2018 ISDA Credit Support Deed (IM) (English law)
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Conditions Precedent in a Nutshell™
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Original text
Paragraph 4. Conditions Precedent, Transfers, Timing, Calculations and Substitutions
4(a) Conditions Precedent. Unless otherwise specified in Paragraph 13, each obligation of the Chargor to make a transfer under Paragraphs 3 and 5 and of the Secured Party to instruct the Custodian (IM) to make a transfer under Paragraphs 3, 4(e)(iii), 5 and the provisions of Paragraph 13 relating to the return of Posted Credit Support (IM) with a Value of zero is subject to the conditions precedent that:
- (i) no Event of Default, Potential Event of Default or Specified Condition has occurred and is continuing with respect to the other party; and
- (ii) no Early Termination Date has occurred or been designated for which any unsatisfied payment obligations (whether present, actual, future or contingent) exist which is in respect of all Covered Transactions (IM).
4(b) Means of Transfer. All transfers under this Deed of any Eligible Credit Support (IM) or Posted Credit Support (IM) shall be made in accordance with the instructions of the Secured Party, Chargor or Custodian (IM), as applicable, and shall be made:
- (i) in the case of Eligible Credit Support (IM), (A) by book-entry, wire or other transfer of such Eligible Credit Support (IM) to the Custodian (IM) (accompanied in the case of certificated securities that cannot be paid or delivered by book-entry by any duly executed instruments of transfer, assignments in blank, transfer tax stamps or any other documents necessary to permit the Custodian (IM) to make legally valid transfers of such certificated securities upon instruction of the Secured Party) and (B) the Custodian (IM) ’s crediting such assets to the relevant Segregated Account; and
- (ii) in the case of Posted Credit Support (IM), by book-entry, wire or other transfer of such Posted Credit Support (IM) by the Custodian (IM) (or in the case of excess proceeds, the Secured Party) to the relevant cash, securities or other account of the Chargor (with the same Custodian (IM) or elsewhere) identified by the Chargor for the receipt of such transfer (accompanied in the case of certificated securities that cannot be paid or delivered by book-entry by any duly executed instruments of transfer, assignments in blank, transfer tax stamps or any other documents necessary to permit the Chargor to make legally valid transfers of such certificated securities without further action of the Custodian (IM)).
4(c) Transfer Timing. Subject to Paragraph 4(a) above (if applicable) and Paragraph 5 and unless otherwise specified in Paragraph 13, if a demand for the transfer of Eligible Credit Support (IM) is made by the Notification Time, then the relevant transfer by the Chargor will be made not later than the close of business on the relevant Regular Settlement Day; if a demand is made after the Notification Time, then the relevant transfer by the Chargor will be made not later than the close of business on the next Local Business Day following the relevant Regular Settlement Day.
Subject to Paragraph 4(a) above (if applicable) and Paragraph 5 and unless otherwise specified in Paragraph 13, if a demand for the transfer of Posted Credit Support (IM) is made by the Notification Time, then the relevant instruction by the Secured Party to the Custodian (IM) will be served prior to the latest time by which instructions must be submitted to the Custodian (IM) under the relevant Control Agreement in order for the Custodian (IM) to effect the transfer of Posted Credit Support (IM) by close of business on the relevant Regular Settlement Day; if a demand is made after the Notification Time, then the relevant instruction by the Secured Party to the Custodian (IM) will be served not later than the latest time (and day) by which instructions must be submitted to the Custodian (IM) under the relevant Control Agreement in order for the Custodian (IM) to effect the transfer of Posted Credit Support (IM) by close of business on the next Local Business Day following the relevant Regular Settlement Day.
4(d) Calculations. All calculations of Value and Credit Support Amount (IM) for purposes of Paragraph 3 in respect of a Calculation Date (IM) will be made by the Calculation Agent (IM) as of the Calculation Time (IM) on such Calculation Date (IM). In the case of any calculation of Value, the Calculation Agent (IM) may use Values most recently reasonably available for close of business in the relevant market for the relevant Eligible Credit Support (IM) as of the relevant Calculation Time (IM). In the case of any calculation of Credit Support Amount (IM), the Calculation Agent (IM) may use relevant information or data (including, but not limited to, inputs for any applicable model specified in Paragraph 13 to determine Margin Amount (IM) for certain Covered Transactions (IM)) most recently reasonably available for close of business in the relevant market(s) as of the Calculation Time (IM). The Calculation Agent (IM) will notify each party (or the other party, if the Calculation Agent (IM) is a party) of its calculations not later than the Notification Time on the Local Business Day following the applicable Calculation Date (IM).
4(e) Substitutions.
