Template:Collateral and set off

Collateral and set-off

Could your posting me collateral, or granting me a security interest, upset a set-off arrangement I have elsewhere?

Talk about first world problems. Who ever heard of too much credit mitigation? It seems absurd, but the JC has heard it cited, by a patient attorney as a risk, in this case:

A certain principal has entered transactions with you under collateralised agency master agreement. Say an agent lending agreement, or an agency ISDA Master Agreement. The Agent, for your behalf and those of your fellow principals, is relying on contractual netting to manage the whole exposure across its portfolio with you. If you go bust, the portfolio atomises into groups of transactions with individual principals which net down, but there may be some counter-indemnity or other mechanism whereby the agent may apply any excess collateral resulting from closeout against one such principal against a shortfall arising following close-out against another.

Now what happens if, independently of that agency arrangement, you grant security, or post collateral to that party? Does this defeat netting or set off?

Friends, it is hard to see how. If it is a pledge or security interest, and there is a shortfall on your portfolio, this is extra ballast, should you want it, but it hardly can interfere with the agent’s rights should it want to apply other collateral excesses to your shortfall. And if you have an excess — well, what is there to set off? If it is pledged by title transfer this might (if it applies) adjust the calculation of insolvency set-off, but surely only in a way that leads to your exposure, such as it is, being better covered rather than worse. Again, that should mean your agent has less, not more, need to dip into other pools of excess collateral to net out.