Template:Csa title transfer vs pledge: Difference between revisions

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==={{tag|Title transfer}} vs. {{tag|Pledge}}===
====The twain between NY law and English law CSAs: pledge v title transfer====
This feels as good a time as any to raise the great subject of [[title transfer]] and [[pledge]]. In a {{nutshell}}:
This feels as good a time as any to raise the great subject of [[title transfer]] and [[pledge]].  
===='''Title Transfer'''====
 
Outright transfer. Examples: The {{1995csa}} – outside the US, by far the most common type of {{csa}} – is a [[title transfer]] document: A vanilla {{gmsla}} or {{gmsla}} operates by title transfer.  
Under a {{nycsa}} one transfers {{{{{1}}}|Credit Support}} by means of ''[[pledge]]''.
*When securities delivered to a party they become the recipient's property absolutely  
 
*Recipient does not hold them in custody for the transferor;
Under a {{ukcsa}} one transfers {{{{{1}}}|Credit Support}} by ''[[title transfer]]''.
*Recipient has only an obligation to redeliver an [[equivalent]] security.
 
*Therefore no {{tag|CASS}} or [[custody]] question arises at any point - the transferor gives up all legal claims to the asset.
What is the difference?
*Nor does it make any sense to talk about the transferee’s right to [[reuse]] or [[rehypothecate]] the asset. It owns the asset outright: by definition it can do what it wants with it; the transferor can’t stop it.<ref>This doesn't stop [[triparty agent]]s requiring title transfer providers to grant their counterparties a right of reuse.</ref>
=====Title transfer=====
===='''Pledge'''====
Under a “{{ttca}}” one party transfers collateral to the other ''outright and absolutely'': it ''gives'' it, free of all reversionary interests, to the {{{{{1}}}|Transferee}}.  
Examples: The {{1995csd}} and {{1994csa}}  are “pledge” documents. Collateral deliveries under the US-style {{msla}} and {{mra}} are pledges (with a right of [[reuse]]).
 
*The transferor delivers the assets to the transferee to hold in [[custody]] for the transferor – the transferor retains title.
Securities delivered to {{{{{1}}}|Transferee}} become the {{{{{1}}}|Transferee}}’s property absolutely. There is no custody involved: the {{{{{1}}}|Transferee}} owns them outright, and not to {{{{{1}}}|Transferor}}’s order. The {{{{{1}}}|Transferee}} has only an obligation to redeliver an [[equivalent]]security — ie one that is fungible with the {{{{{1}}}|Credit Support}} originally posted.
*Recipient holds the assets subject to a {{tag|security interest}} securing its payment obligation under the related transaction.
 
*The custody arrangement only exists while recipient holds the security, not before.
There are no custody/client asset regulatory issues, and nor does it make sense to talk about the {{{{{1}}}|Transferee}}’s right to [[reuse]]or [[rehypothecate]]the asset. It ''owns'' the asset outright: by definition, it can do what it wants with it.
**Under US iterations of this form (e.g. the {{1994csa}}) the pledgee may nonetheless be entitled to sell the pledged asset absolutely, under a process known as [[rehypothecation]]. Don’t laugh. [[Amwell J|We]] think this converts the pledge into a [[title transfer collateral arrangement]] — at least at the point of [[rehypothecation]].
 
=====Pledge=====
The NY law CSAs and English law CSDs are “{{sfca}}s” in that there is a {{{{{1}}}|Pledgor}} who creates a [[security interest]] in favour of the {{{{{1}}}|Secured Party}}, ''but retains beneficial ownership of the assets''.  
 
The {{{{{1}}}|Pledgor}} delivers the assets to the {{{{{1}}}|Secured Party}} to hold in [[custody]], subject to the [[security interest]], for the {{{{{1}}}|Pledgor}}. {{{{{1}}}|Secured Party}} holds the assets subject to a [[security interest]] securing its payment obligation under the related transaction.
 
There is a custody arrangement but only while {{{{{1}}}|Secured Party}} holds the security: Under the NY law CSAs, the {{{{{1}}}|Secured Party}} (by default) is entitled to sell the pledged asset absolutely, under a process known as [[rehypothecation]]. This, we believe, converts the {{sfca}} into a {{ttca}} — at least from the point of [[rehypothecation]]. If so, it makes you wonder why, you know, all the fuss with security interests.
 
====“Transaction” or “Credit Support Document”?====
English law Credit Support Annexes are {{isdaprov|Transaction}}s under the Master Agreement. Therefore they are not {{isdaprov|Credit Support Document}}s.
 
New York law Credit Support Annexes are ''not'' {{isdaprov|Transaction}}s. Explicitly, they '''are''' {{isdaprov|Credit Support Document}}s'', though you should not (according to the ISDA User’s Guide) describe the parties to one as “{{nycsaprov|Credit Support Provider}}s”.
 
English law Credit Support ''Deeds'' (including the {{imcsd}}) — rare birds in the [[Forest of Bretton]] — are ''not'' {{isdaprov|Transaction}}s and, explicitly, ''are'' {{isdaprov|Credit Support Document}}s''.
 
