Allen & Overy’s David Benton: the man who decides if Greece has defaulted
A partner at Allen & Overy, one of England’s “magic circle” of law firms, Mr Benton is the derivatives expert whose legal opinion on Thursday led 15 of the world’s largest investment banks and investors to controversially decide that Greece had not yet defaulted on its government debt.
While the International Swaps and Derivatives Association (ISDA), the industry trade body in charge of the multi-trillion pound credit default swaps (CDS) market, came under fire for not triggering Greek CDS contracts, it made its decision based on Mr Benton and his team’s legal advice.
In the complex and secretive world of derivatives, Mr Benton is the go-to lawyer. Less than two months ago, Risk – the derivatives industry magazine – awarded Allen & Overy the title of “derivatives law firm of the year”, citing in particular the firm’s work for ISDA on the legal issues surrounding Greek CDS.
“We are providing interpretative advice around what kind of credit event would trigger sovereign CDS contracts,” Mr Benton told Risk. “There has been a huge focus among our investor clients about a potential collapse of the euro and the legal consequences that would arise from that, in particular what kind of event would trigger sovereign CDS contracts.”
Client confidentiality prevents Mr Benton or any other Allen & Overy staff from discussing their work for ISDA’s European “credit determinations committee”, the body that rules whether a “credit event” that would see CDSs pay out has taken place. It is clear from the unanimous vote against activating the contracts, worth a total of $3.2bn (£2bn), that the firm’s advice was most likely strongly against triggering them.
Bill Gross, co-founder of Pimco, one of the world’s largest buyers of debt and the mouthpiece of the bond markets, said the decision set a “dangerous precedent” and that he would be “upset” if he held Greek CDS.
“If insurance for CDS and protection against countries is invalidated, that would be much like taking out an insurance policy on flood insurance and then having the companies basically say that it was rain as opposed to flood damage that produced the carnage,” said Mr Gross. He added that the market would be looking closely at the “interpretation” of the law governing the contracts.
ISDA itself admitted the situation in Greece was “still evolving” and that the decision did not mean a default, or credit event, could not occur “at a later date” as “further facts come to light”.
For those not intimate with the finer details of derivatives contract law it seems odd that despite investors being asked to write off more than half the value of their holdings of Greek government debt, this should not be thought valid grounds to claim on insurance contracts written specifically to protect the value of holdings in the bonds.
The legal case for this rests on two principles. Firstly, Greece, despite all its financial problems, has continued to make interest payments on its debt. This puts the country in a position somewhat like a homeowner who is struggling to keep up their mortgage payments, but who has not actually missed a payment.
Secondly, the Greek debt restructuring deal as currently envisaged is based on voluntary haircuts in the value of investors’ holdings through the use of “collective action clauses”. Because of this, legally Greece is not forcing losses on its bondholders and therefore under the ISDA contracts that CDS are sold, there are no grounds to declare a “restructuring credit event” that would allow claims to be made.
Like everything in the eurozone crisis, this will not be the end of the matter and there is nothing to stop investors submitting as many requests for a judgment to ISDA as they like.
As Mr Gross said on Thursday: “It’s not over till it’s over there.”