Template:Assignment and set off
Effect on Netting and Set-off
Could a right to assign by way of security upset close-out netting such that one should, prohibit any assignment by way of security of any rights under a master netting agreement (such as an ISDA Master Agreement or a 2010 GMSLA)?
Generally: No.
- An assignment by way of security is a preferred claim in the assignor’s insolvency over the realised value of certain rights. It is not a direct transfer of those rights to an assignee: the assignor is still obliged to the counterparty, not the assignee, and any claim the assignee would have against the counterparty would be by way of subrogation of the assignor’s claim.
- “Nemo dat quod non habet”: the counterparty’s rights cannot be improved by assignment, and it being a single agreement on termination of the agreement the assignee’s claim is to the termination amount determined under the Agreement, which involves terminating all transactions and determining he aggregate mark-to-market and applying netting. No one can give what they do not have.<ref>Except under US Law — isn't that right, rehypothecation freaks?</re>
At the point of closeout, the assignee’s right is to any termination payment payable to the Counterparty. Therefore any assignment of rights is logically subject to the netting, as opposed to potentially destructive of it.
But: This is only true unless your netting agreement actually disapplies netting of receivables which have been subject to an assignment. If it does something crazy, like dividing these amounts off as "excluded termination amounts not subject to netting". But why on God's green earth would anyone do that? A question you might want to ask to the drafters of the FIA's Professional Client Agreement, which does exactly that.
Netting between legal entities established in England and Wales
In November 1993 — not long after the publication of the 1992 ISDA, the Financial Law Panel (these days the Financial Markets Law Committee published a Statement of the Law relating to Netting which, more or less, confirmed that not only is netting permissible between English entities on an insolvency; it’s compulsory, whether or not you have an ISDA Master Agreement. Therefore one doesn’t need a netting opinion for domestic English swap agreement. Hurrah.