LED

1 2 JUN 2012

On behalf of the Applicants Richard Heis

2nd Witness Statement Exhibit "RH2"

12 June 2012

No 9527 of 2011

IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION COMPANIES COURT

IN THE MATTER OF MF GLOBAL UK LIMITED (in special administration)

AND IN THE MATTER OF THE INVESTMENT BANK SPECIAL ADMINISTRATION REGULATIONS 2011

SECOND WITNESS STATEMENT OF RICHARD HEIS

I, RICHARD HEIS of KPMG LLP, 8 Salisbury Square, London EC4Y 8BB, United Kingdom, insolvency practitioner, STATE AS FOLLOWS: -

A INTRODUCTION

1 I am an insolvency practitioner and a partner at KPMG LLP. On 31 October 2011, my fellow partners, Michael Robe rt Pink (associate partner) and Richard Dixon Fleming, each of KPMG of 8 Salisbury Square London EC4Y 8BB and I (together "the Administrators") were appointed as joint administrators of MF Global UK Limited ("MFG UK").

2 I make this statement in suppo rt of an application under paragraph 63 of Schedule B1 to the Insolvency Act 1986 for directions in respect of the following question: -

Whether a client's client money entitlement in respect of an open position is to be valued as at the PPE by reference to the market value or any mark-to-market value as at the PPE or by reference to the liquidation value?

3 The facts and matters stated herein are either within my own knowledge and

are true or are based on documents and information supplied to me during the course of the special administration. In such cases the source of the information is given and it is true to the best of my knowledge, information

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and belief. In referring to any legal advice the Administrators have received, no privilege is waived by such reference or otherwise.

4 There is now produced and shown to me marked "RH2" a paginated bundle of documents to which I refer in the course of this witness statement. Unless otherwise stated, any page references in this statement are references to the pages of that exhibit.

B PURPOSE OF THE APPLICATION

5 The purpose of the application is to provide the Administrators with the directions which they require to make a correct distribution of the "client money pool" or "CMP". It is also to enable a correct distribution of the assets in the general estate insofar as a shortfall in the satisfaction from the CMP of clients' client money entitlements from the CMP may lead to a claim against the general estate in respect of that shortfall.

Terminology

6 Before proceeding to explain further the purpose of the application, I should explain some of the terms in the application notice and in this statement: -

6.1 A "position" or "trade" refers to a bilateral transaction that has been entered into between (i) MFG UK and a customer (the "customer leg") and/or (ii) MFG UK and a third party (normally an exchange or a market counterparty) (the "market leg") where the customer (or MFG UK in respect of the market leg of the transaction) takes a long or sho rt interest' in an asset or derivative of a reference asset and includes both: -

6.1.1 "exchange traded" positions which are positions that are traded on a recognised exchange. Such positions would include, among other things, futures contracts, options and shares listed on such recognised exchanges; and

6.1.2 "over the counter" or "OTC" positions which are bilateral contracts with a creditor or a client that provide the creditor or client with exposure to an asset or a derivative that is other than those traded on a recognised exchange. Such positions would include, among other things, contracts for differences ( "CFDs"), FX related contracts (forward contracts and options), spread bets and forward contracts and options on reference assets that are not listed on a recognised exchange.

6.2 As stated above, in addition to a contract entered into between MFG UK and the customer, MFG UK would also ordinarily have entered into a further position or trade with a third party whose payment and delivery terms would

' Generally, the term "long" refers to the expectation that the position will rise in value and the term "short" refers to the expectation that the position will fall in value.

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have been equal to and opposite to the terms of the position or trade entered into between MFG UK and its customer. In other words, where, under the customer leg of a given trade, MFG UK was a seller, it would enter into a separate trade with a third party as a buyer in respect of that same trade. Such `back-to-back' or `hedge transaction', if performed, enabled MFG UK to maintain a market neutral position.

6.3 In many cases, the market leg of such a back-to-back trade would have been `matched for clearing'. This meant that, although the trade was entered into through an exchange, the clearing house would have arranged for the transfer of appropriate funds and assets between the parties by `matching' trades between buys and sells, thereby streamlining the process. It is also impo rtant to note that the clearing houses did not just facilitate trades, but pursuant to their default rules, also guaranteed the delivery of such trades so that when MFG UK was declared to be in default by the relevant exchanges/clearing houses after it entered into special administration and failed to deliver the relevant securities or cash to their market counterparty, the clearing house stepped in to fulfil the MFG UK's obligations under those trades. Please see paragraph 11.1.3 for further detail.

6.4 A position or multiple positions can be held by a customer and in respect of many different types of trade. This is to say that a customer may have one or more positions, for example: -

6.4.1 an exchange traded futures contract whereby the customer takes a long position in copper via a copper contract entered into on the London Metal Exchange (the "LME");

6.4.2 an OTC forward contract, whereby the customer agrees a ce rtain exchange rate between US Dollars and Pounds Sterling and such currency is to be delivered to MFG UK at a specified date in the future; and/or

6.4.3 a contract for differences on, for example, 100 shares of Barclays Bank plc, whereby the customer has a positive return as the price of such shares increases.

