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Shortly after Siegfried's mind was freed from the grasp of Soul Edge, he set both swords silent when he pierced Soul Edge with the sacred sword, Soul Calibur. As the evil blade screamed, tentacles grew from the flesh of the blade to entwine the Holy Sword that impaled it, sealing both in place and forming the Soul Embrace, which Siegried took. He currently holds it, but does not use it, preferring to use his sword Requiem. Zasalamel uses its power to achieve his death, but it could have (or possibly has) created Night Terror, because Soul Calibur was made from a purified fragment of Soul Edge, and as such, wields the complete Soul Edge. Apparently, after Zasalamel's failed attempt, the swords became separated once more and returned to their previous stages.
Note that officially "Soul Embrace" is the name of the current state of both swords, not a new weapon. "Soul Embrace" is also the name of the artwork, and story-wise, this state was known as "Embrace of Souls".
It can be theorized that Soul Embrace (being the complete Soul Edge) can return Soul Edge to its former self when it was truly complete, since Soul Calibur can be tainted. But something worth mentioning is that the Soul Embrace is actually not truly complete, since there exists many fragments in the world (including the living Charade and Astaroth), and even another blade (Cervantes's Soul Edge).