HL Deb 09 November 1989 vol 512 cc1067-9

261A The Lord Williams of Elvel to move, That this House do disagree with the Commons in their Amendment No. 261.

Lord Williams of Elvel

My Lords, I beg to move Amendment No. 261A standing in my name. It is a Motion to disagree. Amendment No. 261 raises a number of problems with which we have to take issue. The original draft, which appeared during the summer, was the subject of correspondence, as I know, between the Insolvency Practitioners' Association and the Government. The problem is that it should be the responsibility of the recipient cover for margin to satisfy himself or herself that the property provided is in the beneficial ownership of the provider. That should be the responsibility of the recipient. In our view it cannot be right for the beneficial interests of third parties in trust property to be alienated by statute to cover debts of the market. The proposal as it stands seems to us to be wrong. Therefore we wish to oppose it.

Moved, That the House do disagree with the Commons in their Amendment No. 261.—(Lord Williams of Elvel.)

9.30 p.m.

Lord Trefgarne

My Lords, the first new clause inserted by Amendment No. 261 deals with the narrow set of circumstances relating to specialised financial markets, essentially the futures and options markets which operate a margin system. The clause reproduces, with minor modifications, the effect of Clause 146 and adds a further provision to protect the application by an exchange or clearing house of property subject to certain prior interests in a case where such property is provided as margin in relation to market contracts and the exchange or clearing house does not have notice of the prior interest at the time that the property is provided. This is to ensure that the guarantee of performance in connection with which the margin is taken is not compromised by attempts to pursue possible competing claims.

Perhaps I may explain why the ability to apply margin taken in good faith is so vital. The clearing house provides the guarantee of performance on all the contracts registered with it, typically in excess of 150,000 contacts a day in the case of the London clearing house which clears the main futures and options markets. It is not uncommon for the total daily margin call made by the clearing house to exceed £100 million, and at any one time the clearing house may hold £500 million or more in margin.

It will readily be seen that the exposure is enormous and that there could be very grave consequences if the application of the margin could be prevented or delayed in the event of a default. In a matter of such importance the clearing house will naturally arrange its procedures in relation to margins so as to ensure as far as possible that the margin which it takes is free from any prior right or interest. However, some uncertanties remain; for example, the position in a case in which the firm was unknown to the clearing house, using clients' money to margin its house account. It may be that as matters stand the clearing house holds that money on terms which allow it to be applied in accordance with its rules, notwithstanding that the money should not have been provided to margin those contracts. Even if that were not the case, we think it quite likely that in those circumstances the clearing house's right to apply the property taken in good faith would be upheld over any claim to a prior interest. The clearing house would be in a position analogous to that of a purchaser in good faith for value without notice.

This is a legally uncertain area, and because the ability to use margin is a crucial feature of the clearing system on which the integrity of the margin markets depends uncertainty here must be just as damaging as in the case of the insolvency law uncertainties with which the rest of Part VII deals. For that reason we have been persuaded that it is right to make provision as to the application of margin in the narrow set of circumstances covered by this clause.

I have explained at a little length the background to this clause and why we believe it is necessary. I hope that in the light of that explanation the noble Lord will feel able to withdraw his Motion and that your Lordships will in due course agree to the amendment proposed by the other place.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord, but he has in very clear terms explained the problem. Other people's money can be pledged unknowingly in margin for contract. The other people will therefore and thereby be deprived if the margin is called. The sums involved could be £1 million, £100 million or £1,000 million. It seems to me to be wrong that if someone owns property beneficially and finds his property pledged in margin for a contract, if that contract were called he could lose his money without knowing about it at all. It is a very odd situation. It is up to the recipient of the cover for margin to satisfy himself that the property provided is in the beneficial ownership of the provider. That must be a very basic principle, whatever the sums involved. I recognise what the noble Lord said about the market and how important it is. However, I still believe that it is a fundamental principle of law that somebody's money cannot be pledged on the margin of contracts or anything else without his agreement. Unfortunately that is what the Government have written in. I have no doubt that the noble Lord will wish to speak further to that point when he moves his amendment, if I withdraw my amendment. In that hope, I beg leave to withdraw my amendment.

Amendment No. 261A, as an amendment to Amendment No. 261, by leave, withdrawn.

On Question, Amendment No. 261 agreed to.