The legal stability of credit-default swap contracts has come under threat from a U.S. District Court ruling against Société Générale. Legal officials say the ruling, which found in favor of swap counterparty Aon Financial Products and Aon Corporation, undermines standard CDS documentation and could have far reaching consequences because few legal precedents have been set for disputes between credit derivative participants.
Full details of the dispute could not be immediately ascertained, beyond that it centered on the settlement of a USD10.1 million CDS in which SG sold Aon credit protection on the risk of default by the Republic of Philippines. Officials say the court ruled Aon was entitled to receive payment from SG without delivering the bonds. The International Swaps and Derivatives Association has filed an amicus curiae brief in support of an SG appeal, in which it seeks a reversal of the decision. Louise Marshall, spokeswoman, said the brief is necessary to uphold the integrity of the USD17 trillion CDS market.
In the brief, ISDA states that when making the ruling, "the District Court and the Magistrate Judge looked to another CDS to which SG was not party and which contained different terms to ascertain Aon's and SG's intent in entering into the SG CDS." The brief continues, "If this decision is left to stand, it will result in a lack of confidence in credit default swaps and cause tremendous legal uncertainty."
Ken Hagan, spokesman at SG in New York, and Thaddeus Woosley, spokesman at Aon in Chicago, did not return phone messages by press time.
