Liquidation/Application of Posted Credit Support (VM) - NY VM CSA Provision

2016 NY VM CSA Anatomy™ Go Premium In a Nutshell™ Section 10(c): 10(c) Liquidation/Application of Posted Credit Support (VM). Where there is a Defaulting Party it must pay on demand all the the Non-defaulting Party’s reasonable costs of liquidating any Posted Credit Support (VM) under Paragraph 8 as set out in the Expenses Section of the ISDA Master Agreement. If there is no Defaulting Party, the parties will share the costs. view template 2016 NY VM CSA full text of Section 10(c): 10(c) Liquidation/Application of Posted Credit Support (VM). All reasonable costs and expenses incurred by or on behalf of the Secured Party or the Pledgor in connection with the liquidation and/or application of any Posted Credit Support (VM) under Paragraph 8 will be payable, on demand and pursuant to the Expenses Section of this Agreement, by the Defaulting Party or, if there is no Defaulting Party, equally by the parties. view template Related Agreements Click here for the text of Section 10(c) in the 1994 New York law CSA There is no equivalent to this provision in either the 1995 CSA or the 2016 VM CSA Resources Full wikitext | Nutshell wikitext Navigation 1 (Interpretation) | 2 (Security Interest) | 3 (Credit Support Obligations) | 4 ( Conditions Precedent, Transfer Timing, Calculations and Substitutions) | 5 (Dispute Resolution) | 6 (Holding and Using Posted Collateral (VM)) | 7 (Events of Default) | 8 (Certain Rights and Remedies) | 9 (Representations) | 10 (Expenses) | 11 (Miscellaneous) | 12 (Definitions) | 13 (Elections and Variables) Index: Click ᐅ to expand: 2016 NY VM CSA Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

Note the references here are to the Expenses section (Section 11) in the ISDA Master Agreement and not the Expenses paragpraph (Paragraph 10) in the 2016 NY Law VM CSA. Alles klaar, as usual.

And “Defaulting Party” is term from the ISDA Master Agreement, not the 2016 NY Law VM CSA — it means the person who has committed a Section 5(a) Event of Default — and is to be contrasted with an “Affected Party”, being a person who has is subject to a Section 5(b) Termination Event.

Events of Default versus Termination Events: a refresher

Remember Termination Events are, in the main, less odious than Events of Default, inviting less of the opprobrium on the head of those who suffer them than Failure to Pay, Breach of Agreement or Bankruptcy. And they are less likely to lead directly and immediately to the total implosion of the Affected Party.

So the interesting question, posed not entirely rhetorically for ISDA’s crack drafting squad™, is precisely when in the absence of an Event of Default and thus a Defaulting Party, one would be enforcing on, and therefore liquidating and applying, Posted Credit Support. Not often. You don’t generally enforce security against a solvent counterparty who has suffered a Tax Event Upon Merger and can just pay you back.

Additional Termination Events: the ugly duckling of Termination Events

There is one case where you might: the Additional Termination Event, which is a customised Termination Event added in by the parties. These things — examples are NAV triggers and Key person events — tend to be directly credit-related and apocalyptic in nature than the preprinted Termination Events and thus have more of the characteristics of Events of Default. They are the one time you might be enforcing on pledged collateral (but even in this case it would be unlikely unless the ATE quickly descended into a full-blown Event of Default — which if you were closing out, it could quite likely do — in which case the trick would be to characterise your close out as being predicated on the later Event of Default.

So, in any case if you close out on an ATE, you have to share the enforcement costs, but if it is a full blown Event of Default, you can peg them all on the Defaulting Party.

An odd and probably unintended complexity, it seems to this observer.

See also

• Events of Default and Termination Events for a more in-depth discussion of the differences between Events of Defaultand Termination Events.