The equation is a simplified bivariate form of [Cholesky decomposition][1].  This simplified equation is sometimes called the Kaiser-Dickman algorithm (Kaiser & Dickman, 1962).  

Note that $X_1$ and $X_2$ must be standard normal variables for this algorithm to work properly. 

**References:**

Kaiser, H. F., & Dickman, K. (1962). Sample and population score matrices and sample correlation matrices from an arbitrary population correlation matrix. *Psychometrika, 27*(2), 179-182.

  [1]: http://en.wikipedia.org/wiki/Cholesky_decomposition