From The Jolly Contrarian
Jump to navigation Jump to search
A word about credit risk mitigation

Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you.
Sign up for our newsletter.

/plɛʤ/ (n.)

A legal security interest — a type of bailment, if we’re getting technical — created by transferring possession of an asset by way of security for a an obligation, with the intention to create that security interest. It is the act of pledging, not the document evidencing the pledge, that matters.

The pledgee takes a “special” proprietary legal interest in the assets, though, but does not take legal title to them. The key factor is possession. This makes a pledge kind of awkward where the debtor wants to carry on holding or using the asset — in that case, a floating charge or an assignment by way of security is better — but you do see it (as for example in the 1995 ISDA CSD (English law) — though that document is far less popular than the non-pledge 1994 NY CSA, which is a straight out title transfer collateral arrangement.)

Preferred means of delivering collateral vary in different markets. If you had to generalise, you would say our American friends, west across the big ditch, prefer pledge mechanics; British and commonwealth types tend to favour title transfer.

The twain between NY law and English law CSAs: pledge v title transfer

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 2016 VM CSA by means of pledge.

Under a English law CSA one transfers 2016 VM CSA by title transfer.

What is the difference?

Title transfer

Under a “title transfer collateral arrangement” one party transfers collateral to the other outright and absolutely: it gives it, free of all reversionary interests, to the 2016 VM CSA.

Securities delivered to 2016 VM CSA become the 2016 VM CSA’s property absolutely. There is no custody involved: the 2016 VM CSA owns them outright, and not to 2016 VM CSA’s order. The 2016 VM CSA has only an obligation to redeliver an “equivalent” security — ie one that is fungible with the 2016 VM CSA originally posted.

There are no custody/client asset regulatory issues, and nor does it make sense to talk about the 2016 VM CSA’s right to “reuse” or “rehypothecate” the asset. It owns the asset outright: by definition, it can do what it wants with it.


The NY law CSAs and English law CSDs are “security financial collateral arrangements” in that there is a 2016 VM CSA who creates a security interest in favour of the 2016 VM CSA, but retains beneficial ownership of the assets.

The 2016 VM CSA delivers the assets to the 2016 VM CSA to hold in custody, subject to the security interest, for the 2016 VM CSA. 2016 VM CSA holds the assets subject to a security interest securing its payment obligation under the related transaction.

There is a custody arrangement but only while 2016 VM CSA holds the security: Under the NY law CSAs, the 2016 VM CSA (by default) is entitled to sell the pledged asset absolutely, under a process known as “rehypothecation”. This, we believe, converts the security financial collateral arrangement into a title transfer collateral arrangement — at least from the point of rehypothecation. If so, it makes you wonder why, you know, all the fuss with security interests.

“Transaction” or “Credit Support Document”?

English law Credit Support Annexes are Transactions under the Master Agreement. Therefore they are not Credit Support Documents.

New York law Credit Support Annexes are not Transactions. Explicitly, they are Credit Support Documents, though you should not (according to the ISDA User’s Guide) describe the parties to one as “Credit Support Providers”.

English law Credit Support Deeds (including the 2018 English law IM CSD) — rare birds in the Forest of Bretton — are not Transactions and, explicitly, are Credit Support Documents.

This means that a failure to perform under an English law CSA Transaction is a Failure to Pay or Deliver under Section 5(a)(i). by contrast, a failure to perform under a New York law CSA or an English law CSD is a Credit Support Default under Section 5(a)(iii).

Does this mean anything substantive? Or is the difference only formal?


Because ownership transfers absolutely, a 2016 VM CSA under an English law CSA doesn’t have to do anything to enforce its collateral. It already owns it outright. Indeed, to the contrary, should the 2016 VM CSA that the collateral supports disappear, the 2016 VM CSA will be the creditor of the 2016 VM CSA. It is as if it were a Transaction under the ISDA where the mark-to-market exposure had flipped around.

As New York law CSAs are not Transactions, they are old-fashioned security arrangements. Therefore they 'are Credit Support Documents in the labyrinthine logic of ISDA’s crack drafting squad™ and must be enforced.

See also