London - Mayer Brown lawyers in London were successful in convincing a three-judge panel convened by the International Swaps and Derivatives Association (ISDA) that credit default swaps (CDS) referencing Portuguese bank Novo Banco were not triggered on 29 December 2015 when the Bank of Portugal re-transferred five senior bonds from ‘good bank’ Novo Banco back to ‘bad bank’ Banco Espirito Santo. This was the first time that the so-called External Review process had been used in the seven-year history of ISDA’s EMEA Credit Derivatives Determinations Committee, a committee comprising representatives from fifteen leading dealers and buy-side institutions.

The External Review procedure was invoked because the Committee, which is responsible for making determinations whether CDS have been triggered, failed to reach the required super-majority, instead voting 11-4 that the re-transfer of the bonds did not constitute a “Governmental Intervention Credit Event”. On behalf of the Committee’s eleven “No” voters, Mayer Brown (instructing Robert Miles QC and Andrew de Mestre of 4 Stone Buildings) submitted a written brief (available here) and presented oral arguments (available here) to the panel (which comprised retired Lord Justice Sir Bernard Rix (as Chair), Mark Hapgood QC and Adrian Beltrami QC).

The dispute was the first test of the new “Governmental Intervention Credit Event” which was added to the 2014 ISDA Credit Derivatives Definitions to address new regulations for resolving failing financial institutions. The panel agreed with the arguments advanced by Mayer Brown as to why the re-transfer fell outside of the scope of the “Governmental Intervention” provisions and thus was not a “Credit Event” for purposes of CDS contracts. The panel unanimously concluded (decision here) that “the better answer is that a Government Intervention Credit Event did not occur and that the ‘No’ position is the better answer.”

Commenting on the outcome, London Banking & Finance partner Chris Arnold, who led the Mayer Brown team, said: “We are very pleased that the panel unanimously agreed with the ‘No’ Position. The decision clearly demonstrates the effectiveness of the External Review process and provides the market with additional clarity on the intended scope of the new Governmental Intervention Credit Event”.

The Mayer Brown team included Banking & Finance partner Chris Arnold and Litigation & Dispute Resolution partners Ian McDonald, Susan Rosser and Devi Shah, and of Counsel Alexandra Wood and associate Lauren Theodoulou (all London).