6.5 The customer may be a client or merely a creditor in respect of one or more positions.

6.5.1 By a "client", I mean someone who is entitled to client money protection in respect of that position in accordance with the FSA's client money rules and client money distribution rules as at 31 October 2011, which I refer to as "CASS 7" and "CASS 7A" respectively.

6.5.2 By a "creditor", I mean someone owed a "debt" in respect of that position within the meaning of The Investment Bank Special Administration Regulations 2011 ("the Regulations") and The

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Investment Bank Special Administration (England and Wales) Rules 2011 ("the Rules").

6.6 A position, whether held by a creditor or a client, can be described as "open" or as "closed". An open position is one whose value has not been determined either in accordance with its terms or under any applicable default rules of any relevant exchange or clearing house.

Margin

7 In relation to an open position where MFG UK took on potential liabilities in respect of the future financial performance of that position, the taking and/or the holding of that position would have required the customer to provide both initial margin and variation margin to MFG UK.

7.1 "Initial margin" is an amount of cash or assets deposited by a customer at the beginning of a trade (which may be re-adjusted if required by the terms applicable to the trade) to cover the potential loss on the trade should the customer default and the position be liquidated. The initial margin requirement is based on the underlying risk of the position, including its price volatility and liquidity. It is usually fixed as a percentage of the purchase price of the asset to be purchased or sold and can comprise cash or securities or other assets acceptable as margin.

7.2 "Variation margin" is margin posted on an ongoing basis (typically daily) to cover losses on an open trade or position. Variation margin is a two-way concept that reflects the mark-to-market value of a given contract. Variation margin is the difference between the price of the contract at inception and on the day which the position is marked-to-market. If positive, such variation margin is payable to MFG UK by the customer and similarly payable by MFG UK to the exchange or clearing house in respect of the market leg of any given trade.

7.3 For example, if a customer should lose money based on the mark-to-market value of that asset on a given day, their account would be debited accordingly in terms of variation margin. To the extent that the customer did not have sufficient cash or unencumbered assets in their account to cover the variation margin requirement, the customer would have been subject to a margin call. On the other hand, if a position made money on a given day, the variation margin would have reduced (or could have become a positive amount), with a credit owing to the customer (although such amount was generally not paid to the customer unless it was requested).

8 Note that both initial margin and variation margin on the market leg of the trade (i.e. as between MFG UK and the exchange or clearing house), would ordinarily have been payable on a net basis taking into account MFG UK's other transactions on that exchange or with that respective clearing house.

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Close-out of positions

9 A position is referred to as `closed' when it has been terminated, whether it has been terminated in accordance with its terms or by any applicable default rules. For example, closing a long position in relation to a particular asset would require selling it, whilst closing a short position in relation to a particular asset would require buying it back. The difference between the price at which the position in a security was opened, or initiated, and the price at which it was closed, represents the gross profit or loss on that security position.

10

The price at which a position was closed out is referred to as the `liquidation value' for the purpose of this application.

11 Positions can be closed out for any number of reasons, whether to crystallise profits, stem losses, reduce exposure, generate cash. Whilst most positions are usually closed at the discretion of the underlying customer, positions can be closed involuntarily or by force. For example, when MFG UK entered into special administration, the market legs of many positions were unilaterally closed out by the exchanges and clearing houses as permitted by their applicable default rules.

Below are examples to illustrate the close out of particular trades by reference to (i) an exchange traded product (futures); (ii) an OTC product (options) during the normal course of business, and (iii) the operation of close-outs at different exchanges following the entry of MFG UK into special administration on 31 October 2011: -

11.1.1 Futures

(a) A futures contract is a trade whereby a buyer and seller contract to buy or sell a fixed quantity of assets (such as a physical commodity or a financial instrument) at a specified future date at a specified price. They are standardised, exchange traded transactions. A futures contract would work as follows: -

(b) A customer would place an order for a specific futures contract at their desired purchase price with MFG UK. For example, a single future contact for a ten unit `lot' on the Euro Stoxx 50 index with an expiry date of December 2012 for a price of €2,300.00 (representing the price per unit in the lot of the relevant commodity or product on the Euro Stoxx 50 Index). This trade would have been completed if a counterparty was found in the market who was prepared to sell at that same price.

(c) The customer would be required to deposit an initial margin with MFG UK which was used to protect MFG UK against losses should MFG UK have been required to close out the

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position as against the customer and, consequently the close out its own position with the exchange or clearing house. The initial margin was usually fixed as a percentage of the purchase price of the asset to be purchased or sold and would comprised cash or securities or other assets which MFG UK would have deemed acceptable as margin. In turn, as MFG UK would generally have enter into a hedging transaction with the exchange and MFG UK would also have been required to place similar initial margin with the exchange or clearing house. For futures contracts, initial margin requirements were set by the exchange or clearing house.

