2018 ISDA Credit Support Deed (IM) (English law)
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Original text
2 Security
2(a) Covenant to Perform. Each party as the Chargor covenants with the other party that it will perform the Obligations in the manner provided in the Agreement, this Deed or any other relevant agreement.
2(b) Security. Each party as the Chargor, as security for the performance of the Obligations:
- (i) charges and agrees to charge, with full title guarantee, in favour of the Secured Party by way of first fixed charge:
- (A) all Posted Credit Support (IM) (present and future); and
- (B) each Segregated Account, and
- (ii) assigns and agrees to assign, with full title guarantee, the Assigned Rights to the Secured Party absolutely.
2(c) Restriction on Dealings. Each party as the Chargor must not:
- (i) create or permit to subsist any Security Interest on the Segregated Accounts or the Posted Credit Support (IM) or the Assigned Rights; or
- (ii) sell, transfer, licence, lease, loan, grant any option over, declare a trust over or otherwise dispose of any of its rights in respect of the Segregated Accounts or the Posted Credit Support (IM) or the Assigned Rights,
other than (A) the security created by this Deed, (B) a lien routinely imposed on all securities in a clearing system in which any such Posted Credit Support (IM) may be held or (C) a lien or security interest referred to in, or in connection with, the Control Agreement.
2(d) Release of Security. Upon the transfer by the Custodian (IM) to the Chargor of Posted Credit Support (IM) either (i) following an instruction from the Secured Party, (ii) in accordance with any provisions relating to the transfer of collateral following delivery of a Chargor Access Notice under the Control Agreement or (iii) as otherwise agreed by the parties, the security interest granted under this Deed on that Posted Credit Support (IM) will be released immediately, and the Assigned Rights relating to that Posted Credit Support (IM) will be re-assigned to the Chargor, in each case without any further action by either party. To the extent that all Obligations of the Chargor owed to the Secured Party have been irrevocably satisfied in full and no further Obligations may arise, then at the Chargor’s expense the Secured Party will also release the security interest granted under this Deed on each of the Segregated Accounts.
2(e) Preservation of Security. The security constituted by this Deed shall be a continuing security and shall not be satisfied by any intermediate payment or satisfaction of the whole or any part of the Obligations but shall secure the ultimate balance of the Obligations. If for any reason this security ceases to be a continuing security or any subsequent charge or other interest affects any Security Assets (in each case, other than in relation to either (i) a lien routinely imposed on all securities in a clearing system in which any such Posted Credit Support (IM) may be held or (ii) a lien or security interest referred to in, or connected with, the Control Agreement), the Secured Party may direct that the Chargor open a new account with the Custodian (IM) or continue the existing Segregated Account and the liability of the Chargor in respect of the Obligations at the date of such cessation shall remain regardless of any payments into or out of any such account. The security constituted by this Deed shall be in addition to, and shall not be affected by, any other security now or subsequently held by the Secured Party for all or any of the Obligations.
2(f) Waiver of Defences. The obligations of the Chargor under this Deed shall not be affected by any act, omission or circumstance which, but for this provision, might operate to release or otherwise exonerate the Chargor from its obligations under this Deed or affect such obligations, including (but without limitation) and whether or not known to the Chargor or the Secured Party:
- (i) any time or indulgence granted to or composition with the Chargor or any other person;
- (ii) the variation, extension, compromise, renewal or release of, or refusal or neglect to perfect or enforce, any terms of the Agreement or any rights or remedies against, or any security granted by, the Chargor or any other person;
- (iii) any irregularity, invalidity or unenforceability of any obligations of the Chargor under the Agreement or any present or future law or order of any government or authority (whether of right or in fact) purporting to reduce or otherwise affect any of such obligations to the intent that the Chargor’s obligations under this Deed shall remain in full force and this Deed shall be construed accordingly as if there were no such irregularity, unenforceability, invalidity, law or order; and
- (iv) any legal limitation, disability, incapacity or other circumstance relating to the Chargor, any guarantor or any other person or any amendment to or variation of the terms of the Agreement or any other document or security.
2(g) Immediate Recourse. The Chargor waives any right it may have of first requiring the Secured Party to proceed against or claim payment from any other person or enforce any guarantee or security before enforcing this Deed.
2(h) Reinstatement. Where any discharge (whether in respect of the security constituted by this Deed, any other security or otherwise) is made in whole or in part or any arrangement is made on the faith of any payment, security or other disposition which is avoided or any amount paid pursuant to any such discharge or arrangement must be repaid on bankruptcy, liquidation or otherwise without limitation, the security constituted by this Deed and the liability of the Chargor under this Deed shall continue as if there had been no such discharge or arrangement.
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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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