Custodian (VM) - NY VM CSA Provision

2016 ISDA Credit Support Annex (VM) (New York law) A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: →NY OG →Eng OG →NY VM →Eng VM →Eng IM Custodian Provision 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. You can even ask questions! Ask about it here. Original text “Custodian (VM)” has the meaning specified in Paragraphs 6(b)(i) and 13. 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. 13(h) Holding and Using Posted Collateral (VM). (i) Eligibility to Hold Posted Collateral (VM); Custodians (VM). Party A and its Custodian (VM) will be entitled to hold Posted Collateral (VM) pursuant to Paragraph 6(b); provided that the following conditions applicable to it are satisfied: (A) Party A is not a Defaulting Party. (B) [SPECIFY] [SPECIFY] Initially, the Custodian (VM) for Party A is [SPECIFY] Party B and its Custodian (VM) will be entitled to hold Posted Collateral (VM) pursuant to Paragraph 6(b); provided that the following conditions applicable to it are satisfied: (A) Party B is not a Defaulting Party. (B) [SPECIFY] [SPECIFY] Initially, the Custodian (VM) for Party A is [SPECIFY] (ii) Use of Posted Collateral (VM). The provisions of Paragraph 6(c) will not apply to the [party/parties*] specified here: [SPECIFY] Party A [SPECIFY] Party B and [that party/those parties*] will not be permitted to: [SPECIFY] 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: CSA

Comparisons

More information on what this Custodian chap actually does at Holding and Using Posted Collateral. Neither of the title transfer CSAs have a Custodian, one not being needed.

Basics

A key difference between the security interest CSA and the title transfer CSA is that where you are pretending to hold subject to some security, the Pledgor might be inclined to want to deliver the credit support to a Custodian or escrow agent of some kind on the Secured Party’s behalf, rather than delivering outright to the Secured Party who might, you know, lose the collateral or something.

A party to a title transfer CSA does not have this anxiousness, seeing as the Transferee gets transferred the Credit Support outright and is allowed to lose it, as long as it delivers back something similar.

As long as we are talking OG CSAs or VM CSAs, this is all rather moot: in practice, the Transferee/Secured Party will have a right to rehypothecate any Posted Credit Support, whereupon the Secured Party becomes, effectively a debtor for that Credit Support return obligation, and not a Secured Party at all. That is, exactly like a Transferee under a title transfer CSA.

That being the case, the Custodian provision is almost always a dead letter. Quietly, I find myself wondering why I am even bothering to write all this. Even more so since the VM CSA has, for the largest part, transmogrified itself into an all-cash arrangement: you can’t custody cash: it immediately creates a debt obligation. This is deep financial lore.

If we are talking 2018 Regulatory IM CSA, on the other hand, it is a different story: Eligible Credit Support under that regime is inevitably non-cash, there is generally no right of rehypothecation, and any such Posted Credit Support would be held by a third-party custodian or escrow agent. However, if you were doing that you would be under the 2018 English law IM CSD form. So the Custodian provision remains all but a dead letter in the security interest CSAs.

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See also

• Holding and Using Posted Collateral