Case Study: Posting Plan Assets as Collateral – The Contract Rights Approach

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ERISA plans posting collateral for OTC derivative transactions want to have the same terms as non-ERISA investors—but broker-dealers, which routinely rehypothecate collateral posted by non-ERISA clients (use it as their own to lend out), cannot accept fiduciary responsibility for investing ERISA plan assets, because their on-lending activities would result in prohibited transactions.

Solution Provided:

I developed a work-around referred to as the “contract rights” approach — to contractually transfer title of collateral posted by an ERISA plan to the secured broker-dealer, subject to a contractual right of return when collateral is no longer required under the terms of the Prime Broker or swap agreement being used. (This is how swap collateral is handled under the UK format of the standard ISDA swap agreement.


ERISA plans can utilize Prime Broker and swap agreements on the same terms as non-ERISA investors.

NOTE: Managers or sponsors wishing to use this approach need to consider the risk of placing their assets with the broker.

Category : Case Studies