Template:Csa title transfer vs pledge: Difference between revisions

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===The big difference between {{nycsa}}s and {{ukcsa}}s: {{tag|title transfer}} and {{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]]. Under a {{nycsa}} one transfers {{nycsaprov|Credit Support}} by means of [[pledge]]. Under a {{ukcsa}} one transfers {{vmcsaprov|Credit Support}} by means to [[title transfer]].  
This feels as good a time as any to raise the great subject of [[title transfer]] and [[pledge]].  


What is the difference? Well, in a {{nutshell}}:
Under a {{nycsa}} one transfers {{{{{1}}}|Credit Support}} by means of ''[[pledge]]''.  
====Title transfer under a {{ukcsa}}====
Under a {{ttca}}” when a party provides collateral it transfers it to the other party outright and absolutely: it ''gives'' it, free of all reversionary interests, to the {{{{{1}}}prov|Transferee}}.
*Securities delivered to {{{{{1}}}prov|Transferee}} become the {{{{{1}}}prov|Transferee}}’s property absolutely
*{{{{{1}}}prov|Transferee}} does not hold them in custody for the {{{{{1}}}prov|Transferor}};
*{{{{{1}}}prov|Transferee}} has only an obligation to redeliver an [[equivalent]] security.
*Therefore no {{tag|CASS}} or [[custody]] question arises at any point - the {{{{{1}}}prov|Transferor}} gives up all legal claims to the asset.
*Nor does it make any sense to talk about the {{{{{1}}}prov|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 {{{{{1}}}prov|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>
====Pledge under a {{nycsa}} (and a {{csd}})====
Examples: The {{nycsa}}s and the {{csd}} are {{sfca}}s in that the {{nyvmcsaprov|Pledgor}} creates a [[security interest]] over the document in favour of the {{nyvmcsaprov|Secured Party}}, but retains beneficial ownership of the assets.
*The {{{{{1}}}prov|Pledgor}} delivers the assets to the {{nyvmcsaprov|Secured Party}} to hold in [[custody]], subject to the [[security interest]], for the {{{{{1}}}prov|Pledgor}}. The {{{{{1}}}prov|Pledgor}} retains title to the assets.
*{{{{{1}}}prov|Secured Party}} holds the assets subject to a {{tag|security interest}} securing its payment obligation under the related transaction.
*The custody arrangement only exists while {{{{{1}}}prov|Secured Party}} holds the security, not before.
**Under the {{nycsa}}s  the {{nyvmcsaprov|Secured Party}} may nonetheless be entitled to sell the pledged asset absolutely, under a process known as [[rehypothecation]]. Don’t laugh. The [[JC]] thinks this converts the pledge into a {{ttca}} — at least at the point of [[rehypothecation]]. If so, it makes you wonder why, you know, all the fuss with security interests.


===“{{isdaprov|Transaction}}” versus “{{isdaprov|Credit Support Document}}” complicated affair.===
Under a {{ukcsa}} one transfers {{{{{1}}}|Credit Support}} by ''[[title transfer]]''.  
You are going to love this. Strap yourselves in. Are you ready?
*''{{ukcsa}}s are {{isdaprov|Transaction}}s but are not {{isdaprov|Credit Support Document}}s.
*''{{nycsa}}s '''not''' {{isdaprov|Transaction}}s, and, explicitly, '''are''' {{isdaprov|Credit Support Document}}s'', though you should not (according to the user’s guide) describe the parties to one as “{{nycsaprov|Credit Support Provider}}s”.
*''{{csd}}s (including the {{imcsd}})  are '''not''' {{isdaprov|Transaction}}s and, explicitly, '''are''' {{isdaprov|Credit Support Document}}s''.


This means the Events of Default for failure to pay under an English law CSA — being a {{isdaprov|Transaction}}, a failure to pay under it is a Section {{vmcsaprov|5(a)(i)}} {{vmcsaprov|Failure to Pay or Deliver}} — are different from those applying to New York law CSAs and English law CSDs (being Credit Support Documents, a failure to pay under these is a Section {{isdaprov|5(a)(iii)}} {{isdaprov|Credit Support Default}}).
What is the difference?
=====Title transfer=====
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}}.  


Because ownership transfers absolutely, the {{{{{1}}}prov|Transferee}} doesn’t have to do anything to enforce its collateral. It already owns it outright. Indeed, to the contrary, should the {{{{{1}}}prov|Exposure}} that the collateral supports disappear, the {{{{{1}}}prov|Transferor}} will be the creditor of the {{{{{1}}}prov|Transferee}}. It is as it it were a {{isdaprov|Transaction}} under the ISDA where the mark-to-market exposure had flipped around. Indeed, a {{ukcsa}} '''is''' a “{{isdaprov|Transaction}}” under the {{isdama}} it is an integral part of the {{isdama}} itself, and it is the proverbial schoolboy error to label a {{ukcsa}} as a “{{isdaprov|Credit Support Document}}”. It is not a Credit Support Document. From the point of view of the ISDA architecture it is the {{isdaprov|Confirmation}} for a {{isdaprov|Transaction}}.
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.  


But the {{nycsa}}s are ''not'' {{isdaprov|Transaction}}s, for the same reason: title ''doesn’t'' change hands. They are old fashioned security arrangements. Therefore they '''are'' Credit Support Documents in the labyrinthine logic of {{icds}}. This all no doubt must have seen an excellently complex thing for the little gnomes in {{icds}}when they were devising the idea of the [[CSA]] back in the early nineties. Nowadays, it just seems silly. But here we are, folks.
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 “{{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.