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| ===English law CSAs===
| | The starting point here, being a function of the [[common law]] of [[contract]] — not to mention common ''sense'' — is that every merchant is liable for its own costs and expenses of performing a contract, so if there you incur costs in running a collateral operation, as a general matter, they are for your own account. |
| Paragraph {{csaprov|8}} of the {{vmcsa}} is identical to the [[8 - CSA Provision|equivalent]] in the {{csa}}. Being a function of the [[common law]] of [[contract]], not to mention common sense — why would someone else be liable for your costs and expenses of performing a contract unless it specifically said they would be? — it falls into the goes without saying category. But {{icds}} said it anyway.
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| ===NY law CSA===
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| 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>
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| ===Reduction of {{imcsdprov|Margin Amount (IA)}} posting obligation===
| | Where this might change is as a result of a [[pledge]]. Specifically in the context of ''tax''. |
| 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.
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| 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:
| | Bear in mind the pledge is designed purely as the Secured Party’s comfort it will be made whole if the Pledgor defaults, by the Pledgor handing over some assets as collateral, on the premise that the Pledgor will get them back. This is different from the {{Ttcsa}}, where you get the collateral to keep and do with as you wish, and collateralisation works by way of offset. |
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| {{Quote|{{Nutshell 2018 CSD 3(c)(iii)(B)}}}} | | Now, the idea is not to stick a Secured Party with any additional expenses as a result: if Pledgor delivers collateral to Secured Party to hold hostage, then if the Secured Party suffers any costs, be they by way of tax — the classic is a [[stamp duty]] or similar transfer tax — or perfection and registration of security, and then enforcement and realisation should the Pledgor default, these should be for the Pledgor’s account, as the Secured Party gets no benefit from incurring that cost. All the more so any costs and taxes the Secured Party should incur when transferring the assets ''back'' to the Pledgor at the end of the {{isdaprov|Transaction}}. |
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| “...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.
| | These considerations do not — quite so straightforwardly, at any rate — pertain to [[title transfer]] arrangements. Once you have the asset, it is yours. And you can control, somewhat, for transfer taxes by adjusting your {{{{{1}}}|Eligible Credit Support}} criteria. |
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| 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.
| | This is not an ''entirely'' ironclad justification, by the way — especially when you take into account the effects of [[rehypothecation]]. |
| | ==={{capitalise|{{sicsa}}s}}=== |
| | 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. |
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| ====Why this might matter====
| | {{Csa Expenses summ {{{1}}}}} |
| 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:
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| *Client has '''$100m''' of long custody assets with the [[PB]], over which the prime broker has a [[security interest]].
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| *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.
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| *Just to make the example straightforward, the client has no other indebtedness to the [[PB]] and a zero [[cash]] balance.
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| *Under the [[PBA]] — being an “{{imcsdprov|Other CSA}}”, the [[prime broker]] calls [[initial margin]] of $35m, all of which is attributable to the swap.
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| *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.
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| *Twist: Client ''fails'' to meet the [[Reg IM]] call.
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| 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.
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| 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.
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| The fix is simple enough: Under the {{imcsdprov|Allocated Margin Flow (IM/IA) Approach}}, to say,
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| {{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)}}}}”}}
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| Well, that’s what I’d do.
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The starting point here, being a function of the common law of contract — not to mention common sense — is that every merchant is liable for its own costs and expenses of performing a contract, so if there you incur costs in running a collateral operation, as a general matter, they are for your own account.
Where this might change is as a result of a pledge. Specifically in the context of tax.
Bear in mind the pledge is designed purely as the Secured Party’s comfort it will be made whole if the Pledgor defaults, by the Pledgor handing over some assets as collateral, on the premise that the Pledgor will get them back. This is different from the title transfer CSA, where you get the collateral to keep and do with as you wish, and collateralisation works by way of offset.
Now, the idea is not to stick a Secured Party with any additional expenses as a result: if Pledgor delivers collateral to Secured Party to hold hostage, then if the Secured Party suffers any costs, be they by way of tax — the classic is a stamp duty or similar transfer tax — or perfection and registration of security, and then enforcement and realisation should the Pledgor default, these should be for the Pledgor’s account, as the Secured Party gets no benefit from incurring that cost. All the more so any costs and taxes the Secured Party should incur when transferring the assets back to the Pledgor at the end of the Transaction.
These considerations do not — quite so straightforwardly, at any rate — pertain to title transfer arrangements. Once you have the asset, it is yours. And you can control, somewhat, for transfer taxes by adjusting your {{{{{1}}}|Eligible Credit Support}} criteria.
This is not an entirely ironclad justification, by the way — especially when you take into account the effects of rehypothecation.
security interest CSAs
How to deal with stamp duties is the subject of Paragraphs 10(b) and 10(c), of which there is no equivalent in the English law document.
{{Csa Expenses summ {{{1}}}}}