ISDA 1994 New York Law Credit Support Annex
A Jolly Contrarian owner’s manual™
Holding and Using Posted Collateral in a Nutshell™
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Original text
Para 6 Holding and Using Posted Collateral
6(a) Care of Posted Collateral. 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 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, including, without limitation, any duty to collect any Distributions, or enforce or preserve any rights pertaining thereto.
6(b) Eligibility to Hold Posted Collateral; Custodians.
- 6(b)(i) General. Subject to the satisfaction of any conditions specified in Paragraph 13 for holding Posted Collateral, the Secured Party will be entitled to hold Posted Collateral or to appoint an agent (a “Custodian”) to hold Posted Collateral for the Secured Party. Upon notice by the Secured Party to the Pledgor of the appointment of a Custodian, the Pledgor’s obligations to make any Transfer will be discharged by making the Transfer to that Custodian. The holding of Posted Collateral by a Custodian will be deemed to be the holding of that Posted Collateral by the Secured Party for which the Custodian is acting.
- 6(b)(ii) Failure to Satisfy Conditions. If the Secured Party or its Custodian fails to satisfy any conditions for holding Posted Collateral, 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 to Transfer all Posted Collateral held by it to a Custodian 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 to the same extent that the Secured Party would be liable hereunder for its own acts or omissions.
6(c) Use of Posted Collateral. 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 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 in the name of the Secured Party, its Custodian or a nominee for either.
For purposes of the obligation to Transfer Eligible Credit Support or Posted Credit Support 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 and to receive Distributions made thereon, regardless of whether the Secured Party has exercised any rights with respect to any Posted Collateral pursuant to (i) or (ii) above.
6(d) Distributions and Interest Amount.
- 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 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. 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 in the form of Cash (all of which may be retained by the Secured Party), the Secured Party will Transfer to the Pledgor at the times specified in Paragraph 13 the Interest Amount to the extent that a Delivery Amount 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). The Interest Amount or portion thereof not Transferred pursuant to this Paragraph will constitute Posted Collateral in the form of Cash and will be subject to the security interest granted under Paragraph 2.
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Resources and Navigation
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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 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 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 or, with respect to any Posted Collateral 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.
Transfer of Interest Amounts
There is a simple reconciliation mechanic to manufacture cash payments back to the Pledgor of Posted Credit Support net of any further Transfer Amounts that may be due from the Pledgor on the same day. This is to be compared very, very favourably with the utter chaos in the equivalent term in the 2016 NY Law VM CSA.
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See also
References