(d) Based on the example above, if the initial margin required by the exchange to enter into the trade was 15%, then the customer would have been required to provide MFG UK with €3,450 ((15%*2300)*10) as the initial margin. Additionally, MFG UK would have charged the customer a commission for the trade.

(e) The position would have been marked-to-market on a daily basis to determine the variation margin.

(f) Under the terms of most futures contracts, trades can be closed out for any number of reasons; for example, in order to crystallise profits or stem losses, reduce exposure, generate cash, etc. Using the example above, if on the day after the customer entered into the trade, the Euro Stoxx 50 index was trading at a level of €2,200, the associated variation margin would have been -€1,000 ((€2,200 -€2,300)*10) and accordingly that €1,000 would have been `called' from the customer, the customer may have decided to close out the position on the following day. If he did so and at that time the Euro Stoxx 50 was trading at a level of €2,250, the variation margin requirement would have been reduced by €500 and the €500, plus the €3,450 of initial margin that the customer posted at the outset would have been returned the customer.

11.1.2 Options

(a) An option contract is a financial derivative contract between two parties where the buyer of the option pays the seller of the option a premium (such premium can be paid up front, over time or in arrears) to obtain the right, but not the obligation to buy (a `call option') or sell (a `put option') a specified security or other asset from the option seller at a specified price and date in the future. Options can either be traded on an exchange or on an OTC basis. For example: -

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(b) If MFG UK had written a call option on the Euro Stoxx 50 Index with an expiry date of December 2012 and a `strike' price of €2,300.00 to a customer, that would have entitled the customer to buy 10 units of the Euro Stoxx 50 index from MFG UK in December 2012 (here we have assumed that the Euro Stoxx 50 Index December 2012 futures price was also €2,300.00). For the right to purchase those 10 units, MFG UK would have required the customer to pay it a premium of, for example, €6,000.00. If, on the day after the customer entered into that trade, the futures price of the Euro Stoxx 50 December 2012 dropped to €2,200.00 and the customer wished to liquidate the position because the expected future price was less than the strike price under the option, the customer could have elected to sell the option back to MFG UK and in return, would have received the `new' premium associated with the contract. For example, if the new premium was €5,000, the customer would have received €5,000 as a result of the liquidation (and not the €6,000.00 the customer originally paid as the premium on the basis of the original strike price). In this instance, the customer would not have had to post margin to MFG UK because the customer had paid MFG UK the premium up front.

(c) In the alternative, if the customer would have sold the same option to MFG UK, the customer would have had a contingent financial obligation to MFG UK to deliver the price of the Euro Stoxx 50 in excess of the strike price of €2,300.00 per unit at the option expiry date. As such, the customer would have been required to provide both initial margin and variation margin to MFG UK as the option's price moved over time.

(d) Where the option is exchange traded, MFG UK would have been in a similar position vis-à-vis the exchange or clearing house on the market leg of the trade, as its customer was to it in terms of posting margin and its financial obligations although, as noted above, margin as against the exchange or clearing house would ordinarily have been paid by MFG UK on a net basis in accordance with the applicable rules.

11.1.3 Examples of the operation of close-outs between three different exchanges: Exchange and clearing house default rules vary in their language, but in general, provide the exchange or clearing house with broad powers to deal with the positions of a defaulting member and thereby protect the market by allowing other members ( and other designated non-members) to reduce their exposure to the defaulting member. These powers include, but are not limited to: (i) the unilateral closing out of positions; (ii) the transfer of positions to

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third parties; and (iii) the modification of positions or the entering into offsetting positions for the account and risk of the defaulting party. The ultimate objective of such default rules is typically to enable the clearing house to liquidate the defaulting party's positions without putting the clearing house or its other members or designated non-members at risk, thereby protecting the orderly conduct and integrity of ce rtain markets. Whilst the default rules are relevant to the market leg of MFG UK's trades, but in some instances and depending upon the terms of the exchange's rules and the terms between MFG UK and its customers, the customer leg would also be subject to the rules of the exchange and so capable of close out under those rules. Specific examples of the process include: -

(a) Deutsche Boerse AG ("Deutsche Boerse") and Eurex Clearing AG ("Eurex"): Eurex notified MFG UK that it was in default in respect of its positions on the Deutsche Boerse on 1 November 2011. On the following day Eurex sold through the Deutsche Boerse the majority of MFG UK's positions, with a small residual amount being sold OTC on 3 November 2011 due to lack of liquidity on the Deutsche Boerse in those respective products. The liquidation of MFG UK's positions was undertaken by Eurex by placing orders with the Deutsche Boerse to sell long positions and buy back short positions.

