Introduction

Earlier in July last year, the Stock Exchange Board of India (SEBI) barred the New York-based trading giant Jane Street Group, through its interim order, from India’s securities market, following allegations of BANKNIFTY index manipulation. This has created a fresh wave of complications for arbitration practitioners in financial disputes. Multiple counterparties under International Swap Derivatives Association (ISDA) Master Agreements are now contemplating arbitration to recover close-out amounts and termination payments because of the regulatory action that affects manipulation spanning 21 expiry days between January 2023 and May 2025 [SEBI, 2025].

There are three procedural design issues associated with financial valuation disputes in arbitration that drive how evidence is produced and evaluated. The first is the difficulty arising from the failure of parties to disclose proprietary valuation models. Without the guidance of proprietary valuation models, tribunals must necessarily select between the two extremes of excessive disclosure that potentially results in commercial damage versus insufficient disclosure that results in a degradation of effective challenge to the valuations presented [LCIA, (2020a); UNCITRAL, (1958)]. The second issue is that there are no procedural requirements for experts to commit to or articulate their selected methodology for valuing a business. As such, methodological divergence is viewed as a form of persuasion as opposed to being a determinant of procedural variables [ISDA, (2002)]. The final issue involves timing. Valuation outcomes can vary significantly based upon the date, however, many of the arbitration rules do not specifically provide for the period over which the valuation was conducted [valuation windows, i.e. the period over which pricing inputs are drawn to determine value (e.g., multi-day average, median)], and in many instances do not specify any transaction interruptions (snapshots) [LCIA, (2020b)].

The SEBI investigation documented how Jane Street systematically reversed trades during settlement windows, pushing down index prices across multiple expiry dates through coordinated cash and derivatives market interventions. Current arbitration procedures enable functionally identical strategic behaviour through undefined valuation timing windows, inadequate expert accountability mechanisms and systematically insufficient disclosure enforcement. As counterparties pursue arbitration under the ISDA Master Agreements to recover disputed close-out amounts, they encounter procedural frameworks that will likely replicate the very manipulation patterns they seek to remedy. The analysis to follow focuses on how to structure procedures to limit potential disputes by addressing these issues directly through the procedures rather than via substantive rights.

Disclosure of Proprietary Valuation Methodologies

Financial valuation conflicts typically do not involve any proprietary pricing models. Instead, disputes regarding disclosure occur due to a lack of processes distinguishing between the type of information required for testing the resultant valuation and the type of information that would provide a third party with commercially sensitive information regarding how to implement those outcomes. In most cases, arbitrations are conducted under traditional arbitration rules (such as the LCIA Rules of 2020) that provide general provisions regarding the production of documents; however, those general rules do not provide any mechanism or framework for calibrating the authority to require documents within the context of a valuation where the resultant output is based upon variables that cannot be observed (i.e., non-observable variables) [LCIA, (2020a)].

If one party uses its internally developed pricing outputs as the basis for establishing a value, and those outputs cannot be independently verified or replicated using observable market information, the ability of the other party to dispute the valuation will depend on access to methodology, not the underlying data alone [ISDA, 2002]. In the absence of a defined procedure for presenting valuation information, tribunals will make decisions on a case-by-case basis, resulting in different interpretations of what constitutes adequate information for a valuation to be procedurally verifiable.

The most vital procedural element associated with the disclosure of proprietary models is not the requirement for the disclosure of proprietary models; rather, it is the timing and degree to which such disclosures are necessary for providing a fair chance to verify valuation premise reliability. Therefore, the imposition of disclosure obligations for proprietary models must be limited to specific triggers, such as reliance on valuations generated from non-observable input data or internal assumptions that impact the economic consequences of the valuation, which are significant. This approach will allow for an avoidance of presuming abusive information by not presuming a lack of transparency in the methodology; however, it acknowledges that certain valuation structures are not likely to receive a reasonable amount of scrutiny without some level of methodological transparency.

