Isda welcomes outcome of SG appeal

The International Swaps and Derivatives Association has publicly welcomed a decision by the US Second Circuit Court of Appeals, overturning a ruling that forced Société Générale to pay out on a contentious credit default swap (CDS) contract.

Isda had submitted an amicus brief to the court in May 2006 supporting the Paris-based bank. The CDS, which was referenced to the government of the Philippines, was purchased by Chicago-based Aon Financial in 1999. It was thought to be a hedge against protection on a loan guaranteed by a Filipino public body, which Aon Financial sold to Bear Stearns International.

The two contracts did not reference one another, but the US District Court for the Southern District of New York deemed them to be connected. In light of Aon Financial being forced to pay out on the CDS it had issued to Bear Stearns International, Société Générale was made to pay Aon Financial and its parent company $10 million in cash and legal fees – regardless of the physical nature of the disputed contract and its documentation.

In reversing the judgment, the Second Circuit Court looked at the legal specifications of each contract separately. Isda chief executive Robert Pickel praised the ruling, and said the lower court had undermined legal certainty in the CDS market by misconstruing the parties’ obligations.

(See: Isda weighs in on Societe Generale court ruling, Risk, June 2006.)