(b) Soft commodity positions with NYSE Euronext — LIFFE and LCH.Clearnet Ltd. ("LCH"): LCH declared a default by MFG UK on 31 October 2011. LCH then provided a limited window for MFG UK's customers to transfer their positions to third party brokers. Such transfers took the form of a sale of long positions to certain members and the purchase of short positions to other members. In the period from 9 November 2011 to 17 November 2011, LCH liquidated a number of MFG UK's positions to mitigate risk at the clearing house. On 22 November 2011, LCH sold MFG UK's remaining positions via an auction process whereby the winning bidder received approximately $148,000 of the margin posted by MFG UK to LCH from LCH. The payment of $148,000 by LCH to the winning bidder was the result of an increased variation margin requirement across MFG UK's portfolio between the previous day's closing price and the price at which the portfolio was acquired.

(c) London Metals Exchange ("LME") and LCH: As mentioned above, LCH declared a default by MFG UK on 31 October 2011. After the default, LCH "rolled" certain of MFG UK's positions which were coming to a physical

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delivery date into positions that would expire further into the future in order to avoid the risk of a failed physical delivery. The "rolls" took the form of a sale of the current MFG UK holding and the purchase of a new position. During the period between 1 November 2011 and 23 November 2011, LCH enabled a transfer of the customer leg positions to other members through sales of those positions at their original acquisition price (as opposed to their current market price) and sold other positions to hedge risk at the clearing house. On 24 November 2011, LCH then held an auction to sell the remaining MFG UK positions. The winning bidder purchased the remaining MFG UK po rtfolio and received approximately $40.5 million of the margin posted by MFG UK to the LCH to suppo rt the position. In addition to the liquidation procedures, LME's default rules allow it to choose a date on which the customer leg of the trade is valued for the purpose of determining a default settlement amount. The LME chose 1 November 2011 as such date and delivered `nett sum certificates' to clients and customers on the basis of its 1 November 2011 closing prices.

Liquidation value and mark-to-market value

12 As noted above, when a position is closed out, whether in accordance with its terms or by the application of the relevant default rules, the price at which the position is closed out is referred to as its liquidation value.

12.1 The liquidation value is thus the actual value of that particular position as at the specific date and time the position was closed out. There are a large number of circumstances where positions were closed out and liquidated on a date after the PPE.

12.2 This contrasts with a position's `market value' as at a different date, such as the PPE. "Market value" is the price at which a customer would buy or sell an asset or a particular position at a given time. Market value is generally regarded as the price that a willing buyer and seller, dealing fairly and on arm's length terms would agree as at a given time.

12.3 A firm such as MFG UK would typically "mark to market" its assets or positions on a daily basis, i.e. it would each day update the value of an asset or position to its then current market value. The latest mark-to-market value prior to the PPE ascribed by MFG UK may or may not constitute good evidence as to the market value of that asset or position as at the PPE, depending upon a number of factors including:

12.3.1 how close to the PPE the position was last marked to market;

12.3.2 the movements in the market in the intervening period; and

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12.3.3 the method by which a mark was judged to be appropriate, for example by reference to sales in the market that day or on a previous day or by reference to other indices, each of which might amount only to a proxy of market value because such transactions or quoted prices might be in respect of positions different in size and terms from those in respect of which a mark was placed.

12.4 Moreover, both the latest mark-to-market value and, if different, the market value of a position as at the PPE could be materially different from the actual value at which the position was closed out a few days later. For example, this could be because of the movement of markets between different points in time (and it is notable that markets exhibited significant volatility during the period leading up to and immediately following the entry of MFG UK into special administration). It could also be because the value at which it was closed out was at the discretion of an exchange or clearing house (operating under its default rules) which may not be a true reflection of market value.

12.5 It is the potential difference in the value of a position between the PPE and the date upon which it was later closed out, and the way in which the choice between such values could impact upon distributions from the CMP and from the general estate, which causes the Administrators to bring the application in order to seek the guidance of the Cou rt. Such difference in value might arise for one or more of the reasons outlined above.

13 The Administrators have been advised that there is doubt as to whether a position open as at the time of the Administrators' appointment and closed out after that time should be valued, for the purposes of establishing client money entitlements, either:

13.1 at the estimated market value, as at the time of the Administrators' appointment, without taking into account subsequent events; or

13.2 at the estimated market value as at the time of the Administrators' appointment, but taking account of and adjusting for subsequent events (by application of hindsight) including the fact that the position was subsequently closed out and the value at which it was closed out.

14 On the one hand, hindsight is invariably used in English insolvency procedures to determine the value of general unsecured claims that are contingent as at the time of appointment but which subsequently become ascertained. The liquidation value is treated as `revealing' the value of the open position as at the time of the officeholders' appointment in place of any value thought to be the value of that position at that time. A well known example is the right to indemnity under an insurance contract, where the event insured against has occurred after the date of liquidation but before a distribution is made. In that case, the claim is to be valued at the payout value of the policy, rather than based on an estimate, as at the date of liquidation, of the likelihood of the relevant event occurring.

