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| ===The big difference between {{nycsa}}s and {{ukcsa}}s: {{tag|title transfer}} and {{tag|pledge}}=== | | ====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 {{nycsa}} one transfers {{nycsaprov|Credit Support}} by means of [[pledge]]. Under a {{ukcsa}} one transfers {{vmcsaprov|Credit Support}} by means to [[title transfer]]. | | This feels as good a time as any to raise the great subject of [[title transfer]] and [[pledge]]. |
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| What is the difference? Well, in a {{nutshell}}:
| | Under a {{nycsa}} one transfers {{{{{1}}}|Credit Support}} by means of ''[[pledge]]''. |
| ====Title transfer under a {{ukcsa}}====
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| Under a “{{ttca}}” when a party provides collateral it transfers it to the other party outright and absolutely: it ''gives'' it, free of all reversionary interests, to the {{{{{1}}}prov|Transferee}}. | |
| *Securities delivered to {{{{{1}}}prov|Transferee}} become the {{{{{1}}}prov|Transferee}}’s property absolutely
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| *{{{{{1}}}prov|Transferee}} does not hold them in custody for the {{{{{1}}}prov|Transferor}};
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| *{{{{{1}}}prov|Transferee}} has only an obligation to redeliver an [[equivalent]] security.
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| *Therefore no {{tag|CASS}} or [[custody]] question arises at any point - the {{{{{1}}}prov|Transferor}} gives up all legal claims to the asset.
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| *Nor does it make any sense to talk about the {{{{{1}}}prov|Transferee}}’s right to [[reuse]] or [[rehypothecate]] the asset. It owns the asset outright: by definition it can do what it wants with it; the {{{{{1}}}prov|Transferor}} can’t stop it.<ref>This doesn't stop [[triparty agent]]s requiring title transfer providers to grant their counterparties a right of reuse.</ref>
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| ====Pledge under a {{nycsa}} (and a {{csd}})====
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| Examples: The {{nycsa}}s and the {{csd}} are {{sfca}}s in that the {{nyvmcsaprov|Pledgor}} creates a [[security interest]] over the document in favour of the {{nyvmcsaprov|Secured Party}}, but retains beneficial ownership of the assets.
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| *The {{{{{1}}}prov|Pledgor}} delivers the assets to the {{nyvmcsaprov|Secured Party}} to hold in [[custody]], subject to the [[security interest]], for the {{{{{1}}}prov|Pledgor}}. The {{{{{1}}}prov|Pledgor}} retains title to the assets.
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| *{{{{{1}}}prov|Secured Party}} holds the assets subject to a {{tag|security interest}} securing its payment obligation under the related transaction.
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| *The custody arrangement only exists while {{{{{1}}}prov|Secured Party}} holds the security, not before.
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| **Under the {{nycsa}}s the {{nyvmcsaprov|Secured Party}} may nonetheless be entitled to sell the pledged asset absolutely, under a process known as [[rehypothecation]]. Don’t laugh. The [[JC]] thinks this converts the pledge into a {{ttca}} — at least at the point of [[rehypothecation]]. If so, it makes you wonder why, you know, all the fuss with security interests.
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| ===“{{isdaprov|Transaction}}” versus “{{isdaprov|Credit Support Document}}” complicated affair.===
| | Under a {{ukcsa}} one transfers {{{{{1}}}|Credit Support}} by ''[[title transfer]]''. |
| You are going to love this. Strap yourselves in. Are you ready?
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| *''{{ukcsa}}s are {{isdaprov|Transaction}}s but are not {{isdaprov|Credit Support Document}}s.
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| *''{{nycsa}}s '''not''' {{isdaprov|Transaction}}s, and, explicitly, '''are''' {{isdaprov|Credit Support Document}}s'', though you should not (according to the user’s guide) describe the parties to one as “{{nycsaprov|Credit Support Provider}}s”.
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| *''{{csd}}s (including the {{imcsd}}) are '''not''' {{isdaprov|Transaction}}s and, explicitly, '''are''' {{isdaprov|Credit Support Document}}s''.
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| This means the Events of Default for failure to pay under an English law CSA — being a {{isdaprov|Transaction}}, a failure to pay under it is a Section {{vmcsaprov|5(a)(i)}} {{vmcsaprov|Failure to Pay or Deliver}} — are different from those applying to New York law CSAs and English law CSDs (being Credit Support Documents, a failure to pay under these is a Section {{isdaprov|5(a)(iii)}} {{isdaprov|Credit Support Default}}).