After the trigger for disclosure is established, the format and order for providing the information must be determined to meet the need for Procedural Clarity without forcing Commercially Sensitive Information to be disclosed. The Tribunal may require the disclosure of the Class of Valuation Models used to determine their value, the Objective of the Valuation, and the Categories of Inputs that were used in the Valuation, but will probably not permit or require a party to disclose its Source Code, Algorithmic Logic or Trading Strategies. If the output from the Valuation cannot be replicated using this information, then the Tribunal may allow the Valuation to be reviewed by an Independent, Court-Appointed Expert under Seal to fill in the information void and avoid giving Proprietary Information to the Other Side. From an enforcement perspective, the purpose of this type of disclosure is to provide Procedural Clarity and not to create a situation of Informational Justice between the parties. Article V(1)(b) of the New York Convention requires that each party has a fair opportunity to comprehend and respond to a case being brought against them, which is the standard utilised in valuation disputes where Materially Impactful Undisclosed Methodological Assumptions are present in the outcome [UNCITRAL, (1958)]. By providing structured disclosure, the Valuation Determination will be based on a Logical and Verifiable Basis and Not on an Opaque Basis, but at the same time will not compel a party to provide any more disclosure than what the Due Process requires.

Expert Evidence and Methodological Constraint

Value disputes in finance have various defensible approaches to reach a conclusion. Frequently, the difference of opinion between experts arises from the application of different frameworks and not because the experts disagree with the data presented. Tribunals conduct their own assessments of merit as a matter of persuasion, and they are left to choose among analyses that cannot be directly compared to one another [LCIA, (2020a)]. The systemic issues that create the gaps in procedural standardisation surround the requirement for experts to disclose their decision-making process prior to trial. To remedy this, tribunals should require all experts to submit an upfront statement of methodology, including the rationale used to select the framework, key assumptions made, and a hierarchy of data, as well as a rationale for excluding alternative frameworks from consideration, so that subsequent changes are approved by the tribunal. To address situations where experts have used divergent frameworks to reach their conclusions, the tribunal should require experts to prepare a “divergence map” to show the impact of different methodological decisions and factual differences, thereby enhancing the transparency of the expert’s decision-making process and preserving expert independence [UNCITRAL, (1958)].

Valuation Timing and Temporal Reference Points

Understanding how timing affects financial valuation in legal conflicts is critical to making accurate assessments. Valuation dates, i.e., the specific date as of which an asset or transaction is valued, are typically identified by the contract or arbitration submission materials, but the valuation window may not be identified, nor established, within the contract or arbitration submission materials.viii Additionally, neither of these materials will specify treatment of valuation price formation, which may occur through regulatory intervention or volatility during market stress periods [ISDA, 2002]. The valuation time support is an issue of defining the framework that will govern the determination of the arbitrator’s decision. There is an abundance of viable potential reference points available. Settlement prices, market closing prices (rates), intraday average prices and volume weighted price measures can all be valid references; however, without having a defined procedural framework in which to process these (and other) options, the arbitrator may reach a materially different conclusion based on any of these reference selections alone [LCIA, (2020a)].

To eliminate the potential bias associated with a party’s decision to use multiple values for a given date type (e.g., Settlement Period, First Trading Day), the tribunal needs to implement a default Value Window that matches the market conditions applicable to what type of value a party is seeking. The tribunal may also decide, on a case-by-case basis, that a party needs to deviate from the default. The parties must prove that their chosen Value Window does not adequately represent the economic realities of the transactions being valued. The tribunal must also not allow a party to change their Value Window from that set by the tribunal due to any regulation that limits Market Accessibility or Liquidity, unless an adjustment is necessary due to the removal of Liquidity rather than Price Movement. If there is any regulatory interference affecting Market Access or Liquidity, then the parties should use all inputs used prior to that interference for purposes of Valuation. The tribunal will prescribe a specific process to use in converting a temporal selection into an explicit procedural selection by determining the Value Window. This will give parties greater confidence that they are choosing the correct Value Window based on Reason and that their Valuation outcomes will be intelligible and reviewable [UNCITRAL, (1958)].

