CCC Administers the Auctions for Lloyd’s Credit Notes

by Jennifer Kwon

Lloyd’s American Trust Litigation was a unique coupon settlement. Normally, coupons are for commodities or goods. Here the coupons were for liabilities and debt. Despite the complications involved, CCC again successfully handled the transactions and auctions of the certificates.

It all started in 2002 when Citibank was accused of violating its fiduciary duties and responsibilities as the trustee of the Lloyd’s American Trust Funds by the plaintiffs representing Lloyd’s of London class members who were damaged.

Citibank was held responsible for repeatedly transferring money from one trust fund to another without permission, engaging in the commingling of different trust funds, and failing to maintain appropriate records of the fund’s transactions.

Even though Citibank denied the accusations, it settled by issuing $8,500,000 in cash and $11,500,000 in coupons to class members who were underwriting members of Lloyd’s. These coupons were called Credit Notes (“Notes”) and could be used to receive “equitas premium” credit to reinsure one’s liabilities for prior underwriting periods.

As a part of Lloyd’s Reconstruction and Renewal (R&R) plan, these Notes provided a means to compensate for losses during all periods before 1993, since the New York State Department of Insurance determined that Lloyd’s had not maintained the required minimum surplus.

Here, CCC stepped in as the broker and administrator of auctions for the Notes among class members. The court has granted CCC the authority to facilitate a secondary market for the Notes in order to increase the redemption rate.

These Notes were in effect coupons off of Lloyds services, in this case, usable as debt relief. They were distributed according to each class members’ amount of debt: the more debt a class member held, the more Notes he or she received. The Notes could be used to pay for all or a portion of debt to Lloyd’s.

As a secondary market maker, CCC conducted auctions for class members who wished to sell a portion of their Notes or buy more Notes. The bargain price of the coupons was adjusted in each auction to accommodate the appropriate needs of the sellers and buyers of the coupons.

In the end, CCC facilitated the transactions of approximately 67% of distributed credit notes. It was an impressively high rate, considering the fact that many class members had used their own credit notes to eliminate their debt. Through this case, it proved that CCC can not only successfully trade a good or a service but also accomplish trading debt relief.

This article was written during my internship at Chicago Clearing Corporation (CCC) in 2015.