Conditions Precedent, Transfer Timing, Calculations and Substitutions - NY CSA Provision

ISDA 1994 New York Law Credit Support Annex A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: For corresponding provisions in other CSAs see the table 👇 Conditions Precedent in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. Original text: Para 4 Conditions Precedent, Transfer Timing, Calculations and Substitutions 4(a) Conditions Precedent. Each Transfer obligation of the Pledgor under Paragraphs 3 and 5 and of the Secured Party under Paragraphs 3, 4(d)(ii), 5 and 6(d) is subject to the conditions precedent that: 4(a)(i) no Event of Default, Potential Event of Default or Specified Condition has occurred and is continuing with respect to the other party; and 4(a)(ii) no Early Termination Date for which any unsatisfied payment obligations exist has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the other party. 4(b) Transfer Timing. Subject to Paragraphs 4(a) and 5 and unless otherwise specified, if a demand for the Transfer of Eligible Credit Support or Posted Credit Support is made by the Notification Time, then the relevant Transfer will be made not later than the close of business on the next Local Business Day; if a demand is made after the Notification Time, then the relevant Transfer will be made not later than the close of business on the second Local Business Day thereafter. 4(c) Calculations. All calculations of Value and Exposure for purposes of Paragraphs 3 and 6(d) will be made by the Valuation Agent as of the Valuation Time. The Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) of its calculations not later than the Notification Time on the Local Business Day following the applicable Valuation Date (or in the case of Paragraph 6(d), following the date of calculation). 4(d) Substitutions. 4(d)(i) Unless otherwise specified in Paragraph 13, upon notice to the Secured Party specifying the items of Posted Credit Support to be exchanged, the Pledgor may, on any Local Business Day, Transfer to the Secured Party substitute Eligible Credit Support (the “Substitute Credit Support”); and 4(d)(ii) subject to Paragraph 4(a), the Secured Party will Transfer to the Pledgor the items of Posted Credit Support specified by the Pledgor in its notice not later than the Local Business Day following the date on which the Secured Party receives the Substitute Credit Support, unless otherwise specified in Paragraph 13 (the “Substitution Date”); provided that the Secured Party will only be obligated to Transfer Posted Credit Support with a Value as of the date of Transfer of that Posted Credit Support equal to the Value as of that date of the Substitute Credit Support. The varieties of ISDA CSA Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng Preamble Pre Pre Pre Pre Pre Interpretation 1 1 1 1 1 Security Interest 2 - 2 - 2 Credit Support Obligations 3 2 3 2 3 Transfers, Calculations and Exchanges - 3 - 3 - Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4 Dispute Resolution 5 4 5 4 5 Holding and Using Posted Collateral 6 - 6 - 6 Transfer of Title, No Security Interest - 5 - 5 - Events of Default 7 6 7 6 7 Rights and Remedies 8 - 8 - 8 Representations 9 7 9 7 9 Expenses 10 8 10 8 10 Miscellaneous 11 9 11 9 11 Definitions 12 10 12 10 12 Elections and Variables 13 11 13 11 13 Resources and Navigation Index: Click ᐅ to expand: 1994 NY CSA 1995 CSA 2016 VM CSA

Overview

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.

Summary

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.

2018 IM CSD

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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