2018 ISDA Credit Support Deed (IM) (English law)
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Custody Arrangements and the Control Agreement in a Nutshell™
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Original text
6. Custody Arrangements and the Control Agreement
6(a) General. The Custodian (IM) appointed with respect to each party as Chargor is set out in Paragraph 13. Each party as the Chargor and the other party as the Secured Party and the relevant Custodian (IM) have entered, or will, on or before the first day amounts are required to be transferred hereunder, enter into the Control Agreement regulating the rights of each party to serve instructions on the Custodian (IM). Prior to the enforcement of its rights under Paragraph 8, the Secured Party will have no right to hold (other than in accordance with Paragraph 1(b) or as otherwise agreed between the parties) and have no duty with respect to Posted Credit Support (IM), including, without limitation, any duty to collect any Distributions, or enforce or preserve any rights pertaining to the Posted Credit Support (IM).
6(b) Custodian (IM) Risk. Unless otherwise specified in Paragraph 13 with respect to a party as the Secured Party and the other party as the Chargor:
- (i) the Chargor will be liable for the acts or omissions of the Custodian (IM) to the same extent that the Chargor would be liable hereunder for its own acts or omissions and any such act or omission of the Custodian (IM) will be deemed to be the act or omission of the Chargor for purposes of Paragraph 7 unless Custodian Event is specified as applicable in Paragraph 13, in which case, the consequences of any act or omission of the Custodian (IM) that constitutes a Custodian Event will be as set out in the “Custodian Event” provisions in Paragraph 13;
- (ii) the Secured Party will not be liable for the acts or omissions of the Custodian (IM); and
- (iii) any obligation of the Secured Party to instruct the Custodian (IM) to transfer Posted Credit Support (IM) to the Chargor will be deemed satisfied by the Secured Party’s sending appropriate instructions to the Custodian (IM) in accordance with the terms of the Control Agreement. For the avoidance of doubt, the Secured Party will bear no liability for the failure of:
- (A) the Custodian (IM) to comply with such instructions; or
- (B) the Chargor to provide matched instructions with the Secured Party to the extent required under the Control Agreement in order to give effect to such a transfer of Posted Credit Support (IM) by the Custodian (IM),
- and a failure to transfer Posted Credit Support (IM) to the Chargor under this Deed caused by either (A) or (B) above will not constitute an Event of Default with respect to the Secured Party.
6(c) No Use of Posted Credit Support (IM). Without limiting the rights of the Secured Party under the other provisions of this Deed, the Secured Party will have no right to:
- (i) sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of, or otherwise use in its business any Posted Credit Support (IM); or
- (ii) register any Posted Credit Support (IM) in the name of the Secured Party, its custodian or a nominee for either.
6(d) No Offset. For the avoidance of doubt, no delivery or return of any margin under any Other CSA will be offset against (or netted with) any Delivery Amount (IM) or Return Amount (IM).
6(e) Distributions and Interest Amount. Except as otherwise provided in this Deed, the Secured Party will have no obligation hereunder to pay or to transfer to the Chargor any amount of interest in respect of any Posted Credit Support (IM) in the form of Cash or any Distributions in respect of Posted Credit Support (IM).
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Resources and Navigation
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Comparisons
This is the English law, deed version of Holding and Using Posted Collateral under the NY law CSAs, though it really is quite different, and there is not a lot to be gained from comparison.
Basics
Generally the Control Agreement will defer back to the controlling CSA to determine whether an event has occurred to entitle the Secured Party to exercise a Notice of Exclusive Control.
The point of this whole arrangement being to provide credit mitigation in the unusual event that the party to a derivative contract immolates unexpectedly. This collateral is not there to be optimised, reused, financed (as variation margin might be), since that would convert a credit mitigant in one direction to a credit liability in the other direction. The moment i reuse collateral you have given me, i have an unsecured debt claim to return it to you, for which you are my creditor. That is not the idea.
Once the game is absolutely up, the ISDA Master Agreement is closed out, the Early Termination Amount determined and the parties’ net liabilities to each other crystallised, then — assuming you are actually owed something by the bankrupt Counterparty — you can appropriate your Secured Property. Until then, hands off.
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See also
Template:Csa Custody Arrangements and the Control Agreement sa
References