2016 ISDA Credit Support Annex (VM) (New York law)
A Jolly Contrarian owner’s manual™
Holding and Using Posted Collateral in a Nutshell™
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Original text
Paragraph 6 Holding and Using Posted Collateral (VM)
6(a) Care of Posted Collateral (VM). Without limiting the Secured Party’s rights under Paragraph 6(c), the Secured Party will exercise reasonable care to assure the safe custody of all Posted Collateral (VM) to the extent required by applicable law, and in any event the Secured Party will be deemed to have exercised reasonable care if it exercises at least the same degree of care as it would exercise with respect to its own property. Except as specified in the preceding sentence, the Secured Party will have no duty with respect to Posted Collateral (VM), including, without limitation, any duty to collect any Distributions, or enforce or preserve any rights pertaining thereto.
6(b) Eligibility to Hold Posted Collateral (VM); Custodians (VM).
- 6(b)(i) General. Subject to the satisfaction of any conditions specified in Paragraph 13 for holding Posted Collateral (VM), the Secured Party will be entitled to hold Posted Collateral (VM) or to appoint an agent (a “Custodian (VM)”) to hold Posted Collateral (VM) for the Secured Party. Upon notice by the Secured Party to the Pledgor of the appointment of a Custodian (VM), the Pledgor’s obligations to make any Transfer will be discharged by making the Transfer to that Custodian (VM). The holding of Posted Collateral (VM) by a Custodian (VM) will be deemed to be the holding of that Posted Collateral (VM) by the Secured Party for which the Custodian (VM) is acting.
- 6(b)(ii) Failure to Satisfy Conditions. If the Secured Party or its Custodian (VM) fails to satisfy any conditions for holding Posted Collateral (VM), then upon a demand made by the Pledgor, the Secured Party will, not later than five Local Business Days after the demand, Transfer or cause its Custodian (VM) to Transfer all Posted Collateral (VM) held by it to a Custodian (VM) that satisfies those conditions or to the Secured Party if it satisfies those conditions.
- 6(b)(iii) Liability. The Secured Party will be liable for the acts or omissions of its Custodian (VM) to the same extent that the Secured Party would be liable hereunder for its own acts or omissions.
6(c) Use of Posted Collateral (VM). Unless otherwise specified in Paragraph 13 and without limiting the rights and obligations of the parties under Paragraphs 3, 4(d)(ii), 5, 6(d) and 8, if the Secured Party is not a Defaulting Party or an Affected Party with respect to a Specified Condition and no 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 the Secured Party will, notwithstanding Section 9-207 of the New York Uniform Commercial Code, have the right to:
- 6(c)(i) sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of, or otherwise use in its business any Posted Collateral (VM) it holds, free from any claim or right of any nature whatsoever of the Pledgor, including any equity or right of redemption by the Pledgor; and
- 6(c)(ii) register any Posted Collateral (VM) in the name of the Secured Party, its Custodian (VM) or a nominee for either.
For purposes of the obligation to Transfer Eligible Credit Support (VM) or Posted Credit Support (VM) pursuant to Paragraphs 3 and 5 and any rights or remedies authorized under this Agreement, the Secured Party will be deemed to continue to hold all Posted Collateral (VM) and to receive Distributions made thereon, regardless of whether the Secured Party has exercised any rights with respect to any Posted Collateral (VM) pursuant to (i) or (ii) above.
6(d) Distributions, Interest Amount (VM) and Interest Payment (VM).
- 6(d)(i) Distributions. Subject to Paragraph 4(a), if the Secured Party receives or is deemed to receive Distributions on a Local Business Day, it will Transfer to the Pledgor not later than the following Local Business Day any Distributions it receives or is deemed to receive to the extent that a Delivery Amount (VM) would not be created or increased by that Transfer, as calculated by the Valuation Agent (and the date of calculation will be deemed to be a Valuation Date for this purpose).
