Credit Support Obligations - CSA Provision

1995 ISDA Credit Support Annex (English Law) A Jolly Contrarian owner’s manual™ Resources and navigation Resources Full wikitext | Nutshell wikitext Navigation 1 (Interpretation) | 2 (Credit Support Obligations) | 3 (Transfers, Calculations and Exchanges) | 4 (Dispute Resolution) | 5 (Title Transfer etc) | 6 (Default) | 7 (Representation) | 8 (Expenses) | 9 (Miscellaneous) | 10 (Definitions) | 11 (Elections and Variables) Index — Click the ᐅ to expand: 1995 CSA Paragraph 2 in a Nutshell™ Use at your own risk, campers! 2 Credit Support Obligations 2(a) Delivery Amount. If the Transferee demands a Delivery Amount at least equal to the Transferor’s Minimum Transfer Amount on a Valuation Date, the Transferor must transfer Eligible Credit Support with a Value of the Delivery Amount (rounded under Paragraph 11(b)(iii)(D)) to the Transferee. The “Delivery Amount” is the amount by which the Transferee’s Credit Support Amount exceeds the Value of the Transferor’s Credit Support Balance on that Valuation Date (adjusted for pending but unsettled transfers). 2(b) Return Amount. If the Transferor demands a Return Amount at least equalling the Transferee’s Minimum Transfer Amount on a Valuation Date, the Transferee must transfer the specified Equivalent Credit Support with a Value of the Return Amount (rounded under Paragraph 11(b)(iii)(D)) to the Transferee and the Credit Support Balance will be proportionately reduced. The “Return Amount” is the amount by which (i) the Value of the Transferor’s Credit Support Balance (adjusted for pending but unsettled transfers) exceeds: (ii) the Credit Support Amount. view template Full text of Paragraph 2 Paragraph 2. Credit Support Obligations 2(a) Delivery Amount. Subject to Paragraphs 3 and 4, upon a demand made by the Transferee on or promptly following a Valuation Date, if the Delivery Amount for that Valuation Date equals or exceeds the Transferor’s Minimum Transfer Amount, then the Transferor will transfer to the Transferee Eligible Credit Support having a Value as of the date of transfer at least equal to the applicable Delivery Amount (rounded pursuant to Paragraph 11(b)(iii)(D)). Unless otherwise specified in Paragraph 11(b), the “Delivery Amount” applicable to the Transferor for any Valuation Date will equal the amount by which: (i) the Credit Support Amount exceeds (ii) the Value as of that Valuation Date of the Transferor’s Credit Support Balance (adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such Valuation Date). 2(b) Return Amount. Subject to Paragraphs 3 and 4, upon a demand made by the Transferor on or promptly following a Valuation Date, if the Return Amount for that Valuation Date equals or exceeds the Transferee’s Minimum Transfer Amount, then the Transferee will transfer to the Transferor Equivalent Credit Support specified by the Transferor in that demand having a Value as of the date of transfer as close as practicable to the applicable Return Amount (rounded pursuant to Paragraph 11(b)(iii)(D)) and the Credit Support Balance will, upon such transfer, be reduced accordingly. Unless otherwise specified in Paragraph 11(b), the “Return Amount” applicable to the Transferee for any Valuation Date will equal the amount by which: (i) the Value as of that Valuation Date of the Transferor’s Credit Support Balance (adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such Valuation Date) exceeds (ii) the Credit Support Amount. view template The varieties of ISDA CSA Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng Preamble Pre Pre Pre Pre Pre Interpretation 1 1 1 1 1 Security Interest 2 - 2 - 2 Credit Support Obligations 3 2 3 2 3 Transfers, Calculations and Exchanges - 3 - 3 - Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4 Dispute Resolution 5 4 5 4 5 Holding and Using Posted Collateral 6 - 6 - 6 Transfer of Title, No Security Interest - 5 - 5 - Events of Default 7 6 7 6 7 Rights and Remedies 8 - 8 - 8 Representations 9 7 9 7 9 Expenses 10 8 10 8 10 Miscellaneous 11 9 11 9 11 Definitions 12 10 12 10 12 Elections and Variables 13 11 13 11 13 Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Content and comparisons

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Summary

CSA transfer timings

This is how the timing works for CSA transfers.

