UK: Market Disruption Events

Last Updated: 23 April 2009
Article by John Forrester and Ian Chung

Client Briefing, 21 April 2009

The last six months have been an extraordinary period of time in the financial sector as lenders' relationships with many of their customers have become increasingly strained as the cost of credit (across almost all sectors) increased, providing that credit was even available.

The inter-bank lending markets, which some previously had thought had an almost limitless capacity, virtually disappeared and we moved into a phase where the market focussed on stronger banking capital ratios, a heavier emphasis on interest rate risk in the banking book and more conservative credit assessments.

In the asset finance and corporate lending sectors, this has led to many lenders activating the so-called "Market Disruption Event" (MDE) clauses in their loan documentation. Over the last six months, the use of these provisions is well documented and they have been utilised across the globe by a vast spectrum of lenders.

In a Nutshell

There has been considerable opinion on the operation and applicability of the MDE clause, as the speed of the decline of the credit markets has suddenly transformed what many had previously considered to be a boiler plate provision into an operational headache.

Applying and invoking an MDE was complicated by the fact that lenders tend to employ a variety of legal advisors to prepare their documentation and so MDE provisions can vary significantly from deal to deal, even within the same lender's portfolio. In addition, some borrowers negotiated their documentation to limit the effects of any market disruption, which in the buoyant credit markets of the past appeared commercially acceptable.

Generally an MDE clause operates in loan documentation, where the borrower pays its lender interest comprising three parts; (a) a cost of funds equivalent which, in floating rate loans, is often linked to some prescribed inter-bank rate of a selected interest period (i.e. 3 month LIBOR); (b) the margin; and (c) any additional costs (such as additional regulatory costs).

The most common form of MDE clauses allow a lender to invoke market disruption when there is a disruption event and then to change the cost of funds component to a mutually agreed rate. The usual reasons that permit a lender to invoke market disruption are that:

a. by reason of circumstances affecting the inter-bank market generally, adequate and reasonable means do not exist for ascertaining the selected interest rate;

b. the rate at which deposits in the desired currency are being offered to the lender in the inter-bank market would not adequately reflect the cost to the lender of making the loan; or

c. by reason of circumstances affecting the inter-bank market generally, deposits in the desired currency are not available to it in sufficient amounts in the ordinary course of business.

There are added complications of calling an MDE in syndicated transactions, particularly as the agent bank needs to ensure that it complies with all of its duties (not least the duty of confidentiality) and the fact that any lender invoking such an event will need to consider the consequence of doing so to its reputation and perceived standing amongst its peers.

The Difficulty of Invoking MDE's

Initially, lenders were cautious when invoking these provisions particularly given the large number of commercial, operational and legal consequences that they faced, not least the risk to their reputation.

While the credit markets appeared to be recovering, the gap between the quoted inter-bank rates and the rate at which many commercial banks funded in the market have continued to persist.

This has made it more difficult for lenders to manage the relationship with their customers and, in particular, explain to those customers the consequences of invoking MDEs, particularly when viewed against the lowering of interest rates by the Federal Reserve and many other central banks.

Notwithstanding the difficulties, where applicable, many lenders have called MDEs and the majority of borrowers have had no choice but to accept increased cost for their existing loans, though many borrowers view such cost adjustments as temporary.

What Next?

Invoking the MDE clause is only the first step, as an alternate mechanism for setting the costs needs to be found and agreed. Initially, many lenders were of the view that this disruption was temporary and that eventually the credit markets would ease as liquidity returned.

In some cases, lenders have only been able to obtain overnight or tomorrow night financing (with nothing of longer tenor being either economically viable or available). Consequently, any increased cost to the borrower was uncertain. Many MDE clauses provide that the lenders and the borrowers should negotiate in good faith to resolve such problems and consequently, many lenders agreed alternate rates of financing that were short term in nature (such as 1-month LIBOR) in the hope that when that period expired the MDE would cease and lending would revert to normal, such that lenders would be able to obtain matched funding.

This approach was also more palatable to borrowers who could agree to paying the additional cost of funds for a short term in the hope that LIBOR would again become representative of their lender's cost of funds in the inter-bank market.

Unfortunately, the markets have not reverted to their previous state and the problems of the MDE continue and further complications are on the horizon, particularly if the case is that markets have structurally changed such that the current market conditions are no longer unusual.

From the perspective of many lenders who are trying to return to relationship banking, some mechanism needs to be put in place which gives confidence to their customers (whilst also giving them certainty of cost), while also protecting the lenders from having to disclose to the borrower their own cost of funds in the market. Administratively, agent banks in syndicated deals would also prefer for lenders to agree on an alternative benchmark so that there can be less debate over whether they have taken, or are taking the most appropriate action.

For borrowers, some certainty of cost and a degree of transparency is desired. If an MDE clause has been agreed, and the documentation has been signed, the borrower has to acknowledge that the lender is entitled to activate the clause, but the borrower needs to know that what they are paying is fair and often lenders do not want to disclose the evidence that their funding costs have increased.

There is some confusion in the market as many lenders look to find other publicly available information or indexes that are appropriate for using as reference rates for their funding costs. Borrowers, while reluctant, would also like to find an acceptable alternative to LIBOR and this has led to discussions over possible alternate sources for interest rates such as using indexes of credit default swaps and blended rates quoted by specialist inter-bank brokers.

As these ideas are relatively new, the extent to which they will be successful will not be clear and lenders will need to be careful to ensure that they do not inadvertently give up their rights to call MDEs by placing their absolute faith in an alternate pricing mechanism which could itself be further disrupted.

The Future

Given the current uncertainty on the determination of interest rates, there is value from an operational and relationship banking perspective, in ensuring that any new loan documentation provides as much clarity as possible for borrowers in relation to MDEs so that borrowers are not caught unaware and also so that it is clear whom the burden of the increased costs falls on and the degree of transparency that can be expected by the borrower. At one extreme, the entire actual cost could be passed on to the borrower (though that would require full disclosure of its funding costs by the bank and would most likely mean interest rates being calculated retrospectively, rather than in advance). Alternately, the borrower may choose a fixed reference rate and leave it to the lender to manage the interest rate risk on its funding, whilst providing the lender with the benefit of limited disclosure.

This change to the credit markets may be temporary and it is conceivable that liquidity could return thereby allowing pricing to return to its previous levels. However, the difficulties that many lenders are having suggests that the reality is more likely to be that the credit markets now are far more risk-based in their approach to inter-bank lending and borrowers who borrowed from lenders that now appear weaker could be forced to pay more as a consequence of the perceived weakness of their lender and, ultimately, affect the competitiveness of poorer rated lenders in the market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.