Procedural Architecture for Financial Valuation Disputes

  • The Limits of Ad Hoc Case Management

Traditional arbitration practice relies heavily on ad-hoc case administration to resolve disputes regarding value. Although arbitral rules provide broad authority to arbitral tribunals regarding the manner in which a tribunal will conduct proceedings, they do not provide any specific procedure or manner (denoted as sub-section “Valuation Procedures”) to be followed when managing valuation disputes [LCIA, (2020a)]. Since valuation outcomes rely heavily on a proprietary model and expert methodologies to provide the relevant period for the valuation, ad-hoc orders will produce inconsistent and unpredictable results. Each tribunal would evaluate similar valuation issues differently and rely upon the differences in a variety of ways; not because of differences in the factual underpinnings of the relevant valuation issue, but because each tribunal has taken a different procedural approach to handle the matter.

The reliance on discretionary management creates two major problems for parties: First, when parties are preparing to draft agreements and/or preparing for a proceeding to resolve a valuation issue, they are not able to predict how the tribunal will apply its procedures to the valuation issue. Second, arbitral tribunals can only create a structured process to resolve a valuation issue once proceedings have commenced, which means that valuation positions of the parties will generally be established before the tribunal can design a process to properly adjudicate those valuation positions. Therefore, the end result is a system of retrofitting procedures rather than structured adjudication [Born, G. B., (2021)].

  • Valuation as a Distinct Procedural Category

Valuation matters must be recognised as a unique procedure category within arbitration, similar to construction and intellectual property disputes that necessitate extensive documentation in establishing liability. These types of valuation matters typically involve a significant amount of material evidence however it is not just the amount of material evidence that creates a distinction between this and other types of arbitration. The evidence used to arrive at a decision in these matters is primarily based upon the analytical decision made by the arbitrator as to the methodology used in making a valuation on a party’s behalf. Therefore, in order to avoid the uncertainty on the part of the arbitrator and parties associated with determining value, a party’s expert must agree on the methodology to be used in calculating their client’s respective damages prior to submitting their expert opinion to the arbitration [LCIA, (2020a); Born, G. B., (2021); ICC, (2019)].

  • Core Components of a Financial Valuation Protocol

Four essential components are included in the design of a procedure for valuing an entity. The first component is establishing a disclosure requirement that is triggered only when the value being disclosed relies on internal assumptions that aren’t observable or externally verifiable. This ensures that because the value can’t be replicated, it can be subject to procedural scrutiny, rather than indiscriminately disclosed [LCIA, (2020a); UNCITRAL, (1958)]. 

Secondly, experts must adhere to specific procedures for determining how to arrive at a value. Before establishing the value, experts must identify the types of inputs they will rely on for their value assessments and the methods that will be used to develop the value. Experts should not be allowed to change their methods unless the tribunal has granted permission to do so based on changes in data or on regulatory requirements. This will prevent experts from switching methods to achieve their desired results without infringing upon the independence of the experts [Born, G. B., (2021); LCIA, (2020a)].

Thirdly, when establishing value, the tribunal must define a period during which the value will be established as a default and the conditions under which the value can be established outside the default time period. The default time periods for establishing a value convert the timing of the valuation from an implicit statement to an explicit statement [ISDA, 2002].

Lastly, when a proprietary resource must be evaluated, it is necessary to limit access and make it time-limited, and if necessary, the tribunal should appoint an expert to assist with the evaluation. In this way, the tribunal will ensure that it will have complete and correct procedural knowledge without incurring additional business risk [LCIA, (2020a)]. By addressing valuation as a procedural design problem rather than an evidentiary anomaly, arbitral institutions can preserve flexibility while constraining outcome sensitivity. The objective is not to eliminate discretion, but to structure its exercise where valuation determines outcome [UNCITRAL, (1958)].