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15 On the other hand, in the Lehman Brothers litigation, in the case of claims by clients to share in a distribution of the client money pool, Mr Justice Briggs held that a client's open position was to be valued as at the PPE without the benefit of hindsight, and thus without adjustment to reflect the amount at which the client's open position was subsequently closed out. The decision was, however, reached on the back of the learned Judge's conclusion that distribution of the client money pool was to be based on the so-called `contributions' theory (under which clients had a claim only to client money held for them subject to certain adjustments). The rejection of that conclusion by the Supreme Court, which favoured the so-called `claims' theory (under which each client has a contractual claim to what should have been held for him in accordance with his agreement with the firm) has led the Administrators and their legal team to question whether the Judge's decision on the applicability of hindsight in the Lehman litigation should be followed.

16 It is as a result of the doubt in relation to clients' positions that the Administrators apply for guidance. The Administrators are concerned to know what relevance (if any) the hindsight principle has to the CMP, and to understand what significance (if any) marked-to-market values have to an assessment of market value in terms of working out how to value claims as at the PPE.

C MFG UK

17 In what follows, I set out an overview of the business and affairs of MFG UK insofar as may be relevant to this application and as the facts appear to the Administrators as at the date of this statement. In pa rticular, I deal with the following: -

17.1 overview of the business of MFG UK, including: -

17.1.1 a description of the various exchange traded and over the counter products offered by MFG UK; and

17.1.2 a description of the various exchanges and clearing houses relevant to the business transacted by MFG UK;

17.1.3 an estimate of the quantum of the client money pool;

17.1.4 an estimate of clients' claims by number and value and of those claims: -

(a) an estimate of the liquidation value of such positions, which, relative to the values as at the time of appointment valued without hindsight, indicates, in very broad terms, the significance of the application to the client money pool in US dollars; and

(b) an example of a client's position valued as at the time of appointment as compared to its liquidation value, which

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illustrates the sharp and sudden movements which can and do occur.

Overview of MFG UK

18 As explained above in outline, prior to entering into special administration and as part of its normal trading business, in order to facilitate clients taking positions, MFG UK would enter into a direct trade with the client and simultaneously enter into a back-to-back trade with the appropriate exchange or an appropriate market counterparty in order to hedge its exposure in respect of those positions. Both the trade entered into between MFG UK and the customer and the associated hedging were transacted on a principal to principal basis by MFG UK. As such, MFG UK acted as principal versus the exchange or other counterparty and also as principal with the customer. There was no direct nexus between the customer and the exchange or other counterparty or clearing house.

19 Customer leg transactions were typically executed with clients under MFG UK's standard terms of business, except where positions were taken on by clients under industry standard terms such as ISDA, GMRA, GMSLA or other similar agreements. MFG UK had different standard terms of business for retail clients and non-retail clients (together the "Terms of Business") which were restated from time to time. Copies of the Terms of Business are set out at tab 1, pages 1-222 of RH2.

20 Market leg transactions were typically entered into pursuant to specific agreements between the various exchanges, clearing houses, brokers (as appropriate) and MFG UK. These agreements would typically govern the required conduct for entering into positions, the rules governing the trade, margin requirements and procedures governing a default.

21 MFG UK executed market transactions with over 50 exchanges and multiple market counterparties, each of whom declared a default in respect of MFG UK and terminated and liquidated such transactions after MFG UK went into administration in purported compliance with the applicable default rules and processes.

22 Further, as noted above in paragraph 11.1.3(c), with respect to the LME and the LCH, following MFG UK entering into special administration, in addition to the termination and liquation of such trades, many of such exchanges and clearing houses arranged for the transfer of client positions to new clearing members. This was purportedly, in accordance with their default rules. Although I am not in a position to explain the legal mechanism by which such transfers were effected, and it is not necessary for me to do so for the purpose of this application, I would note that such transfers ultimately impacted on the value of the CMP and on the claims against the CMP. A similar issue arises in relation to the general estate. Whilst the Administrators do not wish the propriety of such transfers to form pa rt of this application, the Administrators would like to highlight that such transfers and issues related to them may form part of a separate application by the Administrators to Court. For present

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purposes, it is sufficient to highlight that transfers and other actions under the default rules of the relevant exchanges and clearing houses are potential adjusting events, the impact of which on claims against the CMP is, absent some other mechanism by which they are to be given effect, contingent upon the application of the hindsight principle to claims against the CMP.

23 MFG UK had little or no ability to influence the liquidation (or tr ansfer) of positions conducted in purported compliance with the applicable default rules notwithstanding that the purpose of Objective 2 under the Regulations is to provide a platform for engagement with market infrastructure bodies to facilitate their default rules or arrangements and the settlement or prompt cancellation of non-settled market contracted or unsettled settlement instructions. MFG UK was therefore, for the most pa rt, unable to hasten the liquidation of the market leg in order to remove itself from the potential risk associated with the losses on the customer leg of each trade. Accordingly, the liquidation of customer and market positions occurred at multiple points in time over the month of November 2011 and, in limited cases, thereafter.

