Assignment by way of security

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A word about credit risk mitigation


Legal security: MortgagePledgeLienBailment
Equitable security: Chargefixedfloating | ABWOS | Equitable lien
Credit risk mitigation: Title transfer | Guarantee | Letter of credit | Netting
Friends and relations: Rehypothecation | Equivalent
Documents: 1994 ISDA CSA (NY law) | 1995 ISDA CSA | 1995 ISDA CSD (English law)
Regulation: LPA 1925 | Financial Collateral Regulations | LPMPA 1994

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Not hitherto commonly known as an ABWOS even though it jolly well ought to be.

There’s quite a bit more over at set-off and even more than that at netting, and some stuff at equitable set-off, too. Unless that’s just a redirect to set-off.

Unless it is “by way of security” in name only — don’t ask, but if you must, see the footnote[1] — an assignment by way of security, usually, does not meet all the formal requirements for a legal assignment set out in the Law of Property Act. So it’s not as good. Being, therefore, an equitable assignment and not a legal assignment, there differences relating to how an assignee enforces its claim against contracting party: a legal assignee can sue in its own name; and equitable assignee only by joining the assignor to the action (I know: shoot me, right?).

Do I need an assignment by way of security if I have a charge?

Not unless you’re the sort of person who wears two pairs of underpants in case the first fails.[2] Both are equitable interests, but a fixed charge is more formal. The problem with a fixed charge is that it requires control over the asset (an actual thing) being charged: that is easy enough if you can take possession of it (prime brokers: hooray!), but if you can’t - if it is some vague right the debtor has to be paid money at a later date - then your fixed charge might wind up looking a bit like a floating charge, which means you may wind up behind other people in the queue.

Assignment and its effect on Netting and Set-off

Could a right to assign by way of security upset close-out netting such that one should forbid parties making assignments by way of security of their rights under a master netting agreement (such as an ISDA Master Agreement or a 2010 GMSLA), for fear of undermining your carefully organised netting opinions?

Generally: No.

  • An assignment by way of security is a preferred claim in the assignor’s insolvency over the realised value of certain rights the assignor holds against its counterparty. It is not a direct transfer of those rights to an assignee: the counterparty is still obliged to the assignor, not the assignee, and any claim the assignee would have against the counterparty would only be by way of subrogation of the assignor’s claim, should the assignor have imploded in the meantime or something.
  • Nemo dat quod non habet”:[3] the unaffected counterparty’s rights cannot be improved (or worsened) by assignment and, it being a single agreement, on termination of the agreement the assignee’s claim is to the termination amount determined under the Agreement, which involves terminating all transactions and determining the aggregate mark-to-market and applying close-out netting. No one can give what they do not have.[4]
  • The assignee can be in no better position than the assignor and this takes subject to any set-off. The conduct of the debtor vis a vis the assignee is irrelevant, unless it gives rise to an estoppel. See Bibby Factors Northwest Ltd v HFD Ltd (paragraphs 38 and 48).[5]

At the point of closeout, the assignee’s right is to any termination payment payable to the Counterparty. Therefore any assignment of rights is logically subject to the netting, as opposed to potentially destructive of it.

But: This is only true insofar as your netting agreement does not actively do something crazy, like disapplying netting of receivables which have been subject to an assignment and dividing these amounts off as "excluded termination amounts not subject to netting".

I know what you are thinking. "But why on God’s green earth would anyone do that?" This is a question you might pose to the FIA’s crack drafting squad™, who confabulated the FIA’s Professional Client Agreement, which does exactly that.

See also

References

  1. An assignment by way of security could be a legal assignment, if it meets the formal criteria, but one of those is that the assignment is absolute and not by way of security only, so — yeah. And there is authority about this, by the way: Mailbox (Birmingham) Limited v Galliford Try Construction Limited [2017] EWHC 67Let me Google that for you.
  2. “That old man, despite all the hardships, still manages to put on a clean pair of underpants every day. And, you know? By the end of the week, he can’t get his trousers on.”—From There’s no land like Poland, by the Not The Nine O’Clock News team.
  3. “A chap cannot give away what he doesn’t own in the first place.” Of course, try telling that to a prime brokerage lawyer, or a counterparty to a 1994 New York law CSA.
  4. Except under New York law — isn’t that right, rehypothecation freaks?
  5. Bibby Factors Northwest Ltd v HFD Ltd [2015] EWCACiv 1908Let me Google that for you