Transfer of Title - CSA Provision
|
ISDA 1995 English Law Credit Support Annex
|
- Don’t say: What's title transfer?
If you must say it, don’t ask five industry associations to get together at once to explain it to you.
Clearing system liens
A little bit of “well, it really ought to go without saying but, hell, you are derivatives lawyers, so we know that’s not how you roll” drafting.
In these modern, dematerialised times, the securities in a clearing system — that is, pretty much all securities — exist only as entries in a ledger maintained by the clearing system. The individual securities are not security-printed, physical things. [1]
In any case, like all good intermediaries, the clearing system gets fees from participants for being a clearing system. To guard against non-payment of these fees, it keeps a lien on all global securities it holds.
Now all this sits a long way down the stack of turtles that makes up the modern metaphysical financial system — almost so deep as to be beyond the paranoid articulations of an ISDA ninja — but, as you can see, not quite.
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.
See also
References
- ↑ See common depositary for more information.