Legally Ineligible Credit Support (VM) - VM CSA Provision

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2016 ISDA VM CSA Anatomy


In a NutshellTM Section 9(e):

Template:Nutshell 2016 CSA 9(e) view template

2016 ISDA VM CSA full text of Section 9(e):

9(e) Legally Ineligible Credit Support (VM).
Unless otherwise specified in Paragraph 11, upon delivery of a Legal Ineligibility Notice by a party, each item of Eligible Credit Support (VM) (or a specified amount of such item) identified in such notice

(i) will cease to be Eligible Credit Support (VM) for purposes of transfers to such party as the Transferee hereunder as of the applicable Transfer Ineligibility Date,
(ii) will cease to be Eligible Credit Support (VM) for the other party as the Transferor for all purposes hereunder (other than for the purposes of the definitions of Credit Support Balance (VM) and Equivalent Credit Support (VM)) as of the Total Ineligibility Date and
(iii) will have a Value of zero on and from the Total Ineligibility Date, other than for the purposes of Paragraph 6.

Legal Ineligibility Notice” means a written notice from the Transferee to the Transferor in which the Transferee

(i) represents that the Transferee has determined that one or more items of Eligible Credit Support (VM) (or a specified amount of any such item) either has ceased to satisfy, or as of a specified date will cease to satisfy, collateral eligibility requirements under law applicable to the Transferee requiring the collection of variation margin (the “Legal Eligibility Requirements”),
(ii) lists the item(s) of Eligible Credit Support (VM) (and, if applicable, the specified amount of such item) that have ceased to satisfy, or as of a specified date will cease to satisfy, the Legal Eligibility Requirements,
(iii) describes the reason(s) why such item(s) of Eligible Credit Support (VM) (or the specified amount thereof) have ceased to satisfy, or will cease to satisfy, the Legal Eligibility Requirements and
(iv) specifies the Total Ineligibility Date and, if different, the Transfer Ineligibility Date.

Total Ineligibility Date” means the date on which the relevant item of Eligible Credit Support (VM) (or a specified amount of such item) has ceased to satisfy, or will cease to satisfy, the Legal Eligibility Requirements applicable to the Transferee for all purposes hereunder, provided that, unless otherwise specified in Paragraph 11, if such date is earlier than the fifth Local Business Day following the date on which the Legal Ineligibility Notice is delivered, the Total Ineligibility Date will be the fifth Local Business Day following the date of such delivery.
Transfer Ineligibility Date” means the date on which the relevant item of Eligible Credit Support (VM) (or a specified amount of such item) has ceased to satisfy, or will cease to satisfy, the Legal Eligibility Requirements for purposes of transfers to the Transferee hereunder, provided that, unless otherwise specified in Paragraph 11, if such date is earlier than the fifth Local Business Day following the date on which the Legal Ineligibility Notice is delivered, the Transfer Ineligibility Date will be the fifth Local Business Day following the date of such delivery.
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Related Agreements
Click here for the text of Section 9(e) in the 1995 English Law CSA
Click here for the text of Section 9(e) in the 2016 English Law VM CSA
Click here for the text of the equivalent, Section 11(g) in the 2016 NY Law VM CSA
Comparisons
There is no equivalent to Paragraph 9(e) in the 1995 English Law CSA.
2016 English law VM CSA and 2016 NY Law VM CSA: click for comparison
Resources Full wikitext | Nutshell wikitext
Navigation 1 (Interpretation) | 2 (Credit Support Obligations) | 3 (Transfers, Calculations and Exchanges) | 4 (Dispute Resolution) | 5 (Title Transfer etc) | 6 (Default) | 7 (Representation) | 8 (Expenses) | 9 (Miscellaneous) | 10 (Definitions) | 11 (Elections and Variables)

No such concept in the 1995 English Law CSA or the 1994 ISDA CSA (NY law)

Concerning as it does legal and not contractual ineligibility of credit support, and that being a function of criteria imposed by regulators on one’s mandatory obligations to post and collect margin, which did not exist before 2016, it is hardly surprising ISDA’s crack drafting squadTM of yore didn’t anticipate the need for this clause, which is convoluted, finnicky, and you can avoid the need for it entirely, should you post cash in a sensible currency.

Difference between 2016 English law VM CSA and 2016 NY Law VM CSA

In most respects they are identical (with references to “Transferor” and “Transferee” switched to “Pledgor” and “Secured Party”). There are two technical differences, for completists:

References

  1. Ahem rehypothecation folks.