- (i) The Chargor may on any Local Business Day by notice (a “2018 English law IM CSD”) inform the Secured Party that it wishes to transfer to the Segregated Account s Eligible Credit Support (IM) (the “2018 English law IM CSD”) specified in that 2018 English law IM CSD in substitution for certain Posted Credit Support (IM) (the “Original Credit Support (IM)”) specified in the 2018 English law IM CSD.
- (ii) Unless Paragraph 13 specifies that no consent is required, the Chargor must obtain the Secured Party’s consent to the proposed substitution. The Chargor will be obliged to transfer the 2018 English law IM CSD to the Segregated Account s on the next Local Business Day following the date:
- (A) on which the Chargor receives notice (which may be oral telephonic notice) from the Secured Party of its consent (if consent is needed); or
- (B) of the 2018 English law IM CSD (if no consent is needed).
- (iii) Subject to Paragraph 4(a) above (if applicable), following the date on which the 2018 English law IM CSD is transferred to the Segregated Account s, unless otherwise specified in Paragraph 13 (the “2018 English law IM CSD”), the Secured Party will be obliged to instruct the Custodian (IM) to transfer to the Chargor the Original Credit Support (IM) as if a demand for such Original Credit Support (IM) had been made pursuant to Paragraph 3(b) after the Notification Time on such 2018 English law IM CSD; provided that the Secured Party will only be obliged to instruct the Custodian (IM) to transfer Original Credit Support (IM) with a Value as of the date of transfer as close as practicable to, but in any event not more than, the Value of the 2018 English law IM CSD as of that date, as calculated by the Calculation Agent (IM).
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Comparisons
Largely the same between the 1994 NY CSA and the 2016 NY VM CSA bar the proviso to the Valuation Time added to Paragraph 4(c) in the 2016 version:
provided that the Valuation Agent may use, in the case of any calculation of (i) Value, Values most recently reasonably available for close of business in the relevant market for the relevant Eligible Credit Support (VM) as of the Valuation Time and (ii) Exposure, relevant information or data most recently reasonably available for close of business in the relevant market(s)
And also some references to Regular Settlement Day and so on. Here is a comparison.
Basics
Paragraph 4(a)
With all this talk of conditions precedent, is this another flawed asset clause? Aren’t the conditions precedent dealt with in Section 2(a)(iii) of the ISDA?
Well, they are — if your Credit Support Annex counts as a Transaction under the ISDA, which the title transfer CSAs do (eg, the English law 1995 CSA and the 2016 VM CSA), but the security interest CSAs (the New York law 1994 NY CSA and 2016 NY VM CSA and the English law 2018 IM CSD) do not.
Paragraph 4(a)(ii)
We are not sure what “for which any unsatisfied payment obligations (whether present, actual, future or contingent) exist” is driving at in Para 4(a)(ii): the conditions precedent. Given that such an Early Termination Date would affect — that is, terminate — all Transactions (keying off an Event of Default but not a Termination Event), if all of the Transaction Amounts have been settled, Q.E.D., there are no Transactions outstanding under the ISDA, so there can hardly be a Transfer requirement under any Credit Support Document.
Oh, hold on: there is one case where this could happen: where a party has committed an Event of Default, had all its Transactions closed out and, before having settled them all and cleared the slate, it has resumed trading under the same ISDA and put some new Transactions on.
Readers, if you are currently doing a double take, rubbing your eyes, and thinking, “What?” do not be alarmed: this is a perfectly understandable reaction. There is no practical chance that any counterparty would be dopey enough to resume trading with a swap counterparty it had just closed out at all, let alone before the Defaulting Party had finally settled its account in full. Seeing as a full EOD close-out does not have the effect of formally terminating the ISDA Master Agreement itself, this remains a theoretical possibility, however absurd, and this is, we thing, the contingency for which ISDA’s crack drafting squad™ is providing.
Interestingly the 2018 English law IM CSD words this provision slightly differently, pulling in any Early Termination Date that has resulted in the termination of all Covered Transactions (IM). This, at least, could attach to some but not all outstanding Transactions.
In the 2018 IM CSD there is a curious reference to “provisions requiring the return of zero-Valued Posted Credit Support (IM)”. It is not entirely clear why ineligible Credit Support (that hence has a Value of zero), since it doesn’t count numerically into the Value of the Posted Credit Support (IM)) should be covered, as on its own theory of the game the Secured Party assigns no value to this collateral and has no justification for holding onto it — but on the other hand, the argument is “well, you are going tetas arriba so frankly anything of yours that I hold I’m damn well keeping and selling for anything I can get for it.”
The latter argument, we fancy, will prevail.
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See also
Template:Csa Conditions Precedent sa
References