Template:M summ 1995 CSA Independent Amount

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.

Is “Independent Amount” different from “initial margin”?

On the face of it, it looks that way, doesn’t it. But no.

If you look at it cold, the Independent Amount as written in the 1995 CSA looks like a fixed currency amount that is paid at the beginning of a relationship, irrespective of how many Transactions you may have on — even if you have none on. As conventionally understood, “initial margin” is, by contrast, Transaction-specific, being calculated by reference to the liquidity and volatility of the specific Transaction to which it relates.

But the 1995 CSA doesn’t have a concept of “initial margin”, and no-one in their right mind would send their swap dealer a wodge of money just to commemorate the signing of an ISDA Master Agreement, exciting though that event may be. Perhaps ISDA’s crack drafting squad™ of 1994 and 1995 lived in a kinder, more naïve time — one more impressionably swooned by the conclusion of a negotiation than our own — or maybe they were just blitzed when they came up with the idea.

In any case, what the market has done since the Children of the Forest first produced that nutty Independent Amount concept is to bend the squad’s fantastical verbal engineering so it works like Transaction-specific initial margin. So, the Independent Amount will be usually defined as “an amount agreed between the parties in relation to each Transaction, or as otherwise advised by Party A”, which rather kicks the issue in to touch. In practice, it’s likely to be articulated as a multiplier on notional, will be required of the client by the swap dealer and not the other way around, will be payable at the start of each Transaction, and may be adjustable 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 meant what it said and sterling gapped down 8%.

Particularly where underlying trades and markets are volatile, expect to see much customisation of the Independent Amount.

• It 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 bigger multiplier that those on lower 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 eligible 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 1995 CSA’s ordinary Transfer provisions.