Terminology check: to make this easy, we refer to both 1995 CSAs and 1995 CSAs as “1995 CSAs”. This cuts out a lot of “Delivery Amount and/or Return Amount as the case may be” nonsense. The date on which someone demands a 1995 CSA we call a “1995 CSA”.

To be clear, neither Demand Date nor 1995 CSA are “ISDA canon”.

Remember the 1995 CSA is simply the person making the demand.

1. Value 1995 CSA and 1995 CSA: Firstly, value what you are going to call: the 1995 CSA under para 1995 CSA or 1995 CSA. This is roughly 1995 CSA - 1995 CSA (or vice versa).
   1. Under 1995 CSA, the 1995 CSA will transfer 1995 CSA having a 1995 CSA as of the date of transfer of the 1995 CSA.
   2. Per the 1995 CSA provision, all calculations happen at the 1995 CSA. Fluctuations in value after that time won’t invalidate the 1995 CSA, but they may mean a party can immediately call for more 1995 CSA (that is, have another 1995 CSA).
   3. The 1995 CSA keys off the 1995 CSA.
2. 1995 CSA: On or promptly following any 1995 CSA (it need not be a 1995 CSA) on which the 1995 CSA has moved in its favour, one party may demand a 1995 CSA (para 2(a)) or a 1995 CSA (para 2(b)).
3. 1995 CSA: Under para 1995 CSA (1995 CSA) if the demand is received before the 1995 CSA on a 1995 CSA that is a 1995 CSA the transfer must be made by close of business on the related Regular Settlement Day. If received after the 1995 CSA or on a non-1995 CSA, the transfer must be made by close of business on the Regular Settlement Day relating to the day after the Demand Date.
4. Settlement Day: Here is where things differ materially between the 1995 CSA and the 2016 VM CSA.
   1. 1995 CSA: The Settlement Day for any day (whether or not it is a 1995 CSA) is:
      1. Cash: for cash, the next 1995 CSA and,
      2. Securities: for securities, the 1995 CSA after the date on which a trade in the relevant security, if effected on the day in question, would have been settled in accordance with customary practice.
   2. 2016 VM CSA: In the new world we have the new concept of the Regular Settlement Day, and this is the same Local Business Day as the Demand Date. The run-off text at the end of Paragraph 3(a) gives you a little more flex: if the demand came after the Notification Time, then you must make the transfer by close on the Regular Settlement Day for the next day. Just how the business days interact under the ISDA and CSA is about as complicated as string theory, by the way.

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General discussion

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See also

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References

ISDA 1995 English Law Credit Support Annex A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: →NY OG →Eng OG →NY VM →Eng VM →Eng IM 1 in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. You can even ask questions! Ask about it here. Original text Paragraph 1. Interpretation Capitalised terms not otherwise defined in this Annex or elsewhere in this Agreement have the meanings specified pursuant to Paragraph 10, and all references in this Annex to Paragraphs are to Paragraphs of this Annex. In the event of any inconsistency between this Annex and the other provisions of this Schedule, this Annex will prevail, and in the event of any inconsistency between Paragraph 11 and the other provisions of this Annex, Paragraph 11 will prevail. For the avoidance of doubt, references to “transfer” in this Annex mean, in relation to cash, payment and, in relation to other assets, delivery. The varieties of ISDA CSA Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng Preamble Pre Pre Pre Pre Pre Interpretation 1 1 1 1 1 Security Interest 2 - 2 - 2 Credit Support Obligations 3 2 3 2 3 Transfers, Calculations and Exchanges - 3 - 3 - Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4 Dispute Resolution 5 4 5 4 5 Holding and Using Posted Collateral 6 - 6 - 6 Transfer of Title, No Security Interest - 5 - 5 - Events of Default 7 6 7 6 7 Rights and Remedies 8 - 8 - 8 Representations 9 7 9 7 9 Expenses 10 8 10 8 10 Miscellaneous 11 9 11 9 11 Definitions 12 10 12 10 12 Elections and Variables 13 11 13 11 13 Resources and Navigation Index: Click ᐅ to expand: CSA

Comparisons

Between the OG CSAs and VM versions: Big change between 1995 and 2016 is the addition of Paragraph 1(b) in the 2016 VM CSA, rabbiting on about Other CSAs, Covered Transactions and so on.

