Margin and any other categories of margin where relevant – in the event their positions are liquidated rather than transferred. Consider all relevant facts, including: (i) the manner in which the IM is held at the CM or its custodian; (ii) the nature of the customer obligations secured by liens on the IM; (iii) the composition of the IM (e.g., whether IM consists of securities or cash); (iv) in the event of the insolvency of the CM’s custodian, any restrictions (legal or otherwise) on the ability of the CM to recover IM from the insolvent custodian; and (v) any other matters described in your responses to the questions above that are relevant to this analysis. Analyze how these facts ultimately affect the conclusions reached.
LCH.C only deals with CMs as principal and is not party to CM/customer arrangements.
a. What is the legal nature of the customers’ rights in the IM held at the CM (or the CM’s custodian)?
To the extent relevant to this analysis, please consider whether customers hold proprietary (i.e., ownership) rights in the IM held at the CM (or the CM’s custodian), or merely contractual rights to recovery of the IM vis-à-vis the CM (or the CM’s custodian).
How does the selection of pledge versus title transfer for the provision of collateral security affect this determination?
What are the relevant legal standards with respect to tracing or other requirements necessary to demonstrate proprietary rights in the IM?
What is the practical effect of maintaining proprietary versus contractual rights?
If the distinction between proprietary versus contractual rights to the IM held at the CM (or the CM’s custodian) is irrelevant as a legal matter, please discuss the legal framework that is relevant to the analysis.
How is a shortfall in Dealer Margin and other custodial property (i.e., property held in a custodial capacity for purposes unrelated to cleared CDS) held by the CM (or its custodian) allocated as between the CMs, the