Template:ISDA transaction and collateral flows: Difference between revisions

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In a fully margined {{isdama}}, [[all other things being equal]], the termination of a {{isdaprov|Transaction}} will lead to two equal and opposite effects:
In a fully margined {{isdama}}, [[all other things being equal]], the termination of a {{isdaprov|Transaction}} will lead to two equal and opposite effects:
*A final payment or exchange  under the {{isdaprov|Transaction}} having a value more or less equal to the [[present value]] of that {{isdaprov|Transaction}};
*A final payment or exchange  under the {{isdaprov|Transaction}} having a value more or less equal to the [[present value]] of that {{isdaprov|Transaction}};
*A offsetting change in the Exposure under the {{t|CSA}} in exactly the same value.
*A offsetting change in the {{isdaprov|Exposure}} under the {{t|CSA}} in exactly the same value.
The strict sequence of these payments ought to be that the {{isdaprov|Transaction}} termination payment goes first, and the collateral return follows, since it can only really be calculated and called once the termination payment has been made.  
The strict sequence of these payments ought to be that the {{isdaprov|Transaction}} termination payment goes first, and the collateral return follows, since it can only really be calculated and called once the termination payment has been made.  


I know what you’re thinking. Hang on! that means the termination payer pays out knowing this will increase its {{isdaprov|Exposure}} for the couple of days it will take for that collateral return to find its way back. That’s stupid! What with the regulators’ obsession minimise systemic counterparty credit risk, wouldn’t it be better to apply some kind of [[Netting of Payments - ISDA Provision|settlement netting]] in anticipation, to keep the credit exposure down?
I know what you’re thinking. ''Hang on! that means the termination payer pays knowing this will increase its {{isdaprov|Exposure}} for the couple of days it will take for that collateral [[Return Amount (VM) - CSA Provision|return]] to find its way back. That’s '''stupid'''!''


Now, dear reader, have you learned nothing? Of course not.  Now there is a burgeoning DTCC product designed to do that — it is in its infancy — but the theory of the ISDA and CSA settlement flows puts egg before chicken and, at the moment, {{isdaprov|Transaction}} flows and [[collateral]] flows tend to be handled by different operational parts of an institution, and their systems don’t talk. 
What with the regulators’ obsession minimise systemic counterparty credit risk, wouldn’t it be better to apply some kind of [[Netting of Payments - ISDA Provision|settlement netting]] in anticipation, to keep the credit exposure down?


Anyway, currently, the payer of a terminating transaction has its heart in its mouth for a day or so. <br>
Now, dear reader, have you learned nothing? It might be ''better'', but “better” is not how {{t|ISDA}} documentation rolls. The theory of the ISDA and CSA settlement flows puts the {{isdaprov|Transaction}} payment egg before the [[variation margin]] chicken so, at the moment, {{isdaprov|Transaction}} flows and [[collateral]] flows tend to be handled by different operations teams, and their systems don’t talk. Currently, the payer of a terminating transaction has its heart in its mouth for a day or so.
 
Industry efforts to date have been targeting at shortening the period between the {{isdaprov|Exposure}} calculation and the final payment of the collateral transfer. <br>

Latest revision as of 09:39, 3 April 2018

Transaction flows and collateral flows

In a fully margined ISDA Master Agreement, all other things being equal, the termination of a Transaction will lead to two equal and opposite effects:

The strict sequence of these payments ought to be that the Transaction termination payment goes first, and the collateral return follows, since it can only really be calculated and called once the termination payment has been made.

I know what you’re thinking. Hang on! that means the termination payer pays knowing this will increase its Exposure for the couple of days it will take for that collateral return to find its way back. That’s stupid!

What with the regulators’ obsession minimise systemic counterparty credit risk, wouldn’t it be better to apply some kind of settlement netting in anticipation, to keep the credit exposure down?

Now, dear reader, have you learned nothing? It might be better, but “better” is not how ISDA documentation rolls. The theory of the ISDA and CSA settlement flows puts the Transaction payment egg before the variation margin chicken so, at the moment, Transaction flows and collateral flows tend to be handled by different operations teams, and their systems don’t talk. Currently, the payer of a terminating transaction has its heart in its mouth for a day or so.

Industry efforts to date have been targeting at shortening the period between the Exposure calculation and the final payment of the collateral transfer.

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