Credit Default Swaps in UK Law

As I explain later in this judgment, the system which Dr Pinkava devised was found to have a number of different applications, some of which fall outside anything he was specifically asked to consider but all of which are of great interest to LIFFE. It is no answer to say that the inventions the subject of the further applications do not achieve the particular aim or object to which his efforts were directed.

The lender accordingly goes into the market as a "protection buyer" and asks a "protection seller" to take on the risk of default in return for the payment of periodic premiums. It "swaps" the risk of default for the payment of those premiums. The protection buyer is known as the long trader and the protection seller as the short trader. What amounts to a credit event is a matter for negotiation but normally reference is made to standard ISDA definitions.

CDSs are quoted and priced in terms of the annualised percentage of the notional principal that the protection buyer must pay. Thus a CDS which is priced at 30 bps means that the protection buyer must pay 0.3 % of the insured principal per annum. If a credit event occurs then the protection buyer ceases paying the premiums and the protection seller must pay an agreed sum (such as the unrecoverable element of the loan) to the protection buyer.

This is indeed the position with a conventional future, but is not the case with the systems devised by Dr Pinkava. I should also note at this point that the presentation also mentions total return indices as one possible approach. Thirdly, the project was described as "a BAU" launch and IT costs were budgeted at £15,000, that is to say the level of costs associated with the launch of a new but conventional future.

In around late 2007, the Oscatello Companies were restructured. A framework agreement providing the basis for the continued operation of the Oscatello Companies was concluded with, among others, the Icelandic bank Kaupthing hf ("Kaupthing"). Kaupthing and certain of its subsidiaries agreed to continue to fund the Oscatello Companies' operations by way of an overdraft facility and other forms of lending, secured over shares in the Oscatello Companies.

Rather what he says in relevant respect is that the Report was "commissioned" in order to "assist" the Joint Liquidators in formulating their response to the Guernsey Proceedings; that the recovery available to Oscatello was materially different depending on a number of scenarios; and that it was prepared "entirely" to enable the Joint Liquidators and their legal advisors to respond to varying scenarios and to prepare a Defence and Counterclaim.

In particular, it is noteworthy that Mr Verrill's evidence is that such draft Report was commissioned at a later stage i.e. following a meeting (on 30 November 2010) with — and a specific request by — the Joint Liquidators' counsel for a document providing details of the individuals from R20 who were involved in the transactions referred to in the Oscatello Report (which I understand to refer to the Draft Oscatello Memorandum); and it was provided shortly thereafter on 22 December 2010 to counsel "