Distributions - VM CSA Provision: Difference between revisions

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Paragraph {{{{{1}}}prov|5(c)(i)}} is identical in the {{csa}} and the {{vmcsa}}. It is only in Paragraph {{{{{1}}}prov|5(c)(ii)}} that things start getting a bit funky.
This part simply requires the holder of credit support to manufacture income back to the poster of credit support — as long as doing so wouldn’t create in itself trigger a further {{{{{1}}}prov|Delivery Amount}} by the {{{{{1}}}prov|Transferor}} — thus precipitating a (short) game of operational ping-pong between the two parties’ back office teams. 
How would that happen? [[All other things being equal|All other things staying equal]], it couldn’t: if the {{{{{1}}}prov|Transferee}}’s {{{{{1}}}prov|Exposure}} and the {{{{{1}}}prov|Value}} of the {{{{{1}}}prov|Transferor}}’s {{{{{1}}}prov|Credit Support Balance}} stayed the same as it was when [[variation margin]] was last called, the arrival of income on any part of that {{{{{1}}}prov|Credit Support Balance}} ought to be spirited back to the {{{{{1}}}prov|Transferor}}: as long as the {{{{{1}}}prov|Transferee}} was still holding it, the {{{{{1}}}prov|Transferee}} would be indebted for that value to the Transferor.
But as we know, {{{{{1}}}prov|Exposure}}s don’t just quietly sit there. If they did, there wouldn’t be any need for initial margin, and collecting even variation margin would be less fraught. So if the {{{{{1}}}prov|Transferee}}’s {{{{{1}}}prov|Exposure}} has increased, the arrival of that income might serve to fill a hole in the existing coverage, in which case, why pay it away only to ask for it back again? Similarly, the value of a pending income payment will be priced into the value of securities comprising credit support. So even if the {{{{{1}}}prov|Exposure}} hasn’t changed in the mean time, the arrival of a [[coupon]] or [[dividend]] is likely to reduce the {{{{{1}}}prov|Value}} of the security generating it, so — [[all other things being equal]] — the {{{{{1}}}prov|Transferee}} might expect to hang onto the {{{{{1}}}prov|Distribution}}. <br>

Revision as of 09:51, 6 January 2020

2016 VM CSA Anatomy™


In a Nutshell™ Section 5(c)(i):

5(c)(i) Distributions. To the extent it would not create a Delivery Amount (VM), the Transferee will transfer Equivalent Distributions (VM) to the Transferor by the Settlement Day following each Distributions Date as calculated by the Valuation Agent. Such a calculation date will be treateds as a Valuation Date.

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2016 VM CSA full text of Section 5(c)(i):

5(c)(i) Distributions. The Transferee will transfer to the Transferor not later than the Settlement Day following each Distributions Date cash, securities or other property of the same type, nominal value, description and amount as the relevant Distributions (“Equivalent Distributions”) to the extent that a Delivery Amount (VM) would not be created or increased by the transfer, as calculated by the Valuation Agent (and the date of calculation will be deemed a Valuation Date for this purpose).

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Related Agreements
Click here for the text of Section 5(c)(i) in the 1995 English Law CSA
Click here for the text of Section 5(c)(i) in the 2016 English Law VM CSA
Click [[{{{3}}} - NY VM CSA Provision|here]] for the text of the equivalent, Section [[{{{3}}} - NY VM CSA Provision|{{{3}}}]] in the 2016 NY Law VM CSA
Comparisons
1995 CSA and 2016 VM CSA: click for comparison
{{nycsadiff {{{3}}}}}

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Paragraph 5(c)(i) is identical in the 1995 CSA and the 2016 VM CSA. It is only in Paragraph 5(c)(ii) that things start getting a bit funky.

This part simply requires the holder of credit support to manufacture income back to the poster of credit support — as long as doing so wouldn’t create in itself trigger a further Delivery Amount by the Transferor — thus precipitating a (short) game of operational ping-pong between the two parties’ back office teams.

How would that happen? All other things staying equal, it couldn’t: if the Transferee’s Exposure and the Value of the Transferor’s Credit Support Balance stayed the same as it was when variation margin was last called, the arrival of income on any part of that Credit Support Balance ought to be spirited back to the Transferor: as long as the Transferee was still holding it, the Transferee otherwise would become indebted for the value of that income to the Transferor.

But as we know, Exposures don’t just quietly sit there. If they did, there wouldn’t be any need for initial margin, and collecting even variation margin would be less fraught. So if the Transferee’s Exposure has increased, the arrival of that income might serve to fill a hole in the existing coverage, in which case, why pay it away only to ask for it back again? Similarly, the value of a pending but as-yet-unpaid income payment will be priced into the value of the securities generating it.[1] So even if the Exposure hasn’t changed in the mean time, the arrival of a coupon or dividend will reduce the Value of those securities on which it was paid, so — all other things being equal — the Transferee might expect to hang onto the Distribution.

  1. ↑ It will trade “dirty” until the distribution is paid, at which point it will trade clean.
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