UT (Tax & Chancery) UT-2022-000134 UT-2022-000135 UT-2022-000137 - [2025] UKUT 00214 (TCC)

The Authority submitted that Mr Lopez’s alleged strategy would have placed him in breach of the Mandate. His strategy did not involve hedging against a “highly likely near term exposure to risk”, nor was it underpinned by a “sound risk management rationale”. The Authority submitted that this, too, made it unlikely that Mr Lopez was pursuing this strategy.

Mr Jaffey submitted that the Anticipatory Hedging Strategy is expressly recognised as legitimate in the Mandate; and the MHI Compliance Report had concluded that Mr Lopez’s trading was not in breach of the Mandate.

Mr Lopez did not seek the evaluation and approval of the Anticipatory Hedging Strategy by Mr Urra or Mr Heiberg in accordance with the requirements of the Mandate. Mr Lopez’s evidence was that his strategy was “completely common” and “entirely normal practice”. Whilst the Tribunal accepts that anticipatory hedging is often undertaken by market makers, the difference is that Mr Lopez was, on his own account, placing orders of 200 lots or more to seek to position himself for RFQs that represented only a small portion of the Desk’s business. We would expect that, at the very least, he would have discussed with Mr Urra to confirm that his proposed strategy did not require approval under the Mandate.

The Mandate defines what it means by “anticipatory hedging” for its purposes. Anticipatory hedging was only permitted under the terms of the Mandate where there was a “highly likely near term exposure to risk” and where there was “a sound risk management rationale for such anticipatory hedging”. We do not place any weight on the conclusions expressed in the MHI Compliance Report in this regard. Whilst Compliance had interviewed Mr Lopez, the report seems only to have identified the explanations which had been provided by Mr Urra and does not expressly record that Mr Lopez said he was pursuing a different strategy. In addition, the conclusion reached was expressed as “to the extent that these were placed with a view to establishing a hedge against expected near term customer trades or to establish a basis position for future sale to clients, would fall into the category of “anticipatory hedging”…”, ie by prefacing with “to the extent that…”, it assumes the required elements are met.

We accept that the phrase “highly likely near term exposure to risk” is not defined or explained further by the Mandate, and that it does not require that the exposure be highly likely to materialise within any specified period of time. However, based on the conclusions reached at [557] to [568] above in relation to the 93 RFQs and directional risk, the Tribunal is not persuaded that there was a “highly likely near term exposure to risk”. Mr Lopez was not regularly trading cash bonds with clients in the size that would justify anticipatory hedging in the size of the Large Orders, and the level of client demand was not sufficiently predictable to explain or justify taking this amount of directional risk. We accept Mr Creaturo’s opinion that hedging in these circumstances was “purely speculative”.

For the same reasons, we have significant doubts as to whether there could be said to be a “sound risk management rationale” for the Anticipatory Hedging Strategy. The Large Orders were not being placed for risk management reasons; even on Mr Lopez’s account they were being placed so that he could obtain anticipatory hedges at beneficial prices and offer more competitive prices to RFQs once received.

However, we do take account of Compliance’s apparent focus on the Desk’s limits and accept that each of Mr Lopez’s Large Orders were of a level where they could be held overnight without breaching the Desk’s limits, and Mr Lopez did not place concurrent Large Orders. Mr Shivji did refer us to F31 where Mr Lopez placed a Large Order of 400 lots very close to the end of the day, at 17.46.21.136, a time at which Mr Urra also had a Large Order of 499 lots on the market, and if they had both traded this would have taken them over the Desk’s PV01 limit. That is correct as a factual matter, but not relevant when assessing, on a standalone basis, the Anticipatory Hedging Strategy as put forward by Mr Lopez.

The Tribunal therefore finds that the Anticipatory Hedging Strategy would result in an increase in market risk and was not within the exception for anticipatory hedging as set out for the purposes of the Mandate.