Credit Support Annex: Difference between revisions
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{{a|csa|}}The {{ | {{a|csa|}}The {{CSA}} is annexed to the {{isdama}} and deals with collateralisation. Oddly, it is not itself a {{isdaprov|Credit Support Document}}, but instead a {{isdaprov|Transaction}} under the {{isdama}}, so frlom the point of view of the [[ISDA architecture]] the {{CSA}} is technically a {{isdaprov|Confirmation}}. | ||
({{isdaprov|Credit Support Document}}s, by contrast, are discrete things that sit outside the [[ISDA architecture itself]], like [[guarantee]]s and [[Letter of credit|letters of credit]] provided by third party {{isdaprov|Credit Support Provider}}s). | |||
There are three basic varieties of {{CSA}}: the [[English law]] [[credit support annex]], where [[collateral]] is provided by [[title transfer]], and is thus a [[title transfer collateral arrangement]], the [[New York law]] [[credit support annex]] where [[collateral]] is provided (in theory) by [[pledge]], and is therefore is (in theory) a [[security collateral arrangement]], and the [[English law]] [[credit support deed]] where collateral is (in theory) provided by security interest but in practice is not passed at all, because in this day and age, no-one in their right mind uses an [[English law]] [[credit support deed]]. | |||
In these pages, the varieties of {{CSA}} will be represented by: | |||
*'''{{csa}}''': The original [[English law]] version of the [[title transfer]] {{CSA}}, published in 1995; | |||
*'''{{vmcsa}}''': The updated [[English law]] [[title transfer]] {{CSA}}, published in 2016 to cater for regulatory [[variation margin]]; and | |||
*'''{{nyvmcsa}}''': The updated [[New York law]] {{csa}}, being an enhanced version of the original {{1994csa}} updated to cater for regulatory [[variation margin]]. I haven’t done the {{1994csa}} in such detail because, frankly, bite me. Three {{CSA}}s should be AMPLE. | |||
*'''[[Credit support deed]]''': I haven’t done this one either, because as far as I know hardly anyone uses it, because the idea of granting a [[security interest]] over derivative [[variation margin]] is stupid.<ref>[[US attorney]]s will swear blind that this is not true, but all I can say is [[rehypothecation]].</ref> | |||
{{titletransfervspledge}} | {{titletransfervspledge}} | ||
{{ | {{sa}} | ||
*{{isdaprov|Credit Support Document}} | *{{isdaprov|Credit Support Document}} | ||
*{{isdaprov|Credit Support Default}} | *{{isdaprov|Credit Support Default}} | ||
*[[Title-transfer collateral arrangement]] | *[[Title-transfer collateral arrangement]] | ||
*[[Security collateral arrangement]] | |||
{{ref}} | {{ref}} |
Revision as of 22:07, 12 January 2020
CSA Anatomy™
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The credit support annex is annexed to the ISDA Master Agreement and deals with collateralisation. Oddly, it is not itself a Credit Support Document, but instead a Transaction under the ISDA Master Agreement, so frlom the point of view of the ISDA architecture the credit support annex is technically a Confirmation. (Credit Support Documents, by contrast, are discrete things that sit outside the ISDA architecture itself, like guarantees and letters of credit provided by third party Credit Support Providers).
There are three basic varieties of credit support annex: the English law credit support annex, where collateral is provided by title transfer, and is thus a title transfer collateral arrangement, the New York law credit support annex where collateral is provided (in theory) by pledge, and is therefore is (in theory) a security collateral arrangement, and the English law credit support deed where collateral is (in theory) provided by security interest but in practice is not passed at all, because in this day and age, no-one in their right mind uses an English law credit support deed.
In these pages, the varieties of credit support annex will be represented by:
- 1995 CSA: The original English law version of the title transfer credit support annex, published in 1995;
- 2016 VM CSA: The updated English law title transfer credit support annex, published in 2016 to cater for regulatory variation margin; and
- 2016 NY Law VM CSA: The updated New York law 1995 CSA, being an enhanced version of the original 1994 NY CSA updated to cater for regulatory variation margin. I haven’t done the 1994 NY CSA in such detail because, frankly, bite me. Three credit support annexs should be AMPLE.
- Credit support deed: I haven’t done this one either, because as far as I know hardly anyone uses it, because the idea of granting a security interest over derivative variation margin is stupid.[1]
The big difference between 1994 New York law CSAs and English law CSAs: title transfer and pledge
This feels as good a time as any to raise the great subject of title transfer and pledge. Under a 1994 New York law CSA one transfers Credit Support by means of pledge. Under a English law CSA one transfers Credit Support by means to title transfer.
