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MBIA sues RBS over CDS termination trigger, reports Bloomberg
Thursday, April 22, 2010
Bloomberg reports that MBIA is suing Royal Bank of Scotland over a $2 billion credit default swap which contained a termination trigger if RBS’s rating fell below a certain level. MBIA has asked a UK court to approve the termination of the contract, according to the article. It goes on to say that RBS failed to notify MBIA when Standard & Poor’s downgraded the UK bank in December 2008, and that RBS then made a subsequent protection payment “to block the termination of the contract”.
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CLO index levels:
| Index | 14 May |
|
| CFlux USD AAA | ↑ | 96.0 |
| CFlux USD AA | ↑ |
87.7 |
| CFlux USD A | ↑ | 85.1 |
| CFlux USD BBB | ↓ | 77.2 |
| CFlux USD BB | ↑ |
75.9 |
| CFlux USD EQ | ↓ | 76.7 |
Two issues: Did the CDS contract require RBS to notify MBIA of a downgrade? And did MBIA accept the payment?
I would have initially chalked this up to poor operational controls on the part of MBIA, but the story on Bloomberg suggests that MBIA was actually on top of this. RBS seems to have tried to catch MBIA asleep at the wheel by making its normal premium payment, hoping that if they accepted payment, MBIA would effectively be acknowledging that the contract was still live and performing.
I wonder at what point mbia noticed there was an unwind trigger in the contract...