Conclusion

To conclude, financial valuation disputes illustrate a structural weakness of traditional arbitration procedures. In situations where outcome depends on non-observable input, expert methodologies, and chronological reference points, traditional arbitration processes do not fail due to market complexities or issues with legal ambiguity. Rather, traditional arbitration fails where analytical choices have outcome determinative implications due to lack of specification and guidance at points within procedures. Also, Courts have continually reiterated that the legitimacy of arbitration derives from the reliability of the decision-making process as opposed to whether the resulting determination accurately reflects the law. The Supreme Court of Canada highlighted this principle in the Swiss Timing v. Commonwealth Games Organising Committee (2010) when it emphasised that arbitral procedures must be designed to give the parties in such a case “a real and effective opportunity” to present and rebut evidence in order to prevent unfairness arising from a lack of understanding of the evidence and procedures available to them [Swiss Timing Ltd. v. Organising Committee, Commonwealth Games 2010, 2014].

The study has found that the repetitive issues faced in disputes involving valuation (disclosure of confidential methods, no limitation of the expert determination process, and timing uncertainty with regards to the valuation) not only are evidentiary concerns, but they are also procedural failures that are interrelated. If the tribunal accepts a valuation value without establishing that the process supporting that valuation was adequately transparent (i.e., the process used by the expert to determine the value), the losing party may have been denied a reasonable chance to challenge the basis upon which the tribunal reached its conclusion. The jurisprudence surrounding enforcement provides additional backing to the proposition that the right to due process may be implicated due to this lack of transparency. To clarify, Corporación AIC, S.A. v. Hidroeléctrica Santa Rita S.A.xiii confirmed that Article V(1)(b) of the New York Convention would be applicable if a party is unable to provide reasonable evidence as to the methodology used in rendering the award, and the standard for Article V(1)(b) is similarly applied to the expert methodologies and other technical bases used in formulating expert testimony [Corporación AIC, S.A. v. Hidroeléctrica Santa Rita S.A., 2023; New York Convention, 1958, art. V(1)(b)].

Evaluating the effectiveness of this analysis changes the focus of evaluating valuation control from entitlement grounds to procedural sequencing. Structured disclosure based on reliance on non- observable inputs, expert methodology used throughout the course of pre-commitment with limited deviation, and express choice of the period for determining valuation changes the nature of what would previously have constituted a reviewable reconstructive exercise regarding valuation into an opportunity to participate in a judicial adjudication process. Thus, while these measures do not broaden or limit the scope of judicial review or the ability of an arbitrator to exercise their discretion, they provide ways to utilise the current case-management authority in a manner that is consistent with procedural fairness and enforceability.

Developing institutional-level valuation procedures will lead to less dependence on tribunal-created procedures through ad hoc means and create a more predictable outcome for cases involving complex financial instruments. Valuation procedures do not change the substantive rights of the parties or the allocation of risk through contract. Rather, they provide a clear and documented reason for how valuations are made. When valuation awards follow an established structure and provide clear explanations of how the valuation process was used within the case and the basic aspects of the process, these awards will not be subject to being overturned at the court level based on Article V(1)(b) and Article V(2)(b) based on public policy considerations that have been interpreted very narrowly in many situations. 

The legitimacy of arbitration as a valid forum to resolve complex financial disputes is based more on the procedural control exercised by the tribunal rather than on what is regulated, as long as the tribunal adequately articulates and explains each of the factors (variables) that go into determining the outcome of the valuations during the arbitration proceeding. By identifying each of the factors that will affect the final valuation and controlling how the factors are applied to each case, arbitration will continue to be viewed as a credible and enforceable means of resolving complex financial disputes. In situations where the variables are not defined, there will not be a uniform definition of “neutral” and this will create a level of uncertainty regarding enforceability. The goal will not be to decide whether or not certain behaviours in the marketplace are ethical but rather to create a framework of arbitration procedures that can be used to determine a valuation while at the same time provide assurance regarding the tribunal’s decision-making authority.

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Disclaimer 

The views expressed in this article are solely those of the author in their individual capacity. They do not necessarily reflect the views of the National Economic Forum (NEF).  NEF assumes no responsibility or liability.