Independent Amount - CSA Provision: Difference between revisions
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If you look at it cold, this 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. But it will be often defined as “an amount agreed between the parties or as otherwise advised by Party X”, which rather kicks the issue in to touch. In practice, it’s likely to be articulated as a multiplier on notional, and will be payable at the start of each {{isdaprov|Transaction}}, and may be adjusted on the fly. | If you look at it cold, this 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. But it will be often defined as “an amount agreed between the parties or as otherwise advised by Party X”, which rather kicks the issue in to touch. In practice, it’s likely to be articulated as a multiplier on notional, and will be payable at the start of each {{isdaprov|Transaction}}, and may be adjusted on the fly. | ||
:For example, a [[dealer]] | :For example, a [[dealer]] who sets IA by reference to the perceived volatility of the {{isdaprov|Transaction}} might reserve the right to increase {{isdaprov|IA}} should that volatility unexpectedly change. You can be sure more than one risk officer embarked on an undignified scramble for {{sex|her}} margin tables — and put in a desperate call to [[Legal]] — the day UK decided [[Brexit means Brexit]]<ref>and [[sterling]] [[gapped]] down 8%</ref>, for example. | ||
Particularly where underlying trades and markets are volatile, expect to see | Particularly where underlying trades and markets are volatile, expect to see much customisation. | ||
*The {{csaprov|independent amount}} might be calculated by reference to a given multiplier for a given asset | *The {{csaprov|independent amount}} 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 lower multiplier that those on the higher 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 elgible for each tier in its discretion, and with effect to existing as well as new transactions. This can have the effect of retroactively adjusting {{csaprov|Independent Amount}}s, in which case the difference can be called under the ordinary {{csaprov|Transfer}} provisions. | *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 elgible for each tier in its discretion, and with effect to existing as well as new transactions. This can have the effect of retroactively adjusting {{csaprov|Independent Amount}}s, in which case the difference can be called under the ordinary {{csaprov|Transfer}} provisions. | ||
===Calculation of {{csaprov|Credit Support Amount}} | |||
How the IA contributes to the Credit support Amount — being the amount one actually has to hand over of a {{csaprov|Valuation Date}} can be mind-boggling. It pans out like for a given counterparty like so: | |||
*First, take your {{csaprov|Exposure}} - the net [[mark-to-market]] value of your {{isdaprov|Transactions}}. Call this '''E'''. | |||
*Next, add to that all the {{csaprov|Independent Amount}}s you are required to pay the other feller. Call this '''IA<sub>t</sub>'''. E + IA<sub>t</sub> is the total amount you have to hand over as Credit Support if it weren't for ... | |||
*Any Independent Amounts the other dude is required to give ''you''. This we will call IA<sub>r</sub>. There’s something faintly absurd about exchanging {{csaprov|Independent Amounts}} by [[title transfer]], but that’s as may be. Stupider things have happened<ref>[[SFTR]] disclosure, for example.</ref>. | |||
*Any Threshold applicable to the Transferor - being an amount below which no variation margin is required.<br /> | |||
This leaves you with a formula as follows: | |||
:Max[0, E + IA<sub>t</sub> - (IA<sub>r</sub> + Threshold. | |||
“Credit Support Amount” means, with respect to a Transferor on a Valuation Date, (i) the Transferee’s Exposure plus (ii) all Independent Amounts applicable to the Transferor, if any, minus (iii) all Independent Amounts applicable to the Transferee, if any, minus (iv) the Transferor’s Threshold; provided, however, that the Credit Support Amount will be deemed to be zero whenever the calculation of Credit Support Amount yields a number less than zero. | |||
===See also=== | ===See also=== | ||
*[[Initial margin]] | *[[Initial margin]] | ||
{{csaanatomy}} | {{csaanatomy}} | ||
Revision as of 19:07, 19 January 2017
Discussion
To be contrasted with variation margin, initial margin (in the ISDA troposphere known as an “Independent Amount”) is the amount of margin you hold in excess of current mark-to-market exposure. You hold it to cover the risk that the market moves suddenly against your counterparty at the same time as it implodes, all before you have a chance to make a further variation margin call.
If you look at it cold, this looks like a fixed currency amount that is paid at the beginning of a relationship, irrespective of how many Transactions you may have on. But it will be often defined as “an amount agreed between the parties or as otherwise advised by Party X”, which rather kicks the issue in to touch. In practice, it’s likely to be articulated as a multiplier on notional, and will be payable at the start of each Transaction, and may be adjusted on the fly.
- For example, a dealer who sets IA by reference to the perceived volatility of the 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[1], for example.
Particularly where underlying trades and markets are volatile, expect to see much customisation.
- The independent amount 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 Transactions on currencies in the highest tier might have a lower multiplier that those on the higher 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 calculation agent can adjust tiers, multipliers, and the assets which are elgible for each tier in its discretion, and with effect to existing as well as new transactions. This can have the effect of retroactively adjusting Independent Amounts, in which case the difference can be called under the ordinary Transfer provisions.
===Calculation of Credit Support Amount How the IA contributes to the Credit support Amount — being the amount one actually has to hand over of a Valuation Date can be mind-boggling. It pans out like for a given counterparty like so:
- First, take your Exposure - the net mark-to-market value of your Transactions. Call this E.
- Next, add to that all the Independent Amounts you are required to pay the other feller. Call this IAt. E + IAt is the total amount you have to hand over as Credit Support if it weren't for ...
- Any Independent Amounts the other dude is required to give you. This we will call IAr. There’s something faintly absurd about exchanging Independent Amounts by title transfer, but that’s as may be. Stupider things have happened[2].
- Any Threshold applicable to the Transferor - being an amount below which no variation margin is required.
This leaves you with a formula as follows:
- Max[0, E + IAt - (IAr + Threshold.
“Credit Support Amount” means, with respect to a Transferor on a Valuation Date, (i) the Transferee’s Exposure plus (ii) all Independent Amounts applicable to the Transferor, if any, minus (iii) all Independent Amounts applicable to the Transferee, if any, minus (iv) the Transferor’s Threshold; provided, however, that the Credit Support Amount will be deemed to be zero whenever the calculation of Credit Support Amount yields a number less than zero.
See also
Replace with {{anat|csa}}