Miscellaneous - VM CSA Provision
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ISDA 2016 English Law VM Credit Support Annex
A Jolly Contrarian owner’s manual™ Miscellaneous in a Nutshell™
Original text
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Comparisons
security interest CSA v title transfer CSA: The Miscellaneous terms are largely the same but for the Further Assurances and Further Protection, which are unique to the security interest CSAs, relating as they do to security interests. See comparison of the ancients and comparison of the moderns which, but for those aspects and the differing terminology, are pretty much the same.
Ancient v modern: The big change is the additional “Legally Ineligible Credit Support” business, and a slug of extra detail in the Default Interest section of the modern CSA, largely there to account for the fever dream that was negative interest rates. See comparison.
NY VM CSA v Eng IM CDS: Largely of a piece until Para 11(f) when the dictates of NY law against Emnhlish, and directly posted VM versus custodied IM, take the two in very different directions. Why they couldn’t have titled the “Other Provisions” section “Miscellaneous”, as they have done in all other editions of the ISDA Credit Support Annex, we will just have to wonder.
Basics
Good Faith and Commercially Reasonable Manner
Whether a merchant should commit herself to dealing in good faith, or in a commercially reasonable manner, or both, is one that vexes the legal profession. Especially those in America. It should not. While doing no more than articulating the commercial imperative it can put many a tedious, and expensive, negotiation to the sword.
Of course, there is a certain kind of negotiator apt to see phantoms and ghosts at every turn. She has a bleak vision indeed of a counterparty’s general commercial aspirations for his organisation. Hobbesian.
“What if,” she will say, “your traders mendaciously use this clause to bring about my firm’s misfortune in a way I – er – cannot now anticipate?”
Litigation risk
The one argument against the general principle is that acting “reasonably” is inherently vague and therefore a source of potential dispute in itself, even if we always exercise our rights reasonably and in good faith. This is just what you would expect a work-creating lawyer to say.
JC says, “come now”. This is constructive vaguess - of the good kind — it only presents litigation risk to clients who don’t trust you — and here you have bigger problems, frankly — or to those whom you don’t trust — also not without issues. Here, your problem is not the good faith obligation; it’s that you have a lousy client relationship. It hardly affects litigation risk in any case: An unhappy client will take action either way, and will argue a lack of good faith in any case.
A contract is a bond of trust. How would a merchant explain to his counterparty that he wished to reserve for himself the right to act in bad faith?
As for commercial reasonableness, yes, it admits shades of doubt, and encourages litigation — well, for you the great case of Barclays v Unicredit should be a source of succour. The fact that “in good faith and a commercially reasonable manner” is written into the Uniform Commercial Code should bend the American ear: if it is okay there — and in the 2016 NY Law VM CSA — why not elsewhere?
In any case, whatever your contract says, if a court finds you have acted wantonly, or in bad faith, do not expect much sympathy when you argue that, by the contract, you were entitled to.
Legally ineligible Credit Support
New for the regulatory margin CSAs
There is no such concept in the ancient CSAs, concerning as it does legal and not contractual ineligibility of credit support, and that being a function of criteria imposed by regulators on one’s mandatory obligations to post and collect margin, which did not exist before 2016, it is hardly surprising ISDA’s crack drafting squad™ of yore didn’t anticipate the need for this clause, which is convoluted, finnicky, and you can avoid the need for it entirely, should you post cash in a sensible currency.
Regulatory margin title transfer CSA vs security interest CSA
In most respects they are identical (with references to “Transferor” and “Transferee” switched to “Pledgor” and “Secured Party”). There are two technical differences, for completists:
- The exception in the 2016 VM CSA for Legally Ineligible Credit Support counting as Eligible Credit Support for the purpose of Credit Support Balance and Equivalent Credit Support. This is because, being a title transfer collateral arrangement, even though it is worth zero for the purposes of discharging one’s regulatory obligation to collect and return collateral, in the real world it is still worth something, and the Transferee still has to give it back, even if that has no effect on valuations under the 2016 VM CSA. With a 2016 NY Law VM CSA since the Secured Party never[1] “gets” it in the first place, the Secured Party doesn’t have to give it back either. (By the way, if you aren’t saying, “hey, but what about rehypothecation under Paragraph 6(c)?” yet, you should be.)
- The exception for valuation on Default — that flows from the fundamental difference between the 2016 VM CSA a title transfer collateral arrangement which is a Transaction under the ISDA Master Agreement and the 2016 NY Law VM CSA which is a security financial collateral arrangement which is only a Credit Support Document under the ISDA Master Agreement.
Specification of certain matters
One from the “well, I’ll be blowed” school of legal expression wherein ISDA’s crack drafting squad™ states the bleeding obvious for the benefit of those timid types who — despite being schooled in its weft and warp — don’t quite trust the common law to deliver elementary common sense.
On the one hand, you can see where they’re coming from — this is the same common law which concluded that email is not an electronic messaging system,[2] after all - but on the other hand come on.
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See also
References
- ↑ Ahem rehypothecation folks.
- ↑ Greenclose v National Westminster Bank plc.