Upper Tribunal Tax and Chancery Chamber

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

Fecha: 31-Ene-2025

Mandate

Mandate

434.

The Traders each gave evidence that they believed their trading was permitted by the Mandate:

(1)

Mr Urra did not accept that the Desk was only permitted to carry out market making in cash EGBs and not in Futures. He said he did not recall that the Mandate permitted trading in Futures only for the purpose of hedging. He considered that speculative positions, even those taking directional risk, would be within the Mandate. He did not think the Mandate was scrutinised, and interpreted it as a wide mandate, and took the position that as long as a trade was within the Desk’s limits, a trader was permitted (by the Mandate) to carry the risk.

(2)

Mr Lopez did not have a specific recollection of being shown the Mandate; but it is a document he would have known about, and the limits and concepts referenced therein were familiar to him and consistent with his understanding of what the Desk was allowed to do and did in practice. Mr Lopez emphasised that the Mandate permitted “transactions in hedging instruments in anticipation of a highly likely near term exposure to risk, where there is a sound risk management rationale for such anticipatory hedging”.

(3)

Mr Sheth couldn’t recall having seen the Mandate at the time, but took the position that his manager, Mr Urra, had shown him the Information Discovery Strategy and therefore it must be within the Mandate.

435.

Mr George, Mr Jaffey and Mr Bailin referred to the conclusions reached by MHI, submitting not only that the Trading Strategies complied with the Mandate but that what mattered was whether the Traders thought that they would be considered by Compliance to be in breach of the Mandate if they pursued the Trading Strategies.

436.

The Tribunal finds it is objectively clear from the terms of the Mandate that:

(1)

The Mandate authorises market-making in EGBs, which would include cash BTPs, and hedging in EGB Futures (including BTP Futures) (which we find are Government bond futures and not exchange traded interest rate futures for this purpose).

(2)

The Mandate does not authorise market making in Futures.

(3)

The market making policy refers to the size of the Desk’s market making inventory and says it must be designed not to exceed, on an ongoing basis, the reasonably expected near-term demand of market making customers. However, this reference to the inventory which may be held is clearly to the instruments in which the Desk may market make, ie EGBs/BTPs, but not the hedging instruments, the Futures.

(4)

The Mandate requires that overall trading and hedging strategies must be evaluated and approved by the Desk Head (Mr Urra) and Division Trading Head (Mr Heiberg) (after consultation with the Risk Management and Compliance departments). It provides that Mr Urra and Mr Heiberg must demonstrate that proposed new or amended strategies will not present a high risk to MHI, can be managed within limits, will be appropriately controlled and will comply with the Volcker Rule’s requirements.

437.

We regard the Traders’ attitudes towards the Mandate as potentially significant.

438.

The Traders did not seek approval for their Trading Strategies in accordance with the requirements of the Mandate, a matter which was not addressed by the MHI Compliance Report. This was in circumstances where Mr Urra was responsible for the Desk’s adherence to the Mandate and, on his own account, had devised a new strategy that was not being used by others in the market; whilst Mr Lopez described the practice of anticipatory hedging as “entirely normal practice”, this failed to reflect the fact that the size of the orders he was placing was targeted at a size of RFQ which represented only about 3% of those sent to MHI; and Mr Sheth put forward an explanation of not having seen the Mandate but assumed it must comply as he was being shown a strategy by his manager, even though the training he had undertaken at MHI must have made it clear to him that the Desk’s activities were constrained, and that he must act within limits.

439.

The MHI Compliance Report concluded that:

“The large futures orders, 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”, and are permitted by the Desk’s mandate.”

440.

We have already expressed our concerns in relation to the position as understood by Compliance at that time. In addition, we consider that the framing of this conclusion, by reference “to the extent that…” the trades were placed for the stated purpose weakens the strength of this conclusion.

441.

In his interview with the Authority Mr Joshi had described speculative pre-positioning in order to meet anticipated client demand as being within the scope of the Mandate. Having read those pages, we agree that Mr Joshi was discussing the purchase of Futures rather than the cash bonds (as the Authority had referenced the orders being placed by Mr Sheth, asking how these fit into the facilitation of client business, expressly adding that this was effectively asking about the Desk’s Mandate). Mr Joshi said it was legitimate to be positioning yourself in anticipation, not of the client coming back, but others in the market coming to execute an order. The Authority questioned whether this was separate from making money from client business, and Mr Joshi said that they were not “outright prop trading” but nevertheless in order to service clients you need to maintain some inventory, and they need to manage that inventory. However, Mr Joshi made it clear that they had asked themselves what the Traders were doing, as this was a client-based business, but had checked that they were within limits and had confirmed with the Chief Risk Officer that they were within their Mandate.

442.

When Mr Heiberg was interviewed by the Authority, he told the Authority the Mandate permitted “anticipatory trading”, building a portfolio ready to sell to clients. However, we consider that Mr Heiberg was discussing cash BTPs; the transcript does not support a conclusion that Mr Heiberg thought that the Mandate permitted building a portfolio of, and holding as inventory, Futures rather than cash BTPs.

443.

Reading the MHI Compliance Report as a whole and the transcripts of the Authority’s interviews with Mr Heiberg and Mr Joshi, the Tribunal accepts that MHI had not at any stage concluded that the Traders were acting outside the Mandate. We consider that MHI’s conclusion was at least in part based on the fact, which is agreed, that the Traders did not breach the Desk’s limits.