Nomura victory sets precedent for credit derivatives delivery

A landmark ruling, favouring Nomura over Credit Suisse First Boston (CSFB), in London yesterday will set a clear precedent for the credit derivatives market, the Japanese investment bank said. Nomura challenged CSFB on the deliverability of convertible bonds into credit derivatives contracts.

CSFB has been ordered to pay damages and costs of $1.2 million to Nomura after a High Court judge ruled that Nomura was permitted to deliver convertible bonds as physical settlement for a credit default swap on Railtrack.

Nomura hedged its exposure to Railtrack convertible bonds through the credit derivatives contract with CSFB prior to the UK rail operator’s default in October 2001. CSFB subsequently refused to accept convertible bonds as settlement for the contract, forcing Nomura to incur costs by exchanging the convertible bonds for straight bonds.

Nomura argued that convertible bonds were ‘not contingent’ and could be delivered under the terms for credit default swap contracts. Credit derivatives experts in London today told RiskNews the ruling confirms what sort of debt is covered by the contracts in the event of default and is in line with recommendations from the International Swaps and Derivatives Association.

“This is an excellent result for the credit derivatives market and clarifies an important point of interpretation,” said Najib Canaan, co-head of fixed income at Nomura in London.