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)?

In General

Generally, No:

• An assignment by way of security is a preferred claim in the assignor’s insolvency over the realised value of certain rights, rather than a direct transfer of those rights to the 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.

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.

Important caveat

This is 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.