What is the difference? Well, in a Nutshell™:
Title transfer under a English law CSA
Under a “title transfer collateral arrangement” when a party provides collateral it transfers it to the other party outright and absolutely: it gives it, free of all reversionary interests, to the {{{{{1}}}prov|Transferee}}.
- Securities delivered to {{{{{1}}}prov|Transferee}} become the {{{{{1}}}prov|Transferee}}’s property absolutely
- {{{{{1}}}prov|Transferee}} does not hold them in custody for the {{{{{1}}}prov|Transferor}};
- {{{{{1}}}prov|Transferee}} has only an obligation to redeliver an equivalent security.
- Therefore no CASS or custody question arises at any point - the {{{{{1}}}prov|Transferor}} gives up all legal claims to the asset.
- Nor does it make any sense to talk about the {{{{{1}}}prov|Transferee}}’s right to reuse or rehypothecate the asset. It owns the asset outright: by definition it can do what it wants with it; the {{{{{1}}}prov|Transferor}} can’t stop it.[2]
Pledge under a 1994 New York law CSA (and a English law CSD)
Examples: The 1994 New York law CSAs and the English law CSD are security financial collateral arrangements in that the Pledgor creates a security interest over the document in favour of the Secured Party, but retains beneficial ownership of the assets.
- The {{{{{1}}}prov|Pledgor}} delivers the assets to the Secured Party to hold in custody, subject to the security interest, for the {{{{{1}}}prov|Pledgor}}. The {{{{{1}}}prov|Pledgor}} retains title to the assets.
- {{{{{1}}}prov|Secured Party}} holds the assets subject to a security interest securing its payment obligation under the related transaction.
- The custody arrangement only exists while {{{{{1}}}prov|Secured Party}} holds the security, not before.
- Under the 1994 New York law CSAs the Secured Party may nonetheless be entitled to sell the pledged asset absolutely, under a process known as rehypothecation. Don’t laugh. The JC thinks this converts the pledge into a title transfer collateral arrangement — at least at the point of rehypothecation. If so, it makes you wonder why, you know, all the fuss with security interests.
“Transaction” versus “Credit Support Document” complicated affair.
You are going to love this. Strap yourselves in. Are you ready?
- English law CSAs are Transactions but are not Credit Support Documents.
- 1994 New York law CSAs not Transactions, and, explicitly, are Credit Support Documents, though you should not (according to the user’s guide) describe the parties to one as “Credit Support Providers”.
- English law CSDs (including the 2018 English law IM CSD) are not Transactions and, explicitly, are Credit Support Documents.
This means the Events of Default for failure to pay under an English law CSA — being a Transaction, a failure to pay under it is a Section 5(a)(i) Failure to Pay or Deliver — are different from those applying to New York law CSAs and English law CSDs (being Credit Support Documents, a failure to pay under these is a Section 5(a)(iii) Credit Support Default).
Because ownership transfers absolutely, the {{{{{1}}}prov|Transferee}} doesn’t have to do anything to enforce its collateral. It already owns it outright. Indeed, to the contrary, should the {{{{{1}}}prov|Exposure}} that the collateral supports disappear, the {{{{{1}}}prov|Transferor}} will be the creditor of the {{{{{1}}}prov|Transferee}}. It is as it it were a Transaction under the ISDA where the mark-to-market exposure had flipped around. Indeed, a English law CSA is a “Transaction” under the ISDA Master Agreement — it is an integral part of the ISDA Master Agreement itself, and it is the proverbial schoolboy error to label a English law CSA as a “Credit Support Document”. It is not a Credit Support Document. From the point of view of the ISDA architecture it is the Confirmation for a Transaction.
But the 1994 New York law CSAs are not Transactions, for the same reason: title doesn’t change hands. They are old fashioned security arrangements. Therefore they 'are Credit Support Documents in the labyrinthine logic of ISDA’s crack drafting squad™. This all no doubt must have seen an excellently complex thing for the little gnomes in ISDA’s crack drafting squad™when they were devising the idea of the CSA back in the early nineties. Nowadays, it just seems silly. But here we are, folks.
See also
- Credit Support Document
- Credit Support Default
- Title-transfer collateral arrangement
- Security collateral arrangement
References
- ↑ US attorneys will swear blind that this is not true, but all I can say is rehypothecation.
- ↑ This doesn't stop triparty agents requiring title transfer providers to grant their counterparties a right of reuse.