, as well as a “Value Date”, which is defined in the MTA as “the date on which the respective obligations of the parties to a foreign exchange or [over-the-counter] transaction are to be performed”. Generally, though not always, the Value Date would be two days after closing a position. The closure of the position at a profit to the customer also gave rise to a sum which would be reflected in the “Financial Statement” section as “Forward Value”. The specific transactions which had been closed out would also be reflected under the “Forward Liquidation” section. On the Value Date, the sum previously...

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