Credit Support Obligations - IM CSD Provision

2018 ISDA Credit Support Deed (IM) (English law) A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: →NY OG →Eng OG →NY VM →Eng VM →Eng IM Credit Support Obligations in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. You can even ask questions! Ask about it here. Original text 3. Credit Support Obligations 3(a) Delivery Amount (IM). Subject to Paragraphs 4 and 5, upon a demand made by the Secured Party on or promptly following a Calculation Date (IM), if the Delivery Amount (IM) applicable to the Chargor for that Calculation Date (IM) equals or exceeds the Chargor’s Minimum Transfer Amount (IM), then the Chargor will transfer to the Custodian (IM) Eligible Credit Support (IM) having a Value as of the date of transfer at least equal to the applicable Delivery Amount (IM) (rounded pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the “Delivery Amount (IM)” applicable to the Chargor for any Calculation Date (IM) will equal the amount by which: (i) the Credit Support Amount (IM) applicable to the Chargor exceeds (ii) the Value as of that Calculation Date (IM) of all Posted Credit Support (IM) held by the Secured Party (as adjusted to include any prior Delivery Amount (IM) and to exclude any prior Return Amount (IM), the transfer of which, in either case, has not yet been completed and for which the relevant Regular Settlement Day falls on or prior to such Calculation Date (IM)). 3(b) Return Amount (IM). Subject to Paragraphs 4 and 5, upon a demand made by the Chargor on or promptly following a Calculation Date (IM), if the Return Amount (IM) applicable to the Secured Party for that Calculation Date (IM) equals or exceeds the Secured Party’s Minimum Transfer Amount (IM), then the Secured Party will instruct the Custodian (IM) to transfer to the Chargor Posted Credit Support (IM) specified by the Chargor in that demand having a Value as of the date of transfer as close as practicable to (but not more than) the applicable Return Amount (IM) (rounded pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the “Return Amount (IM)” applicable to the Secured Party for any Calculation Date (IM) will equal the amount by which: (i) the Value as of that Calculation Date (IM) of all Posted Credit Support (IM) held by the Secured Party (as adjusted to include any prior Delivery Amount (IM) and to exclude any prior Return Amount (IM), the transfer of which, in either case, has not yet been completed and for which the relevant Regular Settlement Day falls on or prior to such Calculation Date (IM)) exceeds (ii) the Credit Support Amount (IM) applicable to the Chargor. 3(c) Margin Amount (IM); Margin Amount (IA); Margin Approach 3(c)(i) “Margin Amount (IM)” means, for any Calculation Date (IM) and a posting obligation of a Chargor under a Regime, the Base Currency Equivalent of an amount equal to the sum of the initial margin amounts in respect of the Covered Transactions (IM) determined using the Method specified as applicable to such Regime in Paragraph 13. 3(c)(ii) “Margin Amount (IA)” means, for any Calculation Date (IM) and a posting obligation of a Chargor, the Base Currency Equivalent of an amount equal to the sum of the Independent Amounts (as defined in any Other CSA) applicable to the Chargor and any other amounts applicable to the Chargor (other than any amounts in respect of Margin Amount (IM) or Exposure), however described, intended by the parties to operate as an Independent Amount, if any, after taking into account any relevant Threshold applicable to the Chargor and any other relevant amounts applicable to the Chargor, however described, intended by the parties to operate as a Threshold but prior to giving effect to any other applicable deduction, discharge or netting of such amounts, under or in relation to the Agreement, as determined and reported by the party responsible for calculating such amounts. For the avoidance of doubt, in order to determine the amounts “applicable to the Chargor” for the purposes hereof, the parties will take into account the effect of any conditions precedent applicable to such amounts. 3(c)(iii) Margin Approach. The parties have agreed, in Paragraph 13, to implement one of the following approaches (each a “Margin Approach”) with respect to the relationship between “Margin Amount (IM)” and “Margin Amount (IA)”. (A) If the “Distinct Margin Flow (IM) Approach” is specified as applicable in Paragraph 13, the following provisions will apply: (1) “Credit Support Amount (IM)” means, with respect to a party as the Chargor, for any Calculation Date (IM), (i) the Margin Amount (IM) applicable to the Chargor, if any, minus (ii) the Chargor’s Threshold (IM); provided, however, that the Credit Support Amount (IM) will be deemed to be zero whenever the calculation of the Credit Support Amount (IM) yields a number less than zero. (2) No Amendment to Obligations in respect of Margin Amount (IA). The posting obligation of a Chargor in respect of any amount that constitutes a Margin Amount (IA) under any Other CSA shall not be affected or amended in any way by the provisions of this Deed. (B) If the “Allocated Margin Flow (IM/IA) Approach” is specified as applicable in Paragraph 13, the following provisions will apply: (1) “Credit Support Amount (IM)” means, with respect to a party as the Chargor, for any Calculation Date (IM), (i) the Margin Amount (IM) applicable to the Chargor, if any, minus (ii) the Chargor’s Threshold (IM); provided, however, that the Credit Support Amount (IM) will be deemed to be zero whenever the calculation of the Credit Support Amount (IM) yields a number less than zero. (2) Amendment to Obligations in respect of Margin Amount (IA). The posting obligation of a Chargor in respect of any amount that constitutes a Margin Amount (IA) under any Other CSA shall be reduced on an aggregate basis by the amount of the Chargor’s Credit Support Amount (IM); provided, however, that if, after such reduction, any such Margin Amount (IA) would be a negative amount, such Margin Amount (IA) will be deemed to be zero. (C) If the “Greater of Margin Flow (IM/IA) Approach” is specified as applicable in Paragraph 13, the following provisions will apply: (1) “Credit Support Amount (IM)” means, with respect to a party as the Chargor, for any Calculation Date (IM), the greater of (i)(A) the Margin Amount (IM) applicable to the Chargor, if any, minus (B) the Chargor’s Threshold (IM) and (ii) the Margin Amount (IA); provided, however, that the Credit Support Amount (IM) will be deemed to be zero whenever the calculation of the Credit Support Amount (IM) yields a number less than zero. (2) Amendment to Obligations in respect of Margin Amount (IA). The posting obligation of a Chargor in respect of any amount that constitutes a Margin Amount (IA) under any Other CSA, other than such obligations of a Chargor under this Deed, shall be reduced to zero. The varieties of ISDA CSA Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng Preamble Pre Pre Pre Pre Pre Interpretation 1 1 1 1 1 Security Interest 2 - 2 - 2 Credit Support Obligations 3 2 3 2 3 Transfers, Calculations and Exchanges - 3 - 3 - Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4 Dispute Resolution 5 4 5 4 5 Holding and Using Posted Collateral 6 - 6 - 6 Transfer of Title, No Security Interest - 5 - 5 - Events of Default 7 6 7 6 7 Rights and Remedies 8 - 8 - 8 Representations 9 7 9 7 9 Expenses 10 8 10 8 10 Miscellaneous 11 9 11 9 11 Definitions 12 10 12 10 12 Elections and Variables 13 11 13 11 13 Resources and Navigation Index: Click ᐅ to expand: CSA