24 Set out at tab 2, page 223 of RH2 is a list of exchanges or markets and a list of dates at which those exchanges purported to transfer, liquidate or close out MFG UK's open trades and positions.

Products provided by MFG UK

25 MFG UK acted as a broker-dealer in commodities, fixed income, equities, foreign exchange, futures and options, and also provided customer financing and securities lending services. In particular, MFG UK acted as an intermediary broker for the European business of the larger MF Global group and provided, amongst other services, matched-principal execution and clearing services for exchange trades and OTC derivative products, as well as for non-derivative foreign exchange products and securities in the cash markets. Set out below are examples of the products provided by MFG UK: -

25.1 Futures: As described above in paragraph 11.1.1, futures are exchange traded products whereby a buyer and seller contract (under a standardised contract) to buy or sell a fixed quantity of specified assets at a specified date in the future at a pre-determined price.

25.2 Forwards: Forward contracts are similar in nature and mechanics to futures contracts as described above in paragraphs 11.1.1 and 25.1. However, the primary difference between them is that forward contracts are intended to provide for the physical delivery of assets at a specified date in the future at a pre-determined price, whereas the settlement of futures is generally made through cash payments. Additionally: -

25.2.1 forward contracts are OTC products and are not standardised, so can be customised to fit a customer's requirements in terms of contract size and maturity; and

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25.2.2 the level of variation margin and initial margin to be posted is set between the contracting parties themselves on a bilateral basis, rather than on a standardised basis set by an exchange.

25.3 Options: A described above in paragraph 11.1.2, an option contract is a financial derivative contract between two parties where the buyer of the option pays the seller of the option a premium to obtain the right, but not the obligation, to buy or sell a specified security or other asset from, or to, the seller at a specified price and date in the future. Options can either be traded on an exchange or on an OTC basis.

25.4 Contract for differences or "CFD": CFDs are OTC derivative contracts that do not require physical delivery of the goods or securities. Settlement is instead made through cash payments.

25.4.1 CFDs have a value defined as the difference between the initial `strike' price at which the contract was entered into and the current market price of the underlying asset or security. For a long position (where the customer benefits from increases in the price of the underlying security or other asset), the initial strike price will usually be the current market offer price for the underlying asset. The difference between this and the current market bid price for the underlying security would be the current value of the CFD. The opposite mechanics would apply to a sho rt position (where the customer benefits from the expectation that the asset will fall in value).

25.4.2 As an example, MFG UK might have offered the customer a long CFD position on the Euro Stoxx 50 index. On the assumption that that, at the time of the trade, the mid-market price quote for the Euro Stoxx 50 Index is €2,300 (for a ten unit lot) with a bid side of €2,299 (being the price that a buyer is willing to pay for that underlying asset) and an offer side of €2,301 (being the price for which a seller is willing to sell that underlying asset), if the customer bought this contract, it would have paid or received the price differential between €2,301 and the price of the underlying asset at the time the contract was closed out, multiplied by 10. Therefore, if at the close of the trade, the bid price of the Euro Stoxx 50 was €2,311, the customer would have gained €100 (€10 * 10).

25.4.3 In order to have facilitated the trade, the customer would have paid MFG UK a commission up front and MFG UK would have required that the customer post margin with respect to that trade. The initial margin would have been a percentage of the underlying asset value calculated on a daily basis, whilst the variation margin would have been the opposite of the current value of the CFD. In other words, in the example given above, at liquidation, the initial margin would have been €231.10 (assuming the required initial margin was 10% of the underlying asset's value), whilst the variation margin would

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have been -€100. Therefore the net margin held against that position by MFG UK would have been €131.10.

25.4.4 Additionally, MFG UK would have charged the customer interest related to its corresponding hedging position on a daily basis.

25.5 Spread Bets: are similar to CFDs in that the customer does not own the underlying securities. Spread bets involve the customer taking a bet on the price movement of a particular security. Again, two prices are usually quoted for that particular security (the bid and the offer price). The customer would have wagered on whether the price of the underlying stock on a given date would be lower than the bid price or higher than the offer price.

25.5.1 Using the example above, if the customer bet €10 per every €1 in price raise of the Euro Stoxx 50, the risk and pay off profile would have been analogous to that of the CFD.

25.5.2 Similarly, the customer would have comparable levels of margin and charges levied on them on a daily basis as set out in the CFD example above, including in respect of MFG UK's hedging position in the market.

The Client Money Pool

26 As at 30 March 2012, being an initial date set by the Administrators for the submission of client money claims in the special administration (the "Submission Date"), the Administrators had collected $900 million of client money, representing virtually all (circa. 100%) of the balances held by third party exchanges, clearing houses and other institutions not including affiliates.

