The Jolly Contrarian’s Glossary
The snippy guide to financial services lingo.™
Sometimes called outright transfer, title transfer is when one merchant sells (or gives) something outright to another, the first thereby abandoning all its claim, interest and colour of right whatsoever to that thing. To be contrasted with a pledge or an assignment by way of security.
Outright title transfer is a special, delicate thing — it has accounting, risk transfer, tax and legal implications that are quite different to giving mere possession over an asset by way of surety with a contingent right to repossess the very same asset back once the debt is discharged.
With title transfer, once you part with an asset, it is gone for ever: your expectation is to the redelivery of one just like it,
These differences may make little practical sense to the person on the Clapham omnibus, who just wants to know a debt is collateralised, but the distinctions forge long, lucrative careers for those in accounting and legal professions, and the JC would be lying if he did not allow that some of his long, inglorious career, had been devoted to getting this rather tendentious distinction right, and being righteously indignant that his colleagues in operations and collateral management seem dispositionally unable to.
The title transfer 1995 ISDA CSA is carefully designed to create a true sale (hence references to redelivery of “Equivalent Credit Support” and not just return of posted assets). Modifications to the CSA (even by side letter or other agreement) which allow any counterparty to retain control over the Credit Support Balance held by the other party may prejudice the true sale analysis. This is what is fondly known as a title transfer collateral arrangement, about which disclosure is required thanks to Article 15 of that most excellent piece of EU doggerel, the Securities Financing Transactions Regulation.
The big difference between 1994 New York law CSAs and English law CSAs: title transfer and pledge
This feels as good a time as any to raise the great subject of title transfer and pledge. Under a 1994 New York law CSA one transfers Credit Support by means of pledge. Under a English law CSA one transfers Credit Support by means to title transfer.
What is the difference? Well, in a Nutshell™:
Title transfer under a English law CSA
Under a “title transfer collateral arrangement” 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 Transferee.
- Securities delivered to Transferee become the Transferee’s property absolutely
- Transferee does not hold them in custody for the Transferor;
- Transferee 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 under a 1994 New York law CSA (and a English law CSD)
Examples: The 1994 New York law CSAs and the English law CSD are security financial collateral arrangements in that the Pledgor creates a security interest over the document in favour of the Secured Party, but retains beneficial ownership of the assets.
- The Pledgor delivers the assets to the Secured Party to hold in custody, subject to the security interest, for the Pledgor. The Pledgor retains title to the assets.
- Secured Party holds the assets subject to a security interest securing its payment obligation under the related transaction.
- The custody arrangement only exists while Secured Party holds the security, not before.
- Under the 1994 New York law CSAs the 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 title transfer collateral arrangement — at least at the point of rehypothecation. If so, it makes you wonder why, you know, all the fuss with security interests.
“Transaction” versus “Credit Support Document” complicated affair.
You are going to love this. Strap yourselves in. Are you ready?
- English law CSAs are Transactions but are not Credit Support Documents.
- 1994 New York law CSAs not Transactions, and, explicitly, are Credit Support Documents, though you should not (according to the user’s guide) describe the parties to one as “Credit Support Providers”.
- English law CSDs (including the 2018 English law IM CSD) are not Transactions and, explicitly, are Credit Support Documents.
This means the Events of Default for failure to pay under an English law CSA — being a Transaction, a failure to pay under it is a Section 5(a)(i) 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 5(a)(iii) Credit Support Default).
Because ownership transfers absolutely, the Transferee doesn’t have to do anything to enforce its collateral. It already owns it outright. Indeed, to the contrary, should the Exposure that the collateral supports disappear, the Transferor will be the creditor of the Transferee. It is as it it were a Transaction under the ISDA where the mark-to-market exposure had flipped around. Indeed, a English law CSA is a “Transaction” under the ISDA Master Agreement — it is an integral part of the ISDA Master Agreement itself, and it is the proverbial schoolboy error to label a English law CSA as a “Credit Support Document”. It is not a Credit Support Document. From the point of view of the ISDA architecture it is the Confirmation for a Transaction.
But the 1994 New York law CSAs are not Transactions, 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 ISDA’s crack drafting squad™. This all no doubt must have seen an excellently complex thing for the little gnomes in ISDA’s crack drafting squad™when they were devising the idea of the CSA back in the early nineties. Nowadays, it just seems silly. But here we are, folks.
Note also the concept of full title guarantee and limited title guarantee, as contemplated by the Law of Property (Miscellaneous Provisions) Act 1994
- This doesn't stop triparty agents requiring title transfer providers to grant their counterparties a right of reuse.