Comparisons

Between US and English law

Here is a comparison between the 1994 NY CSA and the 1995 CSA. The differences are largely down to the security interest versus title transfer — you know Pledgor versus Transferor and so on.

Betweem OG and VM

The key difference between the OG CSAs and the 2016 VM versions: there is no Credit Support Amount concept in the 2016s, seeing as there is no initial margin to reference. (Right?) Instead, it just references the Counterparty’s Exposure.

Delivery Amount

Now the interesting thing here is the difference that pledged collateral under the New York law versions of the CSA makes over title-transferred collateral regime of the English law versions. You will see the difference in the NY law version’s Delivery Amount, which is the positive difference between Secured Party’s Exposure and the value of Posted Credit Support held by the Secured Party — easy, right? — and the equivalent provision in the English law versions which is the positive difference between the Transferee’s Exposure and the Credit Support adjusted to exclude any inflight but unsettled collateral movements.

The English law versions are a bit more leaden in how they describe things but these amount to the same thing: you don’t get any credit (support) for collateral until it has landed with the other party.

This creates some curious scenarios, as you will see.

Return Amount

The only differences here are the liberal, but all the same redundant, spraying of “(VM)” all over the shop in the 2016, a single reference to the Regular Settlement Day in place of the, er, regular Settlement Day and the fact that the balance is deducted from the Credit Support Balance in the 1995, but the Transferee’s Exposure in the 2016 (there not being a “Credit Support Amount” in the 2016), for reasons which are explored more fully below).

Basics

The overall vibe of a Credit Support Annex is self-help.

It is presumed on any day there will be a portfolio of Transactions outstanding under the ISDA (not counting the CSA itself, which under the English law construct, is also a “Transaction”, though it is not under a NY law construct), and these Transactions will each create a market exposure, and when those market exposures are summed, will create an overall “Exposure” owed by one party or the other.

The party to whom the netted amount would be paid were the ISDA Master Agreement closed out on that day can — subject to a few conditions — call for Eligible Credit Support from the party who would be due to pay it.

Title transfer versus pledge

English law CSAs are title transfer CSAs. Credit Support is delivered outright against a contingent obligation on the Transferee to return “equivalent” — meaning fungible — Credit Support. As such, the Transferor has no legal or beneficial interest in Credit Support it has posted: it has only a debt claim against the Transferee for its return (which would be netted off against the Transferee’s debt claim against it under the ISDA Master Agreement). This is why an English law CSA is treated as a Transaction: it is, in every sense, identical to a physically settled asset swap.

