Security - IM CSD Provision
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2018 ISDA Credit Support Deed (IM) (English law)
A Jolly Contrarian owner’s manual™ Security in a Nutshell™
Original text
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Comparisons
But for the addition of those pointless (VM)s everywhere, Section 2 of the 1994 NY CSA is identical to Section 2 of the 2016 NY VM CSA. The 2018 IM CSD has a bit more heft to it with all kinds of additional covenants, restrictions and so on.
Basics
Paragraph 2(a): Covenant to Perform
What is the point of the “covenant to perform”? Unless there is a third-party security trustee involved — common in asset-backed securities, for example — who is not a direct benefit of the covenant to perform then you already have a covenant in the ISDA itself. After all, the whole contract is a mutual covenant to perform. The reasons are partly habitual, belts-and-braces sort of stuff, partly practical and partly the deep magic from which the idea of security sprang in the primordial beginnings of the common law. The practical one is that the English law CSD is, of course, a contract executed as a deed — a “specialty” in the odd language of Section 8 of the Limitation Act 1980 — thereby earning you a 12-year limitation period, quite an upgrade on the 6-year period you get under the non-specialty ISDA Master Agreement, being indebtedness incurred under a “simple contract”.
Now what exactly would you be doing to omit to file a claim under a failed credit support arrangement for 6 months, let alone six years, it is hard to say, so this may seem like a peripheral benefit for all but the truly disorganised — but seeing as you’re signing as a specialty, and the benefit is there for the taking, Casanova’s prerogative applies. Stick it in. No-one will argue about it.
Paragraph 2(b): Security
Some observations about schoolboy errors that, I am afraid to say, readers, rather validate the concern that drafting and even comprehension standards within ISDA’s crack drafting squad™ are off their historical highs. We may find ISDA’s crack drafting squad™ to be haughty, fastidious and pedantic — not, traditionally, seen as shortcomings even if they make the day-to-day experience in the trenches that much more like the Somme — but, generally, the Squad’s legal acumen as been beyond reproach: standing waist-deep in mud for months on end is good for a young negotiator, as long as it is in the service of justified probity.
But in the 2018 English law IM CSD, we see the standard slipping. This clause is a good example:
“(present or future)”: Tossed out, no doubt, as a universal redundant catch-all, it doesn’t quite work in a security charging clause. You can’t, actually, grant a fixed charge over something you haven’t yet delivered into the account you are charging, you can’t identify, and which you aren’t yet — by the very theory of the game — even obliged to deliver into that account. There’s an ontological problem here. It goes deep. For how are you supposed to identify with any certainty what your future Posted Credit Support (IM) will be, before it has been calculated, before it is due, before you’ve posted it, at all, let alone with enough certainty for a fixed charge to attach to it, we can only wonder.
And is the assignment of these rights really absolute, or by way of security?
Paragraph 2(c): Restrictions on Dealings
JC wouldn’t normally get excited about a clause as quotidian is this but it, brings uncommon joy to be the one to point out the references to “clearing systems”. Elsewhere in this Deed — for example, in the definition of Assigned Rights, we find the ’squad carelessly referring to “clearance systems”.
In a document as tediously, fastidiously, anal-retentively-drafted as this one is — the 2018 English law IM CSD really sets a benchmark, even amongst ISDA documents — this will not do.
Remainder of the paragraphs
Paragraphs 2(e) through 2(f) are the usual litany of formal paranoia that it is incumbent on any securities lawyer to say.
Is it perfect? Does it dispatch with the foibles and bear traps of taking security under English law? Yes, probably. Does it do it clearly and neatly and without ado? No, but it doesn’t matter. This is boilerplate designed to stop tendentious arguments by creative lawyers in the unknowable future. This is deep magic for these people, they take it very seriously, and don’t take kindly to people down-playing its significance so practical advice (a) don’t fiddle with it and (b) don’t engage with negotiating counterparties who try to fiddle with it. Be firm. If anyone tweaks it just say no.
Will anyone try to tweak it? You hope not, but then people insist on putting a counterparts clause in an NDA, so JC is beyond being surprised at the behaviour of lawyers.
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See also
- Covenant to pay in a secured, asset-backed debt context