27 A further $146.9 million of client money is held by other MFG affiliates, some of whom are subject to their own insolvency proceedings. Accordingly, it is uncertain at present how much will be recovered and in what timescale. The Administrators however continue to pursue the recovery of client monies held by MFG affiliates.

28 As at the Submission Date, the Administrators had received 3,677 claims from claimants asserting client money protection. The approximate value of those claims is $3.3 billion; a number which the Administrators think is highly inflated when compared to the estimated value of client money claims as reflected in the books and records of MFG UK. The Administrators do not consider that that number can be used sensibly or realistically to estimate the likely final distribution of the CMP in terms of the dividend payable to clients. The Administrators continue to investigate each claim and more claims are being received following the Submission Date.

29 A breakdown of the clients affected by this application has been summarised in the table below which sets out the number of clients whose client money claims accord with the client's client money entitlements reflected in MFG

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UK's books and records and the total value associated with those client's claims if the hindsight principle were to be applied.'

Difference in Value of client Value of client Value of client Claim Value money claims from money claims from money claims from

Levels clients whose claim clients whose claim clients whose claim values would be values would not be values would be lower were the affected by higher were the

hindsight principle application of the hindsight principle to be applied hindsight principle to be applied

(in USD) (in USD) (in USD)

by no. by value by no. by value by no. by value

$0.01 to 346 108,550,704 - - 286 111,231,360 $100,000

$100,000 to16 44,385,695 1,746 341,024,469 18 36,200,999

$500,000

> $500,000 8 296,714,636 - - 11 96,832,121

Total 370 449,651,035 1,746 341,024,469 315 244,264,481

30 The Administrators estimate that for those clients who would do worse if their claim were calculated by reference to the liquidation value when compared to the value of their positions at the time of the Administrators' appointment, the aggregate change in value between the PPE value and the liquidation value is approximately $59.1 million in respect of their cumulative position, whereas those clients who would do better in relation to the same, their aggregate benefit is approximately $27.9 million.

31 It should also be noted that clients whose claim values would not be affected by the application of the hindsight principle would include clients with cash-only balances (i.e. clients who only held cash in their accounts on the date MFG UK entered into special administration). The value of their accounts would not have changed following 31 October 2011.

32 Further, the table below sets out the percentage of clients whose claim values would be affected by the application of the hindsight principle.

2 Please note that the figures exclude accounts that related solely to business transacted on the London Metal Exchange as the Administrators are still compiling information related to these account positions and securities-related accounts.

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Difference in Percentage of Percentage of Percentage of clients Claim Value clients whose claim clients whose claim whose claim values

Levels values would be values would not be would be higher lower were the affected by were the hindsight

hindsight principle application of the principle to be to be applied hindsight principle applied

by no. by value by no. by value by no. by value

$0.01 to $100,000

14.23% 10.49% 11.76% 10.75%

$100,000 to $500,000

0.66% 4.29% 71.82% 32.95% 0.74% 3.50%

> $500,000 0.33% 28.67% 0.45% 9.36%

Total 15.22% 43.45% 71.82% 32.95% 12.96% 23.60%

33 The Administrators anticipate, based on the information set out in the tables above, that approximately 43.45% by claim value (representing approximately 15.22% in number) of clients would suppo rt the date of the PPE without hindsight as the appropriate basis of valuation and 23.60% of clients by claim value (12.96% by number) would likely favour the application of hindsight to the valuation as at the PPE.

34 Clients whose claim value would not be affected by application of the hindsight principle would likely support the application of hindsight, the application of which would overall reduce the aggregate value of client money claims against the CMP, thereby increasing each such client's pro rata share.

Example Client

35 Set out below is a hypothetical example of a client's position ( "Client A") valued as at the time of appointment of the Administrators as compared to its liquidation value. Client A is typical of other clients who held positions at the time that MFG UK entered into administration and where their account values fluctuated between such date and their liquidation date based on market movements between such dates.

35.1.1 Prior to MFG UK entering special administration, Client A traded a large number of positions through MFG UK including both futures and options on various currency pairs, interest rates and stock indices. During the month of October 2011, Client A liquidated the majority of its positions, and left open only a small number of call and put options on LIFFE 3-month Euro (Euribor) at the time that MFG UK entered into special administration.

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35.1.2 As at 31 October 2011, the account had a value of USD 372,768.54. During the month of November, prior to the positions being liquidated, the market moved against Client A and after giving effect to the liquidation of the positions, Client A's account held a value of USD 349,710.22, some USD 23,058.32 less than at the date MFG UK entered into administration.

D REPRESENTATIVE RESPONDENTS

36 The Administrators seek to have appointed representative respondents for clients who would do worse by reference to the liquidation value as applied by virtue of hindsight relative to the value of their positions at the time of the Administrators' appointment, and clients who would do better in relation to the same.

