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| | ====Distributions==== |
| | Handily, {{icds}} captures all the forms of income that could kick off {{{{{1}}}|Posted Credit Support}} as “{{{{{1}}}|Distributions}}”: |
| | {{quote| |
| | {{{{{1}}} Distributions definition}}}} |
| ====Care of Posted Collateral==== | | ====Care of Posted Collateral==== |
| You can basically stop reading after “Without limiting the {{{{{1}}}|Secured Party}}’s rights under Paragraph {{{{{1}}}|6(c)}}”. Because the {{{{{1}}}|Secured Party}}’s rights under {{{{{1}}}|6(c)}} basically allow it to nuke your [[security interest]] the moment it receives your collateral. It can ''give'' your carefully pledged asset away. | | You can basically stop reading after “Without limiting the {{{{{1}}}|Secured Party}}’s rights under Paragraph {{{{{1}}}|6(c)}}”. Because the {{{{{1}}}|Secured Party}}’s rights under {{{{{1}}}|6(c)}} basically allow it to nuke your [[security interest]] the moment it receives your collateral. It can ''give'' your carefully pledged asset away. |
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| In this way does security interest collateral arrangement with rehypothecation convert itself, for all intents and purposes, into a title transfer collateral arrangement. | | In this way does security interest collateral arrangement with rehypothecation convert itself, for all intents and purposes, into a [[title transfer collateral arrangement]]. There is more on this, and rehypothecation, in the {{premium}}. |
| ====Rehypothecation====
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| {{quote|{{Rehypothecation capsule}}}}
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| Paragraph {{{{{1}}}|6(c)}} is the classic part of your [[security interest]] CSA that converts it into a [[title transfer]] CSA, meaning — cough, as with much [[New York law]] frippery — that you might as well not bother with calling this a [[pledge]] or [[security interest]] in the first place.
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| So I give my asset to you, right, carefully only [[Pledge|pledging]] it as [[Security interest|security]] for my [[indebtedness]] to you, and protect myself from your [[credit risk]] because I ''retain [[beneficial ownership]]'' of the asset. It is mine, not yours, and should you explode into a thousand points of light, then, once I have settled my trading account with your administrator, I can have it back.
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| Right?
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| Except that, the moment you get it, ''unless we have agreed otherwise'' — and, by default, the CSA assumes we have not — you may unconditionally sell my asset, absolutely, to anyone you want to, at any time, or actually, damn the torpedoes, just take it onto your own balance sheet and hold it in your own name. Whereupon, my claim against you is for the return of my asset that you no longer have, or have put into your general [[bankruptcy estate]], so you would have to go and buy it in the market, but since you have blown up, you can’t realistically do that, so I am, after all, your [[unsecured creditor]] and all this talk of security interests is a nonce.
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| Note that the {{{{{1}}}|Secured Party}}’s right to flog off the {{{{{1}}}|Pledgor}}’s asset evaporates should it commit an {{isdaprov|Event of Default}}, {{isdaprov|Early Termination Event}} or one of the CSA’s {{{{{1}}}|Specified Condition}}s but — courtesy of Paragraph {{{{{1}}}|7(ii)}}, the {{{{{1}}}|Secured Party}}’s right to call a default as a result of the {{{{{1}}}|Pledgor}} continuing to flog off its assets — there doesn’t seem to be an obligation to buy back assets once they’re sold, by the way — only kicks in after 5 {{{{{1}}}|Local Business Days}}, by which stage even the guys disconsolately wandering around outside the office clutching [[Iron Mountain]] boxes will have pushed off.
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| Oh, what sad times we live in.
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| Note the odd coda: references to {{{{{1}}}|Posted Collateral}} etc — where, for the purposes of calculating your credit support posting obligations, you are [[deemed]] to still hold it, even though in fact you don’t — is in part an attempt to state the bleeding obvious: just because you’ve hocked the assets off to someone else doesn’t mean you don’t still have to account to your counterparty for their value in the long run — and, we think, a rather feeble attempt to avoid having to create an “{{vmcsaprov|Equivalent Credit Support}}” concept. Since you've sent the particular asset your counterparty gave you into the great wide open, the thing you'll be giving back will be [[Fungible|economically]], but not [[Ontological certainty|ontologically]], so in theory you don’t have to give back the ''exact same one'', even if it does have to be identical with it. Perhaps a concern in 1994, though since {{icds}} went full metal jacket on that enterprise in 1995 when crafting the {{csa}}, it is not like we don’t have suitable, road-tested — if a little anal — language to capture the idea of equivalence.
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| But anyway.
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| ====Interest Transfer====
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| {{quote| | |
| “George, you can type this shit, but I can’t say it.”
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| :— Harrison Ford, to George Lucas, about the script of ''Star Wars''}}
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| If you have got as far into the ghastly bowels of ISDA speak that you have been trying to parse the meaning of Paragraph 6(d)(ii)(A)(I) — just the numbering should tell you to stay well clear — then God’s speed to you. JC only got through it because he was multi-tasking while on an all-hands client money remediation legal workstream weekly stakeholder check in call, and frankly even ritualistic satanic torture would appeal compared to that. But what is it saying?
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| So:
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| You are holding Posted Collateral that pays some kind of income, in cash. Cash being cash, it is yours instantly: you can’t custody it.<ref>[[You can’t dust for vomit]].</ref> So you have to “[[manufacture]]” a corresponding payment. This is a finicky legalistic point — true, but finicky. But okay. You are about to make an equivalent cash payment to the Pledgor (Para {{{{{1}}}|6(d)(ii)(A)}}) — but the Pledgor also owes you more Posted Collateral (Para {{{{{1}}}|6(d)(ii)(A)}}(I)) (maybe the Exposure has moved in your favour). What to do?
| | {{{{{1}}} 6(d)(ii)|{{{1}}}}} |
Distributions
Handily, ISDA’s crack drafting squad™ captures all the forms of income that could kick off {{{{{1}}}|Posted Credit Support}} as “{{{{{1}}}|Distributions}}”:
{{{{{1}}} Distributions definition}}
Care of Posted Collateral
You can basically stop reading after “Without limiting the {{{{{1}}}|Secured Party}}’s rights under Paragraph {{{{{1}}}|6(c)}}”. Because the {{{{{1}}}|Secured Party}}’s rights under {{{{{1}}}|6(c)}} basically allow it to nuke your security interest the moment it receives your collateral. It can give your carefully pledged asset away.
In this way does security interest collateral arrangement with rehypothecation convert itself, for all intents and purposes, into a title transfer collateral arrangement. There is more on this, and rehypothecation, in the premium content.
{{{{{1}}} 6(d)(ii)|{{{1}}}}}