Other Provisions - IM CSD Provision

2018 ISDA Credit Support Deed (IM) (English law) 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 11. Other Provisions 11(a) Default Interest. A Secured Party that fails, when required to do so, to instruct the Custodian (IM) to transfer Posted Credit Support (IM) to the Chargor, will be obliged to pay the Chargor (to the extent permitted by applicable law) an amount equal to interest at the Default Rate multiplied by the Value on the relevant Calculation Date (IM) of the items of property that the Secured Party was required to instruct the Custodian (IM) to transfer, from (and including) the date that the Secured Party was required to instruct the Custodian (IM) to transfer the Posted Credit Support (IM) to (but excluding) the date that the Secured Party instructs the Custodian (IM) to transfer the Posted Credit Support (IM). This interest will be calculated on the basis of daily compounding and the actual number of days elapsed. 11(b) Further Assurances. Promptly following a demand made by a party, the other party will execute, deliver, file and record any financing statement, specific assignment or other document, and take any other action that may be necessary or desirable and reasonably requested by that party to create, preserve, perfect or validate any security interest granted under Paragraph 2, to enable that party to exercise or enforce its rights under this Deed with respect to Posted Credit Support (IM) or to effect or document a release of a security interest on Posted Credit Support (IM). 11(c) Further Protection. The Chargor will promptly give notice to the Secured Party of, and defend against, any suit, action, proceeding or lien that involves Posted Credit Support (IM) transferred by the Chargor or that could adversely affect the security interest granted by it under Paragraph 2. 11(d) Good Faith and Commercially Reasonable Manner. Performance of all obligations under this Deed, 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. 11(e) Demands and Notices. All demands and notices made by a party under this Deed will be made as specified in Section 12 of the Agreement, except as otherwise provided in Paragraph 13. 11(f) Specifications of Certain Matters. Anything referred to in this Deed as being specified in Paragraph 13 also may be specified in one or more Confirmations or other documents and this Deed will be construed accordingly. 11(g) Governing Law and Jurisdiction. This Deed, and any non-contractual obligations arising out of or in connection with it will be governed by and construed in accordance with English law. With respect to any dispute, claim, difference or controversy arising out of, relating to or having any connection with this Deed, including any dispute as to its existence, validity, interpretation, performance, breach or termination or the consequences of its nullity and any dispute relating to any non-contractual obligations arising out of or in connection with it (“Proceedings”), each party irrevocably: (i) submits to the non-exclusive jurisdiction of the English courts; (ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party; and (iii) agrees, to the extent permitted by applicable law, that the bringing of Proceedings in any one or more jurisdictions will not preclude the bringing of Proceedings in any other jurisdiction. 11(h) Service of Process. Each party irrevocably appoints the Process Agent, if any, specified opposite its name in Paragraph 13 to receive, for it and on its behalf, service of process in any proceedings before the English courts in connection with this Deed. If for any reason any party’s Process Agent is unable to act as such, such party will promptly notify the other party and may within 30 days appoint a substitute process agent acceptable to the other party. The parties irrevocably consent to service of process given in the manner provided for notices in Section 12 of the Agreement, except as otherwise provided in Paragraph 13. Nothing in this Deed will affect the right of either party to serve process in any other manner permitted by applicable law. 11(i) Third Party Rights. A person who is not a party to this Deed shall not have any rights under the Contracts (Rights of Third Parties) Act 1999 to enforce, or enjoy the benefit of, any term of this Deed. This does not affect any right or remedy of a third party which exists, or is available, apart from the Contracts (Rights of Third Parties) Act 1999. 11(j) Interpretation. Unless otherwise specified in Paragraph 13, references in this Deed to a law, statute or statutory provision include (i) such law, statute or statutory provision as from time to time amended, modified, re-enacted or consolidated whether before or after the date of this Deed; and (ii) any subordinate legislation from time to time made, amended, modified, re-enacted or consolidated, whether before or after the date of this Deed under any such law, statute or statutory provision. Notwithstanding the foregoing, for the purposes of determining (i) if a Transaction is a Covered Transaction (IM) and (ii) what version of any standardised initial margin schedule applies to a particular Transaction (if the parties have otherwise agreed to apply such standardised initial margin schedule to such Transaction), the relevant law, statute, statutory provision or subordinate legislation will be such law, statute, statutory provision or subordinate legislation as in effect on the date the relevant Transaction was entered into. 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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