Template:Csa Expenses summ: Difference between revisions

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 ===NY law CSA===
 Paragraph {{nyvmcsaprov|10(a)}} of the {{nyvmcsa}} is largely the same as Paragraph {{vmcsaprov|8}} of the English law versions — it carries on in {{nyvmcsaprov|10(b)}} and {{nyvmcsaprov|10(c)}} to rabbit on a bit about {{nyvmcsaprov|Posted Collateral}} — but, neglects to specifically call out [[stamp duty]]. How to deal with stamp duties is the subject of Paragraphs {{nyvmcsaprov|10(b)}} and {{nyvmcsaprov|10(c)}}, of which there is no equivalent in the English law document. <br>
+===Reduction of {{imcsdprov|Margin Amount (IA)}} posting obligation===
+An interesting comparison between {{imcsdprov|Credit Support Amount (IM)}} and {{imcsdprov|Posted Credit Support (IM)}}. The first is the amount you are ''obliged'' at any point to have posted to the {{imcsdprov|Custodian (IM)}}; the latter is the amount you ''actually have'' posted at any time. The two might be different, without any suggestion of a default: There might be a pending but not yet due margin call; you might be owed some {{imcsdprov|Margin Amount (IM)}} back, but not yet received it.
+Right. Now, should you be using the {{imcsdprov|Allocated Margin Flow (IM/IA) Approach}} is their interaction with the obligation due for for {{imcsdprov|Margin Amount (IA)}} under the {{imcsdprov|Other CSA}}. Note the definition, which in its {{nutshell}} form I present as follows:
+{{Quote|{{Nutshell 2018 CSD 3(c)(iii)(B)}}}}
+“...will be reduced by that {{imcsdprov|Credit Support Amount (IM)}}”. Now that amount is the amount you are ''required'' to have posted to the {{imcsdprov|Custodian (IM)}} as [[regulatory initial margin]], not what you actually ''have'' posted — the {{imcsdprov|Posted Credit Support (IM)}}. It’s all square, between friends, I guess — but it seems to me to miss a trick. The {{imcsdprov|Other CSA}} is likely to be the controlling one — a [[prime brokerage agreement]], referencing a total margin requirement, of which the {{imcsdprov|Margin Amount (IM)}} is just a part. If the actual {{imcsdprov|Posted Credit Support (IM)}} at a given time is not equal to the required {{imcsdprov|Credit Support Amount (IM)}}, this should not reduce (or for that matter increase) the total margin the [[prime broker]] requires.
+The practical effect is likely to be transitory, since {{imcsdprov|Margin Amount (IM)}} is recalculated and called every day, and should a {{imcsdprov|Chargor}} default entirely in meeting a {{imcsdprov|Margin Amount (IM)}} obligation, it will bring the {{isdama}} down, and will cross-accelerate the {{imcsdprov|Other CSA}} arrangement, whatever it is, also, but all the same this doesn’t seem, instinctively, like the right approach.
+====Why this might matter====
+Let’s just say your {{imcsdprov|Other CSA}} is a [[cross-margining]] arrangement under a [[prime brokerage agreement]], which, until the advent of [[regulatory initial margin]], covered all margin for all [[PB]] products, including derivatives. Let’s take the example:
+*Client has '''$100m''' of long custody assets with the [[PB]], over which the prime broker has a [[security interest]].
+*Client puts on a $100m swap, which is fully [[variation margin]]ed, so the net [[mark-to-market]] value of the ISDA and VM CSA = zero.
+*Just to make the example straightforward, the client has no other indebtedness to the [[PB]] and a zero [[cash]] balance.
+*Under the [[PBA]] — being an “{{imcsdprov|Other CSA}}”, the [[prime broker]] calls [[initial margin]] of $35m, all of which is attributable to the swap.
+*Under the appropriate {{imcsdprov|Method}}, the client’s {{imcsdprov|Margin Amount (IM)}} is $30m. All being well, the upshot will be the client meets the [[Reg IM]] call with assets from another source, directs them to the {{imcsdprov|Custodian}}, and the [[prime broker]] will hold $5mm of custody longs as its {{imcsdprov|Margin Amount (IA)}}. Therefore $95mm of the custody longs will be ''excess'' margin over which the [[PB]] has security, but which it must return on request.
+*Twist: Client ''fails'' to meet the [[Reg IM]] call.
+Ideally, at this point, [[PB]] will want to say, okay, I know you’re meant to pay your regulatory [[initial margin]] to a third party custodian, not to me, but hang it, you didn’t, so until you do, I’m treating the whole $35mm sum as being {{imcsdprov|Margin Amount (IA)}}, so I will require it under the PBA. That means, pai-san, the  “margin excess” of your $100m long custody portfolio is $65mm, not $95mm. So, sortyourself out and make that {{imcsdprov|Margin Amount (IM)}} delivery, but I’m somewhat cool and the gang in the mean time.
+Now, of course, the [[PB]] ''may'' hit the big red button and detonate the relationship at this time — [[buyside counsel]] will assume this outcome to be as sure as the night of utter destruction that follows glorious sunshine 🙄  —  but it may all be a ghastly mistake; you know, the proverbial “error of an administrative or operational nature”, and in any case everyone (except [[buyside counsel]]) knows a prime broker won’t close out a juicy client unless it absolutely ''has'' to — six-way standoffs with over-levered family offices notwithstanding. And it having the freedom to [[recharacterise]], temporarily, {{imcsdprov|Margin Amount (IM)}} as {{imcsdprov|Margin Amount (IA)}} seems as good a way as any to achieve that.
+The fix is simple enough: Under the {{imcsdprov|Allocated Margin Flow (IM/IA) Approach}}, to say,
+{{quote|“any amount that constitutes a {{imcsdprov|Margin Amount (IA)}} under any {{imcsdprov|Other CSA}} shall be reduced on an aggregate basis by the amount of the {{imcsdprov|Chargor}}’s {{strike|Credit Support Amount (IM)|{{imcsdprov|Posted Credit Support (IM)}}}}”}}
+Well, that’s what I’d do.