Federal Judge Rules that Hedge Fund is Bound by Terms of ISDA Docs in CDS Dispute
A Federal judge dismissed most of the claims brought by a hedge fund against a bank under the terms of a credit default swap where the bank was the protection buyer and the hedge fund was the protection seller. As permitted by the ISDA Agreement and related Credit Support Annex, the bank demanded additional collateral as the value of the underlying ABS paper declined. The hedge fund complied with several credit support requests but began to balk as the total collateral approached the notional amount of the CDS. The hedge fund claimed that the bank had made pre-contract representations about the amount of collateral it would require and the economics of the deal, thereby fraudulently inducing the hedge fund to enter into the Agreement. The judge dismissed most of the hedge fund’s claims because the terms of the contact should be enforced against two sophisticated parties. Left open for trial was whether the bank acted in bad faith in its role as Valuation Agent.
OUR TAKE: This is why people hire lawyers to review ISDA Agreements. It all looks boilerplate until the economics change. We have been surprised/terrified by seemingly sophisticated parties who sign swap agreements without reviewing the terms.