New York law CSAs are security interest CSAs: Credit Support is posted by way of security, and the Transferee takes only legal title, holding beneficial interest in the Credit Support for the Transferor. This markedly changes the netting analysis. But — unless the option has been disapplied in the elections paragraph, the holder of pledged Credit Support is entitled to “rehypothecate” it — transfer it outright to a third party, against an obligation to return a fungible asset — and while U.S. attorneys may beg to differ this, to a jaundiced English lawyer, makes a NY law CSA materially identical to an English law one. Both are effectively, title transfer arrangements.

English law Credit Support Deeds, such as the 2018 English law IM CSD, are security interest CSAs. They do not generally allow reuse: for the Ancient version, it wouldn’t make any sense to take under a pledge/custody model, mark yourself in scope for CASS and all that carry on, and then deliver away the collateral: if you wanted to do that it would be better tpo just use a normal title transfer CSA. As a result the 1995 ISDA Credit Support Deed is seldom spoken of, an even more seldom seen. The 2018 English law IM CSD, being a regulatory IM document, specifically forbids reuse of collateral. The whole point of reg IM is that someone sensible is meant to sit on it at all times.

Credit Support Balance v Posted Credit Support

Quick terminology check: “Eligible Credit Support”, once delivered to the person demanding it under a title transfer CSA is called the “Credit Support Balance” and under a security interest CSA is called “Posted Credit Support”. This seems annoying, and is, but ISDA’s crack drafting squad™ has its reasons, as ever. The difference reflects their differing ontological statuses. True.

Collateral posted under a title transfer CSA goes outright, leaving the deliveror only a simple debt claim for an equivalent asset. There is no sense of custody; no bailment; no lingering interest in what has been sent away. It is not like it has been posted into a cubby-hole to be kept safe and sound and later returned. Hence, it is just a “Credit Support Balance”.

Collateral posted under a security interest CSA is “posted” on that basis; there is a (conditioned) expectation of getting back the same thing you sent. This expectation is annihilated by the act of rehypothecation, but still, in theory, it is for an instant there. Hence what you have is “Posted Credit Support”.

However compelling the intellectual grounds for the distinction, in practice it is annoying, especially if you happen to be speaking generally about ISDA Credit Support Annexes of either kind, as the JC is. For ease of deference to his usual slapdash way of thinking about things JC will refer to either as simply “Credit Support”. that can probably apply loosely to Eligible Credit Support, which is te universe of collateral which, by rights, could be posted under the CSA even if it has not necessarily been yet.

The Basic Idea

The basic idea is that Credit Support creates an offsetting value under the CSA which, when set off against the net market exposure under the ISDA Master Agreement proper, would equal zero, or at any rate an acceptably low number: pre-agreed Thresholds, Independent Amounts, Minimum Transfer Amounts may intervene to make that number something other than zero, and Exposure and the value of extant Credit Support may subsequently change, but it will be in any case near zero.

Each party can run this calculation on, essentially, any Local Business Day. The person holding Credit Support must factor its value into its demand.

Where a party is seeking new Credit Support to cover its own outright Exposure, that is a “Delivery Amount”. Where it is seeking to “call back” Credit Support it has already delivered, that is called a “Return Amount”.

The difference between Delivering and Returning

There is not much of a difference, but there is some: with a Return Amount, the Transferee gets to choose which bit of Credit Support the Transferor sends back, out of what the Transferee originally delivered. When the Transferee is calling for a Delivery Amount the Transferor gets to choose from the agreed Eligible Credit Support table in the elections paragraph.

The self-help element is this: you don’t have to call for Credit Support. You may be entitled to, but it is up to you to run the calculations and make the demand. If you don’t, the other party is not obliged to send you anything.

Each party therefore also “marks its own homework”. Should the parties not agree on their respective valuations, there is a dispute resolution process set out in Paragraph 4.

Paragraph 3(c) of the 2018 IM Credit Support Deed on margin mechanics

There is quite a lot in Paragraph 3 of the 2018 English law IM CSD, and rather than setting it all here, we have created a whole page for Paragraph 3(c), seeing as it has no equivalent in the variation margin CSAs.

Premium content Here the free bit runs out. Subscribers click 👉 here. New readers sign up 👉 here and, for ½ a weekly 🍺 go full ninja about all these juicy topics👇 JC’s “nutshell” summary of the clause Background reading and long-form essays A deeper dive into the reason the Credit support Amount disappeared from the VM CSAs. Mechanics of calculating Delivery Amounts and Return Amounts What to do about inflight credit support payments Some mathematical lingo for you as a little treat

See also

• Credit Support Amount (if you have an OG CSA)