Account control agreement: Difference between revisions
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Why would you indemnify the | |||
Why would you indemnify the [[Custodian]] for actions it takes under an [[account control agreement]]? | |||
The logic runs something like this: | The logic runs something like this: | ||
*Custodian is in the middle. It has no skin in the game. | *[[Custodian]] is in the middle. It has no skin in the game. | ||
*If there’s an enforcement event and Pledgee wants to take control of the collateral: | *If there’s an enforcement event and [[Pledgee]] wants to take control of the [[collateral]]: | ||
**Things will be moving super-fast | **Things will be moving super-fast | ||
**Pledgee will want Custodian to act quickly and to not stand on ceremony. | **[[Pledgee]] will want [[Custodian]] to act quickly and to not stand on ceremony. | ||
*If Pledgee instructs Custodian wrongly then: | *If [[Pledgee]] instructs [[Custodian]] wrongly then: | ||
**Pledgee is in the wrong (Q.E.D.) | **[[Pledgee]] is in the wrong (Q.E.D.) | ||
**Pledgee benefits, because Custodian does what it wants and Pledgee gets the collateral | **[[Pledgee]] benefits, because [[Custodian]] does what it wants and [[Pledgee]] gets the [[collateral]] | ||
**Pledgor loses, because Custodian does what Pledgee wants and Pledgee gets the collateral | **[[Pledgor]] loses, because [[Custodian]] does what [[Pledgee]] wants and [[Pledgee]] gets the [[collateral]] | ||
**Custodian is arguably complicit in Pledgee's wrongdoing, but | **[[Custodian]] is arguably complicit in [[Pledgee]]'s wrongdoing, but | ||
***Pledgee started it; | ***[[Pledgee]] started it; | ||
***Custodian has no skin in the game; | ***[[Custodian]] has no skin in the game; | ||
***Custodian may well have no knowledge one way or another; | ***[[Custodian]] may well have no knowledge one way or another; | ||
***Things will be moving super-fast | ***Things will be moving super-fast. | ||
*If Pledgor loses any money as a result: | *If [[Pledgor]] loses any money as a result: | ||
**The Pledgor has an open-and-shut action against Custodian (Q.E.D.) | **The [[Pledgor]] has an open-and-shut action against [[Custodian]] (Q.E.D.) | ||
**The Pledgor has no action against Pledgee. | **The [[Pledgor]] has no action against [[Pledgee]]. | ||
*Doubtful Custodian has a contractual breach claim against Pledgee, because it was complicit in the breach. Therefore: | *Doubtful [[Custodian]] has a contractual breach claim against [[Pledgee]], because it was complicit in the breach. Therefore: | ||
**Custodian can only recover against Pledgee by way of indemnity – since Pledgee hasn't breached. | **[[Custodian]] can only recover against [[Pledgee]] by way of [[indemnity]] – since [[Pledgee]] hasn't breached. | ||
**Practically if Pledgee doesn’t give the indemnity, expect two consequences: | **Practically if [[Pledgee]] doesn’t give the [[indemnity]], expect two consequences: | ||
***Custodian will refuse point blank to follow Pledgee's instructions to take control, or | ***[[Custodian]] will refuse point blank to follow [[Pledgee]]'s instructions to take control, or | ||
***Custodian will insist on an indemnity from Pledgee anyway before taking any action. | ***[[Custodian]] will insist on an [[indemnity]] from [[Pledgee]] anyway before taking any action. | ||
*Pledgee can control the liability under the indemnity easily: | *[[Pledgee]] can control the liability under the [[indemnity]] easily: | ||
**Don’t take control of the collateral when it is not entitled to | **Don’t take control of the [[collateral]] when it is not entitled to | ||
**The liability is in any case determinate – it is the contractual damages that the Pledgor can claim from Custodian as a result. | **The liability is in any case determinate – it is the contractual damages that the [[Pledgor]] can claim from [[Custodian]] as a result. | ||
***Assuming Pledgee doesn’t go bust, Pledgee can return the collateral and maybe suffer some [[buy in]] costs but that’s realistically it. | ***Assuming [[Pledgee]] doesn’t go bust, [[Pledgee]] can return the [[collateral]] and maybe suffer some [[buy in]] costs but that’s realistically it. | ||
***Pledgee would have exactly the same liability if it held the collateral itself as | ***[[Pledgee]] would have exactly the same liability if it held the [[collateral]] itself as [[Custodian]] and didn’t return it when [[Pledgor]] was entitled to it. | ||
===see also=== | ===see also=== | ||
*[[ | *[[Custodian]] | ||
*[[ | *[[Indemnity]] | ||
{{anat|CASS}} | |||
Revision as of 17:12, 17 June 2016
Why would you indemnify the Custodian for actions it takes under an account control agreement?
The logic runs something like this:
- Custodian is in the middle. It has no skin in the game.
- If there’s an enforcement event and Pledgee wants to take control of the collateral:
- If Pledgee instructs Custodian wrongly then:
- If Pledgor loses any money as a result:
- Doubtful Custodian has a contractual breach claim against Pledgee, because it was complicit in the breach. Therefore:
- Pledgee can control the liability under the indemnity easily:
- Don’t take control of the collateral when it is not entitled to
- The liability is in any case determinate – it is the contractual damages that the Pledgor can claim from Custodian as a result.
- Assuming Pledgee doesn’t go bust, Pledgee can return the collateral and maybe suffer some buy in costs but that’s realistically it.
- Pledgee would have exactly the same liability if it held the collateral itself as Custodian and didn’t return it when Pledgor was entitled to it.
see also
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