Title transfer

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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 the right to take possession of that asset back once the debt is discharged. These 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 frustrated that his colleagues in operations and collateral management didn’t seem to be able to.

1995 CSA

The title transfer 1995 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 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 1994 New York law CSA one transfers 2016 VM CSA by means of pledge.

Under a English law CSA one transfers 2016 VM CSA by title transfer.

What is the difference?

Title transfer

Under a “title transfer collateral arrangement” one party transfers collateral to the other outright and absolutely: it gives it, free of all reversionary interests, to the 2016 VM CSA.

Securities delivered to 2016 VM CSA become the 2016 VM CSA’s property absolutely. There is no custody involved: the 2016 VM CSA owns them outright, and not to 2016 VM CSA’s order. The 2016 VM CSA has only an obligation to redeliver an “equivalent” security — ie one that is fungible with the 2016 VM CSA originally posted.

There are no custody/client asset regulatory issues, and nor does it make sense to talk about the 2016 VM CSA’s right to “reuse” or “rehypothecate” the asset. It owns the asset outright: by definition, it can do what it wants with it.

Pledge

The NY law CSAs and English law CSDs are “security financial collateral arrangements” in that there is a 2016 VM CSA who creates a security interest in favour of the 2016 VM CSA, but retains beneficial ownership of the assets.

The 2016 VM CSA delivers the assets to the 2016 VM CSA to hold in custody, subject to the security interest, for the 2016 VM CSA. 2016 VM CSA holds the assets subject to a security interest securing its payment obligation under the related transaction.

There is a custody arrangement but only while 2016 VM CSA holds the security: Under the NY law CSAs, the 2016 VM CSA (by default) is entitled to sell the pledged asset absolutely, under a process known as “rehypothecation”. This, we believe, converts the security financial collateral arrangement into a title transfer collateral arrangement — at least from the point of rehypothecation. If so, it makes you wonder why, you know, all the fuss with security interests.

“Transaction” or “Credit Support Document”?

English law Credit Support Annexes are Transactions under the Master Agreement. Therefore they are not Credit Support Documents.

New York law Credit Support Annexes are not Transactions. Explicitly, they are Credit Support Documents, though you should not (according to the ISDA User’s Guide) describe the parties to one as “Credit Support Providers”.

English law Credit Support Deeds (including the 2018 English law IM CSD) — rare birds in the Forest of Bretton — are not Transactions and, explicitly, are Credit Support Documents.

This means that a failure to perform under an English law CSA Transaction is a Failure to Pay or Deliver under Section 5(a)(i). by contrast, a failure to perform under a New York law CSA or an English law CSD is a Credit Support Default under Section 5(a)(iii).

Does this mean anything substantive? Or is the difference only formal?

Enforcement

Because ownership transfers absolutely, a 2016 VM CSA 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 2016 VM CSA that the collateral supports disappear, the 2016 VM CSA will be the creditor of the 2016 VM CSA. It is as if it were a Transaction under the ISDA where the mark-to-market exposure had flipped around.

As New York law CSAs are not Transactions, they are old-fashioned security arrangements. Therefore they 'are Credit Support Documents in the labyrinthine logic of ISDA’s crack drafting squad™ and must be enforced.

GMSLA

Despite its name, the 2010 GMSLA transaction is one of title transfer, as can be better explained in the articles on market terminology and the term “equivalent” as it is used in the GMSLA.

Full title guarantee

Note also the concept of full title guarantee and limited title guarantee, as contemplated by the Law of Property (Miscellaneous Provisions) Act 1994

See also

• CSA
• CSA Anatomy
• Transfer of Title
• Market terminology in the GMSLA
• GMSLA Anatomy