In a Total Return Swap to Which a Hedge Fund Is a Party, Which Governs: The ISDA Master Confirmation or the Credit Support Annex?

The New York State Supreme Court, Appellate Division, First Department (Court), recently awarded a hedge fund an important victory in its suit to unwind a total return swap with a counterparty and to recover collateral being held by the counterparty.  The Court ruled that the counterparty had defaulted on the swap when it failed to pay in full a $40 million collateral call by the hedge fund pursuant to the ISDA documents governing the swap.  See “How Have Dodd-Frank and European Union Derivatives Trading Reforms Impacted Hedge Fund Managers That Trade Swaps?,” Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013).  A critical issue in the suit was whether language contained in the ISDA Master Confirmation negotiated by the parties modified and trumped the mechanism for disputing a collateral call contained in the credit support annex.  For a discussion of another action involving swap counterparty risk, see “British High Court Interprets ISDA Master Agreement to Suspend Non-Defaulting Party’s Payment Obligations Until Defaulting Party Has Cured the Default,” Hedge Fund Law Report, Vol. 5, No. 20 (May 17, 2013).

To read the full article

Continue reading your article with a HFLR subscription.