- 6(d)(ii) Interest Amount (VM) and Interest Payment (VM). Unless otherwise specified in Paragraph 13 and subject to Paragraph 4(a), in lieu of any interest, dividends or other amounts paid or deemed to have been paid with respect to Posted Collateral (VM) in the form of Cash (all of which may be retained by the Secured Party),
- 6(d)(ii)(A) if “Interest Transfer” is specified as applicable in Paragraph 13, the Interest Payer (VM) will Transfer to the Interest Payee (VM), at the times specified in Paragraph 13, the relevant Interest Payment (VM); provided that if “Interest Payment Netting” is specified as applicable in Paragraph 13:
- 6(d)(ii)(A)(I) if the Interest Payer (VM) is entitled to demand a Delivery Amount (VM) or Return Amount (VM), in respect of the date such Interest Payment (VM) is required to be Transferred:
- 6(d)(ii)(A)(I)(a) such Delivery Amount (VM) or Return Amount (VM) will be reduced (but not below zero) by such Interest Payment (VM); provided that, in case of such Return Amount (VM), if the amount of Posted Collateral (VM) which is comprised of Cash in the Base Currency is less than such Interest Payment (VM), such reduction will only be to the extent of the amount of such Cash which is Posted Collateral (VM) (the “Eligible Return Amount (VM)”); and
- 6(d)(ii)(A)(I)(b) the Interest Payer (VM) will Transfer to the Interest Payee (VM) the amount of the excess, if any, of such Interest Payment (VM) over such Delivery Amount (VM) or Eligible Return Amount (VM), as applicable; and
- 6(d)(ii)(A)(II) if under Paragraph 6(d)(ii)(A)(I)(a) a Delivery Amount (VM) is reduced (the amount of such reduction, the “Delivery Amount Reduction (VM)”) or a Return Amount (VM) is reduced (the amount of such reduction, the “Return Amount Reduction (VM)”), then for purposes of determining Posted Collateral (VM), the Secured Party (a) will be deemed to have received an amount in Cash in the Base Currency equal to any Delivery Amount Reduction (VM), and such amount will constitute Posted Collateral (VM) in such Cash and will be subject to the security interest granted under Paragraph 2 or (b) will be deemed to have Transferred an amount in Cash in the Base Currency equal to any Return Amount Reduction (VM), as applicable, in each case on the day on which the relevant Interest Payment (VM) was due to be Transferred, as applicable; and
- 6(d)(ii)(B) if “Interest Adjustment” is specified as applicable in Paragraph 13, the Posted Collateral (VM) will be adjusted by the Secured Party, at the times specified in Paragraph 13, as follows:
- 6(d)(ii)(B)(I) if the Interest Amount (VM) for an Interest Period is a positive number, the Interest Amount (VM) will constitute Posted Collateral (VM) in the form of Cash in the Base Currency and will be subject to the security interest granted under Paragraph 2; and
- 6(d)(ii)(B)(II) if the Interest Amount (VM) for an Interest Period is a negative number and any Posted Collateral (VM) is in the form of Cash in the Base Currency, the Interest Amount (VM) will constitute a reduction of Posted Collateral (VM) in the form of such Cash in an amount (such amount, the “Interest Adjustment Reduction Amount (VM)”) equal to the absolute Value of the Interest Amount (VM); provided that if the amount of Posted Collateral (VM) which is comprised of such Cash is less than the Interest Adjustment Reduction Amount (VM), such reduction will only be to the extent of the amount of such Cash which is Posted Collateral (VM) and the Pledgor will be obligated to Transfer the remainder of the Interest Adjustment Reduction Amount (VM) to the Secured Party on the day that such reduction occurred.
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Resources and Navigation
Index: Click ᐅ to expand:
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Comparisons
The part of the New York law CSA that undoes all the sterling work that Paragraph 2 does to establish a Security Interest over collateral posted by a Pledgor to a Secured Party.
Note especially 6(c) Use of Posted Collateral — the rehypothecation/reuse right.
The 2016 version is all but the same as the 1994 version, except for a peppering of gratuitous “(VM)s”, until you get to Paragraph 6(d)(ii)(A). All that malarkey about interest transfers, adjustments and reductions at the back end of Paragraph 6(d) is new and, candidly, rather to be regretted. Here is a comparison.
Basics
Distributions
Handily, ISDA’s crack drafting squad™ captures all the forms of income that could kick off Posted Credit Support as “Distributions”:
“Distributions” means with respect to Posted Collateral (VM) other than Cash, all principal, interest and other payments and distributions of Cash or other property with respect thereto, regardless of whether the Secured Party has disposed of that Posted Collateral (VM) under Paragraph 6(c). Distributions will not include any item of property acquired by the Secured Party upon any disposition or liquidation of Posted Collateral (VM) or, with respect to any Posted Collateral (VM) in the form of Cash, any distributions on that collateral, unless otherwise specified herein.
Care of Posted Collateral
You can basically stop reading after “Without limiting the Secured Party’s rights under Paragraph 6(c)”. Because the Secured Party’s rights under 6(c) basically allow it to nuke your security interest the moment it receives your collateral. It can give your carefully pledged asset away.
In this way does security interest collateral arrangement with rehypothecation convert itself, for all intents and purposes, into a title transfer collateral arrangement. There is more on this, and rehypothecation, in the premium content.
Interest transfer, adjustments and reductions: the squad falls down a rabbit hole
“George, you can type this shit, but I can’t say it.”
- — Harrison Ford, to George Lucas, about the script of Star Wars
If you have got as far into the ghastly bowels of ISDA speak that you have been trying to parse the meaning of Paragraph 6(d)(ii)(A)(I) — just the numbering should tell you to stay well clear — then God’s speed to you. JC only got through it because he was multi-tasking while on an all-hands client money remediation legal workstream weekly stakeholder check in call, and frankly even ritualistic satanic torture would appeal compared to that. But what is it saying?
So:
You are holding Posted Collateral that pays some kind of income, in cash. Cash being cash, it is yours instantly: you can’t custody it.[1] So you have to “manufacture” a corresponding payment. This is a finicky legalistic point — true, but finicky. But okay. You are about to make an equivalent cash payment to the Pledgor (Para 6(d)(ii)(A)) — but the Pledgor also owes you more Posted Collateral (Para 6(d)(ii)(A)(I)) (maybe the Exposure has moved in your favour). What to do?
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- Rehypothecation, and what it means under a security interest CSA
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See also
References