This means that a failure to perform under an English law CSA {{isdaprov|Transaction}} is a {{isdaprov|Failure to Pay or Deliver}} under Section {{isdaprov|5(a)(i)}}. by contrast, a failure to perform under a New York law CSA or an English law CS''D'' is a {{isdaprov|Credit Support Default}} under Section {{isdaprov|5(a)(iii)}}.
 
Does this mean anything substantive? Or is the difference only formal?
 
====Enforcement====
Because ownership transfers absolutely, a {{{{{1}}}|Transferee}} under an English law CSA doesn’t have to do anything to enforce its collateral. It already owns it outright. Indeed, to the contrary, should the {{{{{1}}}|Exposure}} that the collateral supports disappear, the {{{{{1}}}|Transferor}} will be the creditor of the {{{{{1}}}|Transferee}}. It is as if it were a {{isdaprov|Transaction}} under the ISDA where the [[mark-to-market]] exposure had flipped around.
 
As New York law CSAs are ''not'' {{isdaprov|Transaction}}s, they are old-fashioned security arrangements. Therefore they '''are'' Credit Support Documents in the labyrinthine logic of {{icds}} and must be enforced.

Latest revision as of 14:37, 8 May 2024

The twain between NY law and English law CSAs: pledge v title transfer

This feels as good a time as any to raise the great subject of title transfer and pledge.

Under a 1994 NY CSA one transfers {{{{{1}}}|Credit Support}} by means of pledge.

Under a English law CSA one transfers {{{{{1}}}|Credit Support}} by title transfer.

What is the difference?

Title transfer

Under a “title transfer collateral arrangement” one party transfers collateral to the other outright and absolutely: it gives it, free of all reversionary interests, to the {{{{{1}}}|Transferee}}.

Securities delivered to {{{{{1}}}|Transferee}} become the {{{{{1}}}|Transferee}}’s property absolutely. There is no custody involved: the {{{{{1}}}|Transferee}} owns them outright, and not to {{{{{1}}}|Transferor}}’s order. The {{{{{1}}}|Transferee}} has only an obligation to redeliver an “equivalent” security — ie one that is fungible with the {{{{{1}}}|Credit Support}} originally posted.

There are no custody/client asset regulatory issues, and nor does it make sense to talk about the {{{{{1}}}|Transferee}}’s right to “reuse” or “rehypothecate” the asset. It owns the asset outright: by definition, it can do what it wants with it.

Pledge

The NY law CSAs and English law CSDs are “security financial collateral arrangements” in that there is a {{{{{1}}}|Pledgor}} who creates a security interest in favour of the {{{{{1}}}|Secured Party}}, but retains beneficial ownership of the assets.

The {{{{{1}}}|Pledgor}} delivers the assets to the {{{{{1}}}|Secured Party}} to hold in custody, subject to the security interest, for the {{{{{1}}}|Pledgor}}. {{{{{1}}}|Secured Party}} holds the assets subject to a security interest securing its payment obligation under the related transaction.

There is a custody arrangement but only while {{{{{1}}}|Secured Party}} holds the security: Under the NY law CSAs, the {{{{{1}}}|Secured Party}} (by default) is entitled to sell the pledged asset absolutely, under a process known as “rehypothecation”. This, we believe, converts the security financial collateral arrangement into a title transfer collateral arrangement — at least from the point of rehypothecation. If so, it makes you wonder why, you know, all the fuss with security interests.

“Transaction” or “Credit Support Document”?

English law Credit Support Annexes are Transactions under the Master Agreement. Therefore they are not Credit Support Documents.

New York law Credit Support Annexes are not Transactions. Explicitly, they are Credit Support Documents, though you should not (according to the ISDA User’s Guide) describe the parties to one as “Credit Support Providers”.

English law Credit Support Deeds (including the 2018 English law IM CSD) — rare birds in the Forest of Bretton — are not Transactions and, explicitly, are Credit Support Documents.

This means that a failure to perform under an English law CSA Transaction is a Failure to Pay or Deliver under Section 5(a)(i). by contrast, a failure to perform under a New York law CSA or an English law CSD is a Credit Support Default under Section 5(a)(iii).

Does this mean anything substantive? Or is the difference only formal?

Enforcement

Because ownership transfers absolutely, a {{{{{1}}}|Transferee}} under an English law CSA doesn’t have to do anything to enforce its collateral. It already owns it outright. Indeed, to the contrary, should the {{{{{1}}}|Exposure}} that the collateral supports disappear, the {{{{{1}}}|Transferor}} will be the creditor of the {{{{{1}}}|Transferee}}. It is as if it were a Transaction under the ISDA where the mark-to-market exposure had flipped around.

As New York law CSAs are not Transactions, they are old-fashioned security arrangements. Therefore they 'are Credit Support Documents in the labyrinthine logic of ISDA’s crack drafting squad™ and must be enforced.