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The {{csa}} is technically a Transaction under the {{isdama}} in its own right — that is deep ISDA lore — but it is still a ''weird'' {{isdaprov|Transaction}}, and the standard replacement cost methodology doesn’t work brilliantly for it: rather than having defined payments upfront, each of which can be valued and discounted back to a given date to reveal a present value, payment obligations under a {{csa}} are entirely dependent on the future performance of the ''other'' {{isdaprov|Transaction}}s in the portfolio under your {{isdama}}. So good luck determining the replacement value of something like that. | The {{csa}} is technically a Transaction under the {{isdama}} in its own right — that is deep ISDA lore — but it is still a ''weird'' {{isdaprov|Transaction}}, and the standard replacement cost methodology doesn’t work brilliantly for it: rather than having defined payments upfront, each of which can be valued and discounted back to a given date to reveal a present value, payment obligations under a {{csa}} are entirely dependent on the future performance of the ''other'' {{isdaprov|Transaction}}s in the portfolio under your {{isdama}}. So good luck determining the replacement value of something like that. | ||
But the good news is you don’t have to: the {{csaprov|Credit Support Balance}} isn’t calculated by reference to its own discounted future cashflows: rather, it is just the inverse of the aggregate present value of all the other Transactions under the ISDA. So the “replacement cost” on any day is just the prevailing value of the {{csaprov|Credit Support Balance}}. It is therefore easier to treat that as an {{isdaprov|Unpaid Amount}} (none of this tedious mucking about with replacement costs and so on). But that means you have to deem the {{isdaprov|Close-Out Amount}}<ref>Or {{isdaprov|Market Quotation}}, if under a {{1992ma}}. Loss | But the good news is you don’t have to: the {{csaprov|Credit Support Balance}} isn’t calculated by reference to its own discounted future cashflows: rather, it is just the inverse of the aggregate present value of all the other Transactions under the ISDA. So the “replacement cost” on any day is just the prevailing value of the {{csaprov|Credit Support Balance}}. It is therefore easier to treat that as an {{isdaprov|Unpaid Amount}} (none of this tedious mucking about with replacement costs and so on). But that means you have to deem the {{isdaprov|Close-Out Amount}}<ref>Or {{isdaprov|Market Quotation}}/{{isdaprov|Loss}}, if under a {{1992ma}}.Spoddy point: the definition of {{isdaprov|Loss}} in the {{1992ma}} ''includes'' the “Unpaid Amount” concept in the definition: “{{isdaprov|Loss}} includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant {{isdaprov|Early Termination Date}} and not made...” </ref> as zero. | ||
===Including “comprehensive” {{isdaprov|Termination Event}}s=== | ===Including “comprehensive” {{isdaprov|Termination Event}}s=== | ||
Revision as of 10:02, 29 July 2019
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2016 VM CSA Anatomy™
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This clause explains how you value the 1995 CSA itself — being a Transaction in its own right, of course — when closing out an ISDA Master Agreement. The basic gist is that you treat the Credit Support Balance (VM) as of the Early Termination Date — being the total value of the Credit Support you have ponied up at any time — as an Unpaid Amount, rather than treating is as a contingent return obligation, the present value of which would go into the Close-Out Amount[1].
Why Unpaid Amounts and not Close-out Amounts?
The 1995 CSA is technically a Transaction under the ISDA Master Agreement in its own right — that is deep ISDA lore — but it is still a weird Transaction, and the standard replacement cost methodology doesn’t work brilliantly for it: rather than having defined payments upfront, each of which can be valued and discounted back to a given date to reveal a present value, payment obligations under a 1995 CSA are entirely dependent on the future performance of the other Transactions in the portfolio under your ISDA Master Agreement. So good luck determining the replacement value of something like that.
But the good news is you don’t have to: the Credit Support Balance isn’t calculated by reference to its own discounted future cashflows: rather, it is just the inverse of the aggregate present value of all the other Transactions under the ISDA. So the “replacement cost” on any day is just the prevailing value of the Credit Support Balance. It is therefore easier to treat that as an Unpaid Amount (none of this tedious mucking about with replacement costs and so on). But that means you have to deem the Close-Out Amount[2] as zero.
Including “comprehensive” Termination Events
Consider expanding of the Default provision under Paragraph 6 of the CSA to include “Termination Events where all Transactions are Affected Transactions”. This is as per Section 3.2 of the 2001 ISDA Margin Provisions which recommend that Paragraph 6 of the CSA should apply where all Transactions are closed out following an Event of Default or “Specified Condition” — the latter of which is defined to include the Termination Events listed under the ISDA Master Agreement. It is likely that all Transactions would be Affected Transactions should a Credit Event Upon Merger or Additional Termination Event occur.
See also
References
- ↑ Or Loss, or Market Quotation, if you still labour under an antediluvian 1992 ISDA.
- ↑ Or Market Quotation/Loss, if under a 1992 ISDA.Spoddy point: the definition of Loss in the 1992 ISDA includes the “Unpaid Amount” concept in the definition: “Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made...”