2016 ISDA Credit Support Annex (VM) (New York law)
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Rights and Remedies in a Nutshell™
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Original text
Paragraph 8 Certain Rights and Remedies
8(a) Secured Party’s Rights and Remedies. If at any time (1) an Event of Default or Specified Condition with respect to the Pledgor has occurred and is continuing or (2) an Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Pledgor, then, unless the Pledgor has paid in full all of its Obligations that are then due, the Secured Party may exercise one or more of the following rights and remedies:
- (i) all rights and remedies available to a Secured Party under applicable law with respect to Posted Collateral (VM) held by the Secured Party;
- (ii) any other rights and remedies available to the Secured Party under the terms of Other Posted Support (VM), if any;
- (iii) the right to Set-off (A) any amounts payable by the Pledgor with respect to any Obligations and (B) any Cash amounts and the Cash equivalent of any non-Cash items posted to the Pledgor by the Secured Party as margin under any Other CSA (other than any Other CSA Excluded Credit Support) the return of which is due to the Secured Party against any Posted Collateral (VM) or the Cash equivalent of any Posted Collateral (VM) held by the Secured Party (or any obligation of the Secured Party to Transfer that Posted Collateral (VM)); and
- (iv) the right to liquidate any Posted Collateral (VM) held by the Secured Party through one or more public or private sales or other dispositions with such notice, if any, as may be required under applicable law, free from any claim or right of any nature whatsoever of the Pledgor, including any equity or right of redemption by the Pledgor (with the Secured Party having the right to purchase any or all of the Posted Collateral (VM) to be sold) and to apply the proceeds (or the Cash equivalent thereof) from the liquidation of the Posted Collateral (VM) to (A) any amounts payable by the Pledgor with respect to any Obligations and (B) any Cash amounts and the Cash equivalent of any non-Cash items posted to the Pledgor by the Secured Party as margin under any Other CSA (other than any Other CSA Excluded Credit Support) the return of which is due to the Secured Party in that order as the Secured Party may elect.
Each party acknowledges and agrees that Posted Collateral (VM) in the form of securities may decline speedily in Value and is of a type customarily sold on a recognized market, and, accordingly, the Pledgor is not entitled to prior notice of any sale of that Posted Collateral (VM) by the Secured Party, except any notice that is required under applicable law and cannot be waived.
8(b) Pledgor’s Rights and Remedies. If at any time an Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Secured Party, then (except in the case of an Early Termination Date relating to fewer than all Transactions where the Secured Party has paid in full all of its obligations that are then due under Section 6(e) of this Agreement):
- (i) the Pledgor may exercise all rights and remedies available to a Pledgor under applicable law with respect to Posted Collateral (VM) held by the Secured Party;
- (ii) the Pledgor may exercise any other rights and remedies available to the Pledgor under the terms of Other Posted Support (VM), if any;
- (iii) the Secured Party will be obligated immediately to Transfer all Posted Collateral (VM) and, if the Secured Party is an Interest Payer (VM), the Interest Payment (VM) to the Pledgor; and
- (iv) to the extent that Posted Collateral (VM) or the Interest Payment (VM) is not so Transferred pursuant to (iii) above, the Pledgor may:
- (A) Set-off any amounts payable by the Pledgor with respect to any Obligations against any Posted Collateral (VM) or the Cash equivalent of any Posted Collateral (VM) held by the Secured Party (or any obligation of the Secured Party to Transfer that Posted Collateral (VM));
- (B) Set-off, net, or apply credit support received under any Other CSA or the proceeds thereof against any Posted Collateral (VM) or the Cash equivalent of any Posted Collateral (VM) held by the Secured Party (or any obligation of the Secured Party to Transfer that Posted Collateral (VM)); and
- (C) to the extent that the Pledgor does not Set-off under (iv)(A) or (iv)(B) above, withhold payment of any remaining amounts payable by the Pledgor with respect to any Obligations, up to the Value of any remaining Posted Collateral (VM) held by the Secured Party, until that Posted Collateral (VM) is Transferred to the Pledgor.
