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2016 ISDA Credit Support Annex (VM) (New York law)
A Jolly Contrarian owner’s manual™
Miscellaneous in a Nutshell™
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Paragraph 11 Miscellaneous
11(a) Default Interest. A Secured Party that fails to make, when due, any Transfer of Posted Collateral (VM) will be obligated to pay the Pledgor (to the extent permitted under applicable law) an amount equal to interest at the Default Rate multiplied by the Value of the items of property that were required to be Transferred, from (and including) the date that Posted Collateral (VM) was required to be Transferred to (but excluding) the date of Transfer of that Posted Collateral (VM). This interest will be calculated on the basis of daily compounding and the actual number of days elapsed. An Interest Payer (VM) that fails to make, when due, any Transfer of an Interest Payment (VM) will be obligated to pay the Interest Payee (VM) (to the extent permitted under applicable law) an amount equal to interest at the Default Rate (and for such purposes, if the Default Rate is less than zero, it will be deemed to be zero) multiplied by that Interest Payment (VM), from (and including) the date that Interest Payment (VM) was required to be Transferred to (but excluding) the date of Transfer of that Interest Payment (VM). This interest will be calculated on the basis of daily compounding and the actual number of days elapsed.
11(b) Further Assurances. Promptly following a demand made by a party, the other party will execute, deliver, file and record any financing statement, specific assignment or other document and take any other action that may be necessary or desirable and reasonably requested by that party to create, preserve, perfect or validate any security interest or lien granted under Paragraph 2, to enable that party to exercise or enforce its rights under this Annex with respect to Posted Credit Support (VM) or an Interest Payment (VM) or to effect or document a release of a security interest on Posted Collateral (VM) or an Interest Payment (VM).
11(c) Further Protection. The Pledgor will promptly give notice to the Secured Party of, and defend against, any suit, action, proceeding or lien that involves Posted Credit Support (VM) Transferred by the Pledgor or that could adversely affect the security interest and lien granted by it under Paragraph 2, unless that suit, action, proceeding or lien results from the exercise of the Secured Party’s rights under Paragraph 6(c).
11(d) Good Faith and Commercially Reasonable Manner. Performance of all obligations under this Annex, including, but not limited to, all calculations, valuations and determinations made by either party, will be made in good faith and in a commercially reasonable manner.
11(e) Demands and Notices. All Demands and Notices made by a party under this Annex will be made as specified in the Notices Section of this Agreement, except as otherwise provided in Paragraph 13.
11(f) Specifications of Certain Matters. Anything referred to in this Annex as being specified in Paragraph 13 also may be specified in one or more Confirmations or other documents and this Annex will be construed accordingly.
11(g) Legally Ineligible Credit Support (VM). Unless otherwise specified in Paragraph 13, 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 Secured Party hereunder as of the applicable Transfer Ineligibility Date,
- (ii) will cease to be Eligible Credit Support (VM) for the other party as the Pledgor for all purposes hereunder as of the Total Ineligibility Date and
- (iii) will have a Value of zero on and from the Total Ineligibility Date.
“Legal Ineligibility Notice” means a written notice from the Secured Party to the Pledgor in which the Secured Party
- (i) represents that the Secured Party 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 Secured Party 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) 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 Secured Party for all purposes hereunder; provided that, unless otherwise specified in Paragraph 13, 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 Secured Party hereunder; provided that, unless otherwise specified in Paragraph 13, 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.
11(h) Return of Posted Credit Support (VM) with a Value of Zero. Subject to Paragraph 4(a), the Secured Party will, promptly upon demand (but in no event later than the time at which a Transfer would be due under Paragraph 4(b) with respect to a demand for the Transfer of Eligible Credit Support (VM) or Posted Credit Support (VM)), Transfer to the Pledgor any item of Posted Credit Support (VM) (or the specified amount of such item) that as of the date of such demand has a Value of zero; provided that the Secured Party will only be obligated to Transfer any Posted Credit Support (VM) in accordance with this Paragraph 11(h), if, as of the date of Transfer of such item, the Pledgor has satisfied all of its Transfer obligations under this Annex, if any.
11(i) Reinstatement of Credit Support Eligibility. Upon a reasonable request by the Pledgor, the Secured Party will determine whether an item (or a specified amount of such item) of Eligible Credit Support (VM) that was the subject of a prior Legal Ineligibility Notice would currently satisfy the Legal Eligibility Requirements applicable to the Secured Party. If the Secured Party determines that as of such date of determination such item (or specified amount of such item) satisfies the Legal Eligibility Requirements applicable to the Secured Party, the Secured Party will promptly following such determination rescind the relevant Legal Ineligibility Notice with respect to such item (or specified amount of such item) by written notice to the Pledgor. Upon the delivery of such notice, the relevant item (or specified amount of such item) will constitute Eligible Credit Support (VM) hereunder.
