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Abstract: 

The recent decision in LBIE v. Assured Guaranty is a rare case in which a court has addressed how to value terminated credit default swap contracts (“CDS”) governed by ISDA documentation. The plaintiff argued in that litigation that the only reasonable way to calculate loss under the 1992 ISDA Master Agreement is to use market prices and market inputs. But following a trial on the merits, the New York Supreme Court rejected that position and affirmed the significant flexibility and broad discretion given to a non-defaulting party. The court specifically concluded that the cash-flow method that Assured used to value its terminated CDS was reasonable in light of the text of the 1992 ISDA Master Agreement, and that there is no single uniform industry practice for doing such a valuation. The factors considered by the Trial Court include the market conditions at the time and the specific economic bargain that Assured agreed to when it sold protection under the CDS contracts. The decision has been affirmed by the Appellate Division, First Department on appeal, and the New York Court of Appeals has declined to consider the issues further.

Keywords: Calculation of CDS Termination Amounts

Affiliations:  1: Cleary Gottlieb Steen & Hamilton LLP; 2: Cleary Gottlieb.