Template:Csa title transfer vs pledge

Title transfer vs. Pledge

This feels as good a time as any to raise the great subject of title transfer and pledge. In a Nutshell™:

Title Transfer

The 1995 CSA – outside the US, by far the most common type of 1995 CSA – is a title transfer document:

• When securities delivered to a party they become the recipient's property absolutely
• Recipient does not hold them in custody for the transferor;
• Recipient has only an obligation to redeliver an equivalent security.
• Therefore no CASS or custody question arises at any point - the transferor gives up all legal claims to the asset.
• Nor does it make any sense to talk about the 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 transferor can’t stop it.
• Pledge: The 1995 ISDA CSD (English law) and 1994 NY CSA are “pledge” documents:
  • The transferor delivers the securities to the receipient to hold for the transferor – the transferor retains title.
  • Recipient holds securities as transferor's custodian subject to a security interest securing their obligation under the swap.
  • The custody arrangement only exists while recipient holds the security, not before.
  • Under US iterations of this form (e.g. the 1994 NY CSA) the pledgee may nonetheless be entitled to sell the pledged asset absolutely, under a process known as rehypothecation. Don’t laugh. We think this converts the pledge into a title transfer collateral arrangement — at least at the point of rehypothecation.