8(c) Deficiencies and Excess Proceeds. The Secured Party will Transfer to the Pledgor any proceeds and Posted Credit Support (VM) remaining after liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b) after satisfaction in full of all amounts payable by the Pledgor with respect to any Obligations; and the Pledgor in all events will remain liable for any amounts remaining unpaid after any liquidation, Set-off and/or application under 8(a) and 8(b).
8(d) Final Returns. When no amounts are or thereafter may become payable by the Pledgor with respect to any Obligations (except for any potential liability under Section 2(d) of this Agreement, any obligation to Transfer any Interest Payment (VM) under this Paragraph 8(d) or any obligation to Transfer any interest payment under any Other CSA), (i) the Secured Party will Transfer to the Pledgor all Posted Credit Support (VM), and (ii) the Interest Payer (VM) will Transfer to the Interest Payee (VM) any Interest Payment (VM).
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Comparisons
security interest CSAs: The 1994 NY CSA and 2016 NY VM CSA versions, both being under New York law and of broadly the same intent, barring the scattering of (VM)s all over the shop, are predictably similar, with one difference: the 2016 NY VM CSA contemplates the interplay of a regulatory margin VM CSA with any other CSA for non-regulated business, so has to deal with “any Cash amounts and the Cash equivalent of any non-Cash items posted to the Pledgor by the Secured Party as margin under any Other CSA (other than any Other CSA Excluded Credit Support)”. See this comparison.
title transfer CSAs: There is no “Certain rights and Remedies” clause under either of the title transfer CSAs, so any stray references to them redirect to their security interest CSA equivalents
IM CSD: The 2018 English law IM CSD, being under English law with all its own peculiarities about taking security, and also not really contemplating rehypothecation and that strikes against the heart and soul of regulatory IM, is quite different.
Basics
Secured Party’s Rights and Remedies
The circumstances in which the Secured Party can exercise its rights and remedies under the pledge following an Event of Default or Specified Condition with respect to the Pledgor, such as set-off, liquidation, and customary and statutory rights, without prior notice to the Pledgor.
Pledgor’s Rights and Remedies
Of course, it is a bilateral contract, and the Pledgor might be the Non-defaulting Party and Secured Party being the one going through its existential crisis. They are broadly the same rights that the Secured Party can exercise if the shoe is on the other foot. The difference is that the Secured Party must give back collateral, rather than it being sold (which figures) and if it is not so transferred, set off and withhold payments otherwise due to the Secured Party.
Why wouldn’t the Posted Collateral be returned? Rehypothecation for one reason: if the Secured Party has reused the Collateral by punting it out into the market, even under a repo, being a Defaulting Party it may well not be able to get it back.
Deficiencies and Excess Proceeds
All versions do the same thing: Once the security has been exercised, proceeds realised and the outstanding amount due settled, the Secured Party must return any excess of the realised proceeds to the posting party, and if there is a shortfall after the security has been realised and applied against the debt, the posting party remains liable for it. This is all good standard security-taking stuff.
Final Returns
All versions get to more or less the same place: Once all Obligations are fully settled (with an exception for Taxes — we suppose because they could be imposed retrospectively, so it’s impossible to discharge them definitively — the Secured Party has to give the Posted Credit Support back.
This ought to happen automatically where we are talking about variation margin — Q.E.D., if your Obligations are all settled you have no Exposure so your counterparty has no grounds to hold Posted Credit Support — but for Independent Amounts or initial margin posted under an 2018 English law IM CSD, this is not necessarily the case: the CSA itself might specify an independent Independent Amount that is not conditional on any Transaction. (This is not how most dealers handle initial margin on their swaps — it tends to be Transaction-specific — but this is how the original CSAs were conceived at the time of the First Men.)
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See also
Template:Csa Rights and Remedies sa
References