DRAFT, TELEGRAM TO HONG KONG
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STERLING GUARANTEES
Your Tel No 594 of 3 June. We regret that misunderstanding persists about the provision relating to accidental breaches.
2. Part of the problem is associated with your view that HMG has sought to narrow the definition originally contained in para 2 of our Tel No 1209 of 26 November 1973 (described in what follows as the November formula). In fact, there has been no intention on our part to narrow the definition in any way, and we cannot find that we have done so.
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3. You suggest in para 5 of your telegram that the November formula would have accommodated any breach (not involving a deliberate reduction in sterling holdings) which rosulted from a fall in market prices. We do not accept this interpretation because it fails to take into account that the ambit of the November formula explicitly extended only to purely accidental breaches. That is, the November formula relates to breaches that are purely accidental, not to any
breaches.
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4. There then arises the question of what breaches can be regarded as purely accidental. Although you have asked, by implication, for greater precision, we think it would be
in appropriate and misconceived to try to set out a comprehensive list of possible purely accidental breaches. In fact, it
would be hardly to the advantage of the participants since unlisted breaches would presumably be ineligible.
5. But as indication of what we regard as the only fair and reasonable approach, we have stated (in para 2 of our Tel No 357 of 10 April) that a purely accidental breach is one which could not reasonably have been foreseen or prudently provided against and instanced as an example, a breach arising from a substantial fall in the price of gilts in, say, the last