11(j) Credit Support Offsets. If the parties specify that “Credit Support Offsets” is applicable in Paragraph 13, and on any date:
- 11(j)(i) a Transfer of Eligible Credit Support (VM) is due under this Annex to satisfy a Delivery Amount (VM) or a Return Amount (VM) obligation, and a Transfer of credit support (other than any Other CSA Excluded Credit Support) is also due under any Other CSA;
- 11(j)(ii) the parties have notified each other of the credit support that they intend to Transfer under this Annex and Transfer under such Other CSA (other than any Other CSA Excluded Credit Support) to satisfy their respective obligations; and
- 11(j)(iii) in respect of Paragraph 11(j)(ii), each party intends to Transfer one or more types of credit support that is fully fungible with one or more types of credit support the other party intends to Transfer (each such credit support, a “Fungible Credit Support Type”),
then, on such date and in respect of each such Fungible Credit Support Type, each party’s obligation to make a Transfer of any such Fungible Credit Support Type hereunder or under such Other CSA will be automatically satisfied and discharged and, if the aggregate amount that would have otherwise been Transferred by one party exceeds the aggregate amount that would have otherwise been Transferred by the other party, replaced by an obligation hereunder or under such Other CSA, as applicable, upon the party by which the larger aggregate amount would have been Transferred to Transfer to the other party the excess of the larger aggregate amount over the smaller aggregate amount. If a party’s obligation to make a Transfer of credit support under this Annex or an Other CSA is automatically satisfied and discharged pursuant to this Paragraph 11(j), then, for purposes of this Annex or the Other CSA, as applicable, the other party will be deemed to have received credit support of the applicable Fungible Credit Support Type in the amount that would otherwise have been required to be Transferred, in each case on the day on which the relevant Transfer was due.
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Overview
security interest CSA v title transfer CSA: The Miscellaneous terms are largely the same but for the Further Assurances and Further Protection, which are unique to the security interest CSAs, relating as they do to security interests. See comparison of the ancients and comparison of the moderns which, but for those aspects and the differing terminology, are pretty much the same.
Ancient v modern: The big change is the additional “Legally Ineligible Credit Support” business, and a slug of extra detail in the Default Interest section of the modern CSA, largely there to account for the fever dream that was negative interest rates. See comparison.
NY VM CSA v Eng IM CDS: Largely of a piece until Para 11(f) when the dictates of NY law against Emnhlish, and directly posted VM versus custodied IM, take the two in very different directions. Why they couldn’t have titled the “Other Provisions” section “Miscellaneous”, as they have done in all other editions of the ISDA Credit Support Annex, we will just have to wonder.
Summary
Good Faith and Commercially Reasonable Manner
Whether a merchant should commit herself to dealing in good faith, or in a commercially reasonable manner, or both, is one that vexes the legal profession. Especially those in America. It should not. While doing no more than articulating the commercial imperative it can put many a tedious, and expensive, negotiation to the sword.
Of course, there is a certain kind of negotiator apt to see phantoms and ghosts at every turn. She has a bleak vision indeed of a counterparty’s general commercial aspirations for his organisation. Hobbesian.
“What if,” she will say, “your traders mendaciously use this clause to bring about my firm’s misfortune in a way I – er – cannot now anticipate?”
Litigation risk
The one argument against the general principle is that acting “reasonably” is inherently vague and therefore a source of potential dispute in itself, even if we always exercise our rights reasonably and in good faith. This is just what you would expect a work-creating lawyer to say.
JC says, “come now”. This is constructive vaguess - of the good kind — it only presents litigation risk to clients who don’t trust you — and here you have bigger problems, frankly — or to those whom you don’t trust — also not without issues. Here, your problem is not the good faith obligation; it’s that you have a lousy client relationship. It hardly affects litigation risk in any case: An unhappy client will take action either way, and will argue a lack of good faith in any case.
A contract is a bond of trust. How would a merchant explain to his counterparty that he wished to reserve for himself the right to act in bad faith?
As for commercial reasonableness, yes, it admits shades of doubt, and encourages litigation — well, for you the great case of Barclays v Unicredit should be a source of succour. The fact that “in good faith and a commercially reasonable manner” is written into the Uniform Commercial Code should bend the American ear: if it is okay there — and in the 2016 NY Law VM CSA — why not elsewhere?
In any case, whatever your contract says, if a court finds you have acted wantonly, or in bad faith, do not expect much sympathy when you argue that, by the contract, you were entitled to.
Legally ineligible Credit Support
New for the regulatory margin CSAs
There is no such concept in the ancient CSAs, 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 squad™ 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.
Regulatory margin title transfer CSA vs security interest 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:
- The exception in the 2016 VM CSA for Legally Ineligible Credit Support counting as Eligible Credit Support for the purpose of Credit Support Balance and Equivalent Credit Support. This is because, being a title transfer collateral arrangement, even though it is worth zero for the purposes of discharging one’s regulatory obligation to collect and return collateral, in the real world it is still worth something, and the Transferee still has to give it back, even if that has no effect on valuations under the 2016 VM CSA. With a 2016 NY Law VM CSA since the Secured Party never[1] “gets” it in the first place, the Secured Party doesn’t have to give it back either. (By the way, if you aren’t saying, “hey, but what about rehypothecation under Paragraph 6(c)?” yet, you should be.)
- The exception for valuation on Default — that flows from the fundamental difference between the 2016 VM CSA a title transfer collateral arrangement which is a Transaction under the ISDA Master Agreement and the 2016 NY Law VM CSA which is a security financial collateral arrangement which is only a Credit Support Document under the ISDA Master Agreement.
Specification of certain matters
One from the “well, I’ll be blowed” school of legal expression wherein ISDA’s crack drafting squad™ states the bleeding obvious for the benefit of those timid types who — despite being schooled in its weft and warp — don’t quite trust the common law to deliver elementary common sense.
On the one hand, you can see where they’re coming from — this is the same common law which concluded that email is not an electronic messaging system,[2] after all - but on the other hand come on.
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See also
Template:Csa Miscellaneous sa
References