| | What is the difference? |
| | =====Title transfer===== |
| | Under a “{{ttca}}” one party transfers collateral to the other ''outright and absolutely'': it ''gives'' it, free of all reversionary interests, to the {{{{{1}}}|Transferee}}. |
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| Because ownership transfers absolutely, the {{{{{1}}}prov|Transferee}} doesn’t have to do anything to enforce its collateral. It already owns it outright. Indeed, to the contrary, should the {{{{{1}}}prov|Exposure}} that the collateral supports disappear, the {{{{{1}}}prov|Transferor}} will be the creditor of the {{{{{1}}}prov|Transferee}}. It is as it it were a {{isdaprov|Transaction}} under the ISDA where the mark-to-market exposure had flipped around. Indeed, a {{ukcsa}} '''is''' a “{{isdaprov|Transaction}}” under the {{isdama}} — it is an integral part of the {{isdama}} itself, and it is the proverbial schoolboy error to label a {{ukcsa}} as a “{{isdaprov|Credit Support Document}}”. It is not a Credit Support Document. From the point of view of the ISDA architecture it is the {{isdaprov|Confirmation}} for a {{isdaprov|Transaction}}.
| | Securities delivered to {{{{{1}}}|Transferee}} become the {{{{{1}}}|Transferee}}’s property absolutely. There is no custody involved: the {{{{{1}}}|Transferee}} owns them outright, and not to {{{{{1}}}|Transferor}}’s order. The {{{{{1}}}|Transferee}} has only an obligation to redeliver an “[[equivalent]]” security — ie one that is fungible with the {{{{{1}}}|Credit Support}} originally posted. |
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| But the {{nycsa}}s are ''not'' {{isdaprov|Transaction}}s, for the same reason: title ''doesn’t'' change hands. They are old fashioned security arrangements. Therefore they '''are'' Credit Support Documents in the labyrinthine logic of {{icds}}. This all no doubt must have seen an excellently complex thing for the little gnomes in {{icds}}when they were devising the idea of the [[CSA]] back in the early nineties. Nowadays, it just seems silly. But here we are, folks.
| | There are no custody/client asset regulatory issues, and nor does it make sense to talk about the {{{{{1}}}|Transferee}}’s right to “[[reuse]]” or “[[rehypothecate]]” the asset. It ''owns'' the asset outright: by definition, it can do what it wants with it. |
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| | =====Pledge===== |
| | The NY law CSAs and English law CSDs are “{{sfca}}s” in that there is a {{{{{1}}}|Pledgor}} who creates a [[security interest]] in favour of the {{{{{1}}}|Secured Party}}, ''but retains beneficial ownership of the assets''. |
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| | The {{{{{1}}}|Pledgor}} delivers the assets to the {{{{{1}}}|Secured Party}} to hold in [[custody]], subject to the [[security interest]], for the {{{{{1}}}|Pledgor}}. {{{{{1}}}|Secured Party}} holds the assets subject to a [[security interest]] securing its payment obligation under the related transaction. |
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| | There is a custody arrangement but only while {{{{{1}}}|Secured Party}} holds the security: Under the NY law CSAs, the {{{{{1}}}|Secured Party}} (by default) is entitled to sell the pledged asset absolutely, under a process known as “[[rehypothecation]]”. This, we believe, converts the {{scfa}} into a {{ttca}} — at least from the point of [[rehypothecation]]. If so, it makes you wonder why, you know, all the fuss with security interests. |
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| | ====“Transaction” or “Credit Support Document”?==== |
| | English law Credit Support Annexes are {{isdaprov|Transaction}}s under the Master Agreement. Therefore they are not {{isdaprov|Credit Support Document}}s. |
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| | New York law Credit Support Annexes are ''not'' {{isdaprov|Transaction}}s. Explicitly, they '''are''' {{isdaprov|Credit Support Document}}s'', though you should not (according to the ISDA User’s Guide) describe the parties to one as “{{nycsaprov|Credit Support Provider}}s”. |
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| | English law Credit Support ''Deeds'' (including the {{imcsd}}) — rare birds in the [[Forest of Bretton]] — are ''not'' {{isdaprov|Transaction}}s and, explicitly, ''are'' {{isdaprov|Credit Support Document}}s''. |
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| | This means that a failure to perform under an English law CSA {{isdaprov|Transaction}} is a {{isdaprov|Failure to Pay or Deliver}} under Section {{isdaprov|5(a)(i)}}. by contrast, a failure to perform under a New York law CSA or an English law CS''D'' is a {{isdaprov|Credit Support Default}} under Section {{isdaprov|5(a)(iii)}}. |
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| | Does this mean anything substantive? Or is the difference only formal? |
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| | ====Enforcement==== |
| | Because ownership transfers absolutely, a {{{{{1}}}|Transferee}} 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 {{{{{1}}}|Exposure}} that the collateral supports disappear, the {{{{{1}}}|Transferor}} will be the creditor of the {{{{{1}}}|Transferee}}. It is as if it were a {{isdaprov|Transaction}} under the ISDA where the [[mark-to-market]] exposure had flipped around. |
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| | As New York law CSAs are ''not'' {{isdaprov|Transaction}}s, they are old-fashioned security arrangements. Therefore they '''are'' Credit Support Documents in the labyrinthine logic of {{icds}} and must be enforced. |