Title transfer collateral arrangement

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A word about credit risk mitigation


Legal security: MortgagePledgeLienBailment
Equitable security: Chargefixedfloating | ABWOS | Equitable lien
Credit risk mitigation: Title transfer | Guarantee | Letter of credit | Netting
Friends and relations: Rehypothecation | Equivalent
Documents: 1994 ISDA CSA (NY law) | 1995 ISDA CSA | 1995 ISDA CSD (English law)
Regulation: LPA 1925 | Financial Collateral Regulations | LPMPA 1994

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A collateral arrangement whereby, instead of instigating a pledge or security interest of some kind, a debtor provides cash or financial collateral to its creditor by means of title transfer against a contingent obligation on the creditor to return an equivalent security should the exposure be resolved.

Known, for the purposes of the Financial Collateral Directive, as a title transfer financial collateral arrangement. But it’s the same thing among us finance lawyer freaks, and contrasted sharply with a security financial collateral arrangement, which is a whole different thing.

The SFTR disclosure

This has profound — some might say a bit barmy — consequences when one considers the 2015/2365/EC (EUR Lex) (also known, stiffly, as The Regulation on Transparency of Securities Financing Transactions and of Reuse, more casually, as the securities financing transaction regulations and fondly as SFTR) which, at Article 15, have some things to say about title transfer collateral arrangements and what you have to tell your counterparty about them.

CASS rules

The CASS rules impact on title transfer collateral arrangements, albeit tangentially: strictly speaking, a title transfer collateral arrangement is not a client money arrangement. but it is like one: an “arrangement by which a client transfers full ownership of money to a firm for the purpose of securing or otherwise covering present or future, actual, contingent or prospective obligation”. This sounds a lot like receiving money from, or holding money for or on behalf of a client, in connection with (etc etc) its MiFID business — except that by cleverly constructing it as a title transfer collateral arrangement, you are subtly changing it into a contractual liability (not a regulated deposit taking activity), and not a kind of bailment, which is what the client money rules bite on. Reluctantly, for professional clients, the CASS 7 rules give brokers a pass, but they prohibit title transfer collateral arrangements with retail clients.

As indeed do the CASS rules, especially if your counterparty should ask for you to change or terminate one.

Note also, there is a genus of lawyer (Causidicus mediocris) who frets that a TTCA might be recharacterised as a pledge, with apocalyptic consequences.

See also