Miscellaneous - CSA Provision

ISDA 1995 English Law Credit Support Annex A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: →NY OG →Eng OG →NY VM →Eng VM →Eng IM Miscellaneous in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. You can even ask questions! Ask about it here. Original text Paragraph 9. Miscellaneous 9(a) Default Interest. Other than in the case of an amount which is the subject of a dispute under Paragraph 4(a), if a Transferee fails to make, when due, any transfer of Equivalent Credit Support, Equivalent Distributions or the Interest Amount, it will be obliged to pay the Transferor (to the extent permitted under applicable law) an amount equal to interest at the Default Rate multiplied by the Value on the relevant Valuation Date of the items of property that were required to be transferred, from (and including) the date that the Equivalent Credit Support, Equivalent Distributions or Interest Amount were required to be transferred to (but excluding) the date of transfer of the Equivalent Credit Support, Equivalent Distributions or Interest Amount. This interest will be calculated on the basis of daily compounding and the actual number of days elapsed. 9(b) Good Faith and Commercially Reasonable Manner. Performance of all obligations under this Annex, including, but not limited to, all calculations, valuations and determinations made by either party, will be made in good faith and in a commercially reasonable manner. 9(c) Demands and Notices. All demands and notices given by a party under this Annex will be given as specified in Section 12 of this Agreement. 9(d) Specifications of Certain Matters. Anything referred to in this Annex as being specified in Paragraph 11 also may be specified in one or more Confirmations or other documents and this Annex will be construed accordingly. The varieties of ISDA CSA Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng Preamble Pre Pre Pre Pre Pre Interpretation 1 1 1 1 1 Security Interest 2 - 2 - 2 Credit Support Obligations 3 2 3 2 3 Transfers, Calculations and Exchanges - 3 - 3 - Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4 Dispute Resolution 5 4 5 4 5 Holding and Using Posted Collateral 6 - 6 - 6 Transfer of Title, No Security Interest - 5 - 5 - Events of Default 7 6 7 6 7 Rights and Remedies 8 - 8 - 8 Representations 9 7 9 7 9 Expenses 10 8 10 8 10 Miscellaneous 11 9 11 9 11 Definitions 12 10 12 10 12 Elections and Variables 13 11 13 11 13 Resources and Navigation Index: Click ᐅ to expand: CSA

Comparisons

security interest CSA v title transfer CSA: The Miscellaneous terms are largely the same but for the Further Assurances and Further Protection, which are unique to the security interest CSAs, relating as they do to security interests. See comparison of the ancients and comparison of the moderns which, but for those aspects and the differing terminology, are pretty much the same.

Ancient v modern: The big change is the additional “Legally Ineligible Credit Support” business, and a slug of extra detail in the Default Interest section of the modern CSA, largely there to account for the fever dream that was negative interest rates. See comparison.

NY VM CSA v Eng IM CDS: Largely of a piece until Para 11(f) when the dictates of NY law against Emnhlish, and directly posted VM versus custodied IM, take the two in very different directions. Why they couldn’t have titled the “Other Provisions” section “Miscellaneous”, as they have done in all other editions of the ISDA Credit Support Annex, we will just have to wonder.

Basics

Good Faith and Commercially Reasonable Manner

Whether a merchant should commit herself to dealing in good faith, or in a commercially reasonable manner, or both, is one that vexes the legal profession. Especially those in America. It should not. While doing no more than articulating the commercial imperative it can put many a tedious, and expensive, negotiation to the sword.

Of course, there is a certain kind of negotiator apt to see phantoms and ghosts at every turn. She has a bleak vision indeed of a counterparty’s general commercial aspirations for his organisation. Hobbesian.

“What if,” she will say, “your traders mendaciously use this clause to bring about my firm’s misfortune in a way I – er – cannot now anticipate?”

Litigation risk

The one argument against the general principle is that acting “reasonably” is inherently vague and therefore a source of potential dispute in itself, even if we always exercise our rights reasonably and in good faith. This is just what you would expect a work-creating lawyer to say.

JC says, “come now”. This is constructive vaguess - of the good kind — it only presents litigation risk to clients who don’t trust you — and here you have bigger problems, frankly — or to those whom you don’t trust — also not without issues. Here, your problem is not the good faith obligation; it’s that you have a lousy client relationship. It hardly affects litigation risk in any case: An unhappy client will take action either way, and will argue a lack of good faith in any case.

A contract is a bond of trust. How would a merchant explain to his counterparty that he wished to reserve for himself the right to act in bad faith?

As for commercial reasonableness, yes, it admits shades of doubt, and encourages litigation — well, for you the great case of Barclays v Unicredit should be a source of succour. The fact that “in good faith and a commercially reasonable manner” is written into the Uniform Commercial Code should bend the American ear: if it is okay there — and in the 2016 NY Law VM CSA — why not elsewhere?

In any case, whatever your contract says, if a court finds you have acted wantonly, or in bad faith, do not expect much sympathy when you argue that, by the contract, you were entitled to.

Legally ineligible Credit Support

New for the regulatory margin CSAs

There is no such concept in the ancient CSAs, concerning as it does legal and not contractual ineligibility of credit support, and that being a function of criteria imposed by regulators on one’s mandatory obligations to post and collect margin, which did not exist before 2016, it is hardly surprising ISDA’s crack drafting squad™ of yore didn’t anticipate the need for this clause, which is convoluted, finnicky, and you can avoid the need for it entirely, should you post cash in a sensible currency.

Regulatory margin title transfer CSA vs security interest CSA

In most respects they are identical (with references to “Transferor” and “Transferee” switched to “Pledgor” and “Secured Party”). There are two technical differences, for completists:

• The exception in the 2016 VM CSA for Legally Ineligible Credit Support counting as Eligible Credit Support for the purpose of Credit Support Balance and Equivalent Credit Support. This is because, being a title transfer collateral arrangement, even though it is worth zero for the purposes of discharging one’s regulatory obligation to collect and return collateral, in the real world it is still worth something, and the Transferee still has to give it back, even if that has no effect on valuations under the 2016 VM CSA. With a 2016 NY Law VM CSA since the Secured Party never “gets” it in the first place, the Secured Party doesn’t have to give it back either. (By the way, if you aren’t saying, “hey, but what about rehypothecation under Paragraph 6(c)?” yet, you should be.)
• The exception for valuation on Default — that flows from the fundamental difference between the 2016 VM CSA a title transfer collateral arrangement which is a Transaction under the ISDA Master Agreement and the 2016 NY Law VM CSA which is a security financial collateral arrangement which is only a Credit Support Document under the ISDA Master Agreement.

Specification of certain matters

One from the “well, I’ll be blowed” school of legal expression wherein ISDA’s crack drafting squad™ states the bleeding obvious for the benefit of those timid types who — despite being schooled in its weft and warp — don’t quite trust the common law to deliver elementary common sense.

On the one hand, you can see where they’re coming from — this is the same common law which concluded that email is not an electronic messaging system, after all - but on the other hand come on.

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