37 The Administrators have identified: -

37.1 Attestor Value Master Fund LP ( "Attestor" or "Representative Party A") as a representative respondent representing clients who would do worse by the application of hindsight; and

37.2 Schneider Trading Associates Limited ( "Schneider Trading" or "Representative Party B") as a representative respondent representing clients who would do better by the application of hindsight.

38 If the Court should appoint further or other representative respondents, it may also be necessary to reformulate the questions the subject of the application.

Attestor Value Master Fund LP

39 Attestor is a fund registered in the Cayman Islands which specialises in the sale and purchase of distressed debt.

40 Attestor has confirmed by letter to the Administrators dated 11 June 2012 which is set out at tab 3 of pages 224 to 238 of RH2, that Attestor:

40.1 has an interest in the outcome of this application by virtue of the 17 May 2012 assignment to it of certain claims which NCI Finance Limited ("NCI") may have had against MFG UK, including NCI's client money claim (the "NCI Client Money Claim"); and

40.2 in its capacity as holder of the NCI Client Money Claim, is prepared to act as a representative respondent in this application for clients who would favour the valuation of client money entitlements as at the PPE by reference to the market value or any mark-to-market value.

41 Subject to the Court determining the questions asked in the application notice, the Administrators believe that the figures below represent NCI's total `client money entitlement' within the meaning of "the client money rules" and "the client money distribution rules" as defined by Chapter 7 of the Financial Services Authority's Handbook ("FSA Handbook").

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Approach to valuation Marked to market value as at 31 October 2011

(in USD)*

Close out value (in USD)*

Client money entitlement 16,100,434.96 13,128,071.80

* Amounts converted using the middle market (mean of spot buying and selling) rates as observed by the Bank of England's Foreign Exchange Desk in the London interbank market around 4pm on 31 October 2011

Schneider Trading Associates Limited

42 Schneider Trading is a brokerage, trading and financial services company incorporated in England & Wales.

43 Schneider Trading has confirmed by letter to the Administrators dated 8 June 2012 which is set out at tab 4, pages 239 to 253 of RH2, that Schneider Trading is prepared to act as a representative respondent in this application for clients who would do better by reference to the liquidation value relative to the value of their positions at the time of the PPE.

44 Subject to the Court determining the questions asked in the application notice, the Administrators believe that the figures below represent Schneider Trading's total `client money entitlement' within the meaning of "the client money rules" and "the client money distribution rules" as defined by Chapter 7 of the FSA Handbook.

Approach to valuation Marked to market value as at 31 October 2011

(in USD)*

Close out value (in USD)*

Client money entitlement 6,886,384.74 7,372,167.36

* Amounts converted using the middle market (mean of spot buying and selling) rates as observed by the Bank of England's Foreign Exchange Desk in the London interbank market around 4pm on 31 October 2011

E DIRECTIONS AND COSTS

45 I do not say anything about further directions for taking the application forwards and will leave it to submissions. I however ask for an order that the Administrators' costs of and occasioned by the application be paid on the indemnity basis from the CMP. For the reasons set out above and elaborated below, the application is one which the Administrators are required to bring in order to discharge their duties as administrators and for MFG UK to discharge its duties as trustee of the CMP. Without clear answers to the questions asked in the application notice, neither the estate nor the CMP can proceed towards a final distribution nor, of more immediate relevance in the light of the other questions to be resolved, to a further interim distribution. It is because the questions asked in this application are discrete and, hopefully, capable of resolution within a reasonable timeframe that this application has been brought

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as a separate application from other applications which the Administrators anticipate in relation to the client money pool.

46 I also ask that the Court make prospective costs orders in favour of Representative Party A and Representative Party B only and in the terms set out in the draft order attached to the application notice. The Administrators believe that it is appropriate to pay each such respondents' costs in relation to the hearing of the application at first instance because, at first instance, the application is one which the Administrators need to bring in order to obtain the guidance they need.

47 I add that the Administrators would oppose the award of any protective costs order in favour of any other party or any interested person who would seek to intervene. Such appearance or intervention is at the choice of that party or intervener for their own purpose, for example as a regulator interested in the proper application of its rules, and not for the purpose of assisting the Administrators. Such cost should not be paid for by clients or by creditors. Similarly, if the Court should be satisfied with the representative respondents, any other client wishing to appear should do so at its own costs.

I believe that the facts stated in this witness statement are true.

Y `^ Richard Heis

12 June 2012

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Applicant Richard Heis

2nd Witness Statement RH2

12 June 2012

No 9527 of 2011

IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION COMPANIES COURT

IN THE MATTER OF MF GLOBAL UK LIMITED (in special administration)

AND IN THE MATTER OF THE INVESTMENT BANK SPECIAL ADMINISTRATION REGULATIONS 2011

SECOND WITNESS STATEMENT OF RICHARD HEIS

Solicitors for the Administrators:

Weil Gotshal & Manges

110 Fetter Lane

London EC4A lAY

Tel: +44 020 7903 1000

Fax: +44 20 7903 0990

Ref: AP/ML/KE/63238.0003

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