View source for Template:Csa IA Threshold MTA summ


Okay. Now in a CSA, beyond your basic Exposure and how much {{{{{1}}}|Credit Support}} you have already posted, there are three — well, if you count {{{{{1}}}|Rounding}}, three-and-a-half — levers determining what you will have to post, or may call, in the future. These are:

{{L1}}'''{{{{{1}}}|Independent Amount}}''' or “'''{{{{{1}}}|IA}}'''”: How much do you have to leave with the other guy, over and above your mark-to-market {{{{{1}}}|Exposure}}, to make things nice. There isn’t an {{{{{1}}}|Independent Amount}} in a [[Modern CSA|modern variation margin CSA]] for reasons canvassed in the {{premium}}.<li>
'''{{{{{1}}}|Threshold}}''': Is there any lower limit of {{{{{1}}}|Exposure}} that you might have to wait for before being able to call, or be obliged to post, variation margin. There isn’t a {{{{{1}}}|Threshold}} in a [[Modern CSA|modern variation margin CSA]], either, for reasons also canvassed in the {{premium}}. But they are somewhat related.<li>
'''{{{{{1}}}|Minimum Transfer Amount}}''' or “'''{{{{{1}}}|MTA}}'''”: Assuming you are over your {{{{{1}}}|Threshold}}, is there a “smallest integral amount” of incremental {{{{{1}}}|Exposure}} that must arisen before a posting obligation arises and anyone has to go to the trouble of paying out? <li>
'''{{{{{1}}}|Rounding}}''': Somewhat related to this is the question of {{{{{1}}}|Rounding}} where the {{{{{1}}}|Transfer Amount}} gets rounded up or down to a whole number, so no one has to be rifling down the back of the sofa for shillings and pence. Oddly, this appears only in the Elections, and not in the {{{{{1}}}|Credit Support Obligations}} section itself. In any case, these days rounding is typically to the nearest whole unit of currency — dollar, euro, pound; back in the day it might have been a hundred or a thousand — but not in any case the sort of thing one would expect to send a counterparty over the edge, {{plainlink|https://en.wikipedia.org/wiki/Mr_Creosote|Mr. Creosote}} references notwithstanding. </ol>
<nowiki>These three levers do different things: {{</nowiki>{{{1}}}|Independent Amount}} is what is now colloquially referred to as [[initial margin]]: it is a buffer that just sits there for a rainy day. {{{{{1}}}|Threshold}} allows you to set a point where okay yes my credit people are now officially freaking out and you need to make them less freaky fast. So the {{{{{1}}}|Threshold}} will typically be a big number. You cross it once, and the CSA starts up. If you drop below it, the CSA stops again. If one or other party wishes to ''never'' post {{{{{1}}}|Credit Support}} (did happen, not really nowadays with regulatory VM, but there is the odd [[Non-financial counterparty|NFC]] in this bucket) you would set your {{{{{1}}}|Threshold}} at “Infinity”. The {{{{{1}}}|Minimum Transfer Amount}} is usually a small, round number (say USD1m, or USD5m) that reflects the fact that small movements in {{{{{1}}}|Exposure}} are not really worth getting your collateral ops steampunk machine fired up for.
====Isn’t Threshold something to do with Cross Default?====
Well, it is, but that is different: that is the {{isdaprov|Threshold Amount}}: The Threshold in the CSA is a different thing. They are both thresholds, but {{icds}} might have used a different word. 

A bit late now, however, but the JC thesaural service came up with “knock-in level”, or “floor”, or “gate”, or “trigger”, or “hurdle”. Or, yes, threshold. 

====Is “Independent Amount” different from “initial margin”?====
On the face of it, it looks that way, doesn’t it. But no. 

<nowiki>If you look at it cold, the {{</nowiki>{{{1}}}|Independent Amount}}, especially as written in the [[OG CSA]]s, looks like a fixed currency amount that is paid at the beginning of a relationship, irrespective of how many {{isdaprov|Transactions}} you may have on — and even if you have ''none'' on. As conventionally understood, “[[initial margin]]” is, by contrast, {{isdaprov|Transaction}}-specific, being calculated by reference to the liquidity and volatility of the specific {{isdaprov|Transaction}} to which it relates.

But the [[OG CSA]]s don’t have a concept of “[[initial margin]]”, and it quickly became clear no one in their right mind would send their swap dealer a wodge of money just to commemorate the signing of an {{isdama}}, exciting though that event may be. 

Hold the phone: it turns out that some customers ''do'' send their swap dealers wodges of money to commemorate the signing of an ISDA. This we discuss in more detail in our article on the [[undead ISDA]]. These are typically small customers and the amount required is relatively small and, we think, can be retrieved with an earnest promise to cease trading business.

Perhaps {{icds}} of 1994 and 1995 lived in a kinder, more naïve time — one more impressionably swooned by the conclusion of a [[negotiation]] than our own — or maybe they were just blitzed when they came up with the idea.<ref>This isn’t an entirely outlandish speculation: how else can you rationalise their formulation of {{isdaprov|Indemnifiable Taxes}}, for example? It was the “naughty nineties”, after all.</ref>

In any case, what the market has done since the [[Children of the Woods]]<nowiki> first produced that nutty {{</nowiki>{{{1}}}<nowiki>|Independent Amount}} concept is to bend the squad’s fantastical verbal engineering so it </nowiki>''works like'' {{isdaprov|Transaction}}-specific [[initial margin]]<nowiki>. So, the {{</nowiki>{{{1}}}<nowiki>|Independent Amount}} will be usually defined as “an amount agreed between the parties in relation to each </nowiki>{{isdaprov|Transaction}}, or as otherwise advised by Party A”,<ref>Being the [[dealer]], of course.</ref> which rather kicks the issue in to touch. In practice, it’s likely to be articulated as a multiplier on notional, will be required of the client by the [[swap dealer]] and not the other way around, will be payable at the start of each {{isdaprov|Transaction}}, and may be adjustable on the fly. 

For example, a [[dealer]]<nowiki> who sets an {{</nowiki>{{{1}}}<nowiki>|Independent Amount}} by reference to the perceived volatility of the </nowiki>{{isdaprov|Transaction}} might reserve the right to increase [[IA]] should that volatility unexpectedly change. You can be sure more than one risk officer embarked on an undignified scramble for her margin tables — and put in a desperate call to [[Legal]] — the day UK decided [[Brexit means Brexit|Brexit meant what it said]] and [[sterling]] [[gapped]] down 8%.

Particularly where underlying trades and markets are volatile, expect to see much customisation of the {{{{{1}}}|Independent Amount}}: It might be calculated by reference to a given multiplier for a given asset class: it is not uncommon to see tiering in FX transactions, for example, where {{isdaprov|Transaction}}s on currencies in the highest tier might have a bigger multiplier that those on lower tiers. 

Especially where one counterparty is providing access to markets for the other party (so-called [[synthetic prime brokerage]]) there may be a provision that the {{ca}} can adjust tiers, multipliers, and the assets which are eligible for each tier in its discretion, and with effect to existing as well as new transactions. This can have the effect of retroactively adjusting {{{{{1}}}|Independent Amount}}s, in which case the difference can be called under the CSA’s ordinary {{{{{1}}}|Transfer}} provisions.