Between English law and New York law: The New York version also has a Para 1(b) to explain what the reference to “Secured Parties” is all about. This is not germane to the title transfer-style English law versions of the Annex.

Between VM and IM: The 2018 English law IM CSD is, unusually for an English law document, a security interest arrangement which does not count as a Transaction. There is a bit to clarify in the Interpretation section as to all of this.

And then there is a sneaky extra bit of interpretation at the back end of the 2018 English law IM CSD in para 11(j). Would you look at that.

Basics

A paragraph of unremarkable, if unnecessary, throat-clearing, the “definitions and inconsistency” clauses are largely the same across all versions of the CSA.

“Transfer”

With one exception: the English law versions, but not the New York law ones, are marred by a bizarre for the avoidance of doubt rider which is both a non sequitur — no one was talking about “transfers” here, much less was in any particular state of doubt about them — but also an own goal: rather than avoiding doubt, this rider does nothing quite so much as introduce it.

Wait: was I meant to be doubting something here? Should I have been confused? Have I missed something?

There is nothing a cheerful attorney likes more than to worry about things, and she will toss sleeplessly for nights on end, fully occupied by questions such as — is “delivery” of cash different from “payment” of it? Is there something legally significant about “payment” that I somehow missed, in Banking Law 302, in 1989?

Tell your legal eagles to relax. It won’t do any good, but you can tell them. To the best the JC can figure out, all this means is that a Transferor must physically part with its collateral, handing it bodily over to the Transferee.

There is an interesting question as to what this might mean if your counterparty is also your banker, and you direct it to transfer credit support into the bank account you maintain with it, meaning that legally the counterparty hasn’t done anything with the cash at all — not an unusual scenario, should you be a hedge fund and the counterparty your prime broker — but this will set your legal eagles off again, and we don’t want that. We are just getting started.

Nomenclature

Being an annex to an ISDA Master Agreement, references to the “Agreement” means that particular ISDA Master Agreement; the “Annex” is the credit support annex and, if you were pedantic enough that you really felt the need to refer to it, the “Schedule” is the schedule to the ISDA Master Agreement.

Covered Transaction

As a concept, “Covered Transaction” only arrived in the 2016 VM CSA, in Paragraph 1(b). It is in the 2016 NY Law VM CSA, too, in Paragraph 1(c).

In the 1990s versions of the CSA, the neatest way of describing whether a given set of Transactions is covered or not is to say something like:

“[SPECIFY] Transactions will [not] be relevant for purposes of determining “Exposure” under the Credit Support Annex.”

But what does “Other CSA” mean?

This “Other CSA” talk has in mind those who, in 2016, wished to “grandfather” Transactions which were already live when the regulatory margin obligations came into force, but which therefore preceded it and were out of scope for it.

Cue a monstrously painful dual-CSA regime where new transactions were margined under a new, regulatory margin-compliant 2016 VM CSA, and old ones were allowed to roll off on the clapped-out (but somehow better, right?) “other” 1995 CSA.

No doubt this made sound commercial sense in 2016. But a few years later, for all except those with 30-year inflation swaps on the books, all this “Other CSA” chat is just barnacle-encrusted confusion for everyone.

Premium content Here the free bit runs out. Subscribers click 👉 here. New readers sign up 👉 here and, for ½ a weekly 🍺 go full ninja about all these juicy topics👇 JC’s “nutshell” summary of the clause Background reading and long-form essays Other CSAs and non-regulatory initial margin More idle speculation about that additional bit of interpretation in Para 11(j) of the 2018 IM CSD. Could it be ... ERISA related?