Template:Csa Interest Payment summ: Difference between revisions

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But better still would be just straight out capitalising interest, with no option to transfer it. Perhaps this is just me.
But better still would be just straight out capitalising interest, with no option to transfer it. Perhaps this is just me.


===Interest Amounts under the {{csa}}===
====Interest Amounts under the {{csa}}====
It really ought to be quite simple, and in the {{csa}} it is: if a {{csaprov|Transferor}} has posted [[cash]] — probably less likely back in the day, but in the world of [[regulatory margin]], ''de rigueur'' nowadays — then you get [[interest]] on it — as long as paying interest wouldn’t, in itself, trigger a call for a further {{csaprov|Delivery Amount}} by the {{csaprov|Transferor}} — thus precipitating a (short) game of operational ping-pong between the two parties’ back office teams.   
It really ought to be quite simple, and in the {{csa}} it is: if a {{csaprov|Transferor}} has posted [[cash]] — probably less likely back in the day, but in the world of [[regulatory margin]], ''de rigueur'' nowadays — then you get [[interest]] on it — as long as paying interest wouldn’t, in itself, trigger a call for a further {{csaprov|Delivery Amount}} by the {{csaprov|Transferor}} — thus precipitating a (short) game of operational ping-pong between the two parties’ back office teams.   


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But as we know, {{csaprov|Exposure}}s ''don’t'' just quietly sit there. If they did, there wouldn’t be any need for initial margin, and collecting even [[variation margin]] would be less fraught. So if the {{csaprov|Transferee}}’s {{csaprov|Exposure}} has increased, the arrival of that interest might serve to fill a hole in the existing coverage, in which case, why pay it away only to ask for it back again?  
But as we know, {{csaprov|Exposure}}s ''don’t'' just quietly sit there. If they did, there wouldn’t be any need for initial margin, and collecting even [[variation margin]] would be less fraught. So if the {{csaprov|Transferee}}’s {{csaprov|Exposure}} has increased, the arrival of that interest might serve to fill a hole in the existing coverage, in which case, why pay it away only to ask for it back again?  


===Interest Amounts under the {{vmcsa}}===
====Interest Amounts under the {{vmcsa}}====
But in the {{vmcsa}} things get a little more complex. There follows an excruciating torture session for innocent and well-loved members of her majesty’s vocabulary, and all to get across a simple point.  In the nutshell to the right I have tried to simplify the drafting but I am a bit jet-lagged and it is testing even my patience. But know this: {{vmcsaprov|Interest Payment}} is a fiddly, time-and resource-consuming pain which will inevitably lead to error, confusion and name-calling. {{vmcsaprov|Interest Adjustment}} — just adding accrued interest to your {{vmcsaprov|Credit Support Balance}} — is far simpler and more elegant: none of this Kafkaesque complexities for netting and offsetting individual payments. It all comes out in the wash.
But in the {{vmcsa}} things get a little more complex. There follows an excruciating torture session for innocent and well-loved members of her majesty’s vocabulary, and all to get across a simple point.  In the nutshell to the right I have tried to simplify the drafting but I am a bit jet-lagged and it is testing even my patience. But know this: {{vmcsaprov|Interest Payment}} is a fiddly, time-and resource-consuming pain which will inevitably lead to error, confusion and name-calling. {{vmcsaprov|Interest Adjustment}} — just adding accrued interest to your {{vmcsaprov|Credit Support Balance}} — is far simpler and more elegant: none of this Kafkaesque complexity for netting and offsetting individual payments. It all comes out in the wash.
 
First, you have the choice between “{{vmcsaprov|Interest Transfer}}” and “{{vmcsaprov|Interest Adjustment}}”.
===={{vmcsaprov|Interest Transfer}}====
Here there is the choice of whether “{{vmcsaprov|Interest Payment Netting}}” applies. As far as the [[JC]] can tell, most market participants have switched this off, we surmise simply to avoid the torture of figuring out what you have to pay if it is switched on.
 
If {{vmcsaprov|Interest Payment Netting}} does ''not'' apply, then the {{vmcsaprov|Interest Payer}} must pay interest per the agreement in the elections (at Paragraph {{vmcsaprov|11(g)(ii)}}), and note there is no proviso allowing you to cry off if paying this amount would create a new {{vmcsaprov|Delivery Amount}}.
 
If {{vmcsaprov|Interest Payment Netting}} ''does'' apply then descend we must into the labyrinthine mind of {{icds}}. The short point is that you must work out if, on the same date, the {{vmcsaprov|Interest Payer}} is due a cash payment under the {{vmcsa}}, and if so, net the two off and pay the balance. Again, no proviso for what happens if this payment would lead to a margin call from the {{vmcsaprov|Interest Payer}}.
 
===={{vmcsaprov|Interest Adjustment}}====
{{vmcsaprov|Interest Adjustment}} is a far simpler method: incoming interest is just added to the {{vmcsaprov|Credit Support Balance}}. If, on your next margin call, net, the {{vmcsaprov|Credit Support Balance}} exceeds your counterparty’s {{vmcsaprov|Exposure}} to you, you get your interest back through the normal mechanism of calling for a {{vmcsaprov|Return Amount}}. All the netting and offsetting happens automatically. The only contingency — and well spotted, {{icds}}, for this one is truly for details freaks — is if you receive ''negative'' interest on your {{vmcsaprov|Credit Support Balance}} such that it wipes out the {{vmcsaprov|Credit Support Balance}} entirely and is ''still'' unsatisfied, then the {{vmcsaprov|Interest Payer}} — and in the case of negative interest, this is the person {{vmcsaprov|Transferor}}, not the {{vmcsaprov|Transferee}} — has to pay the balance. But if you are accruing interest and calling for margin daily, the likelihood of that happening is extremely low, and it is hard to see why you couldn’t just add this to the usual margin call process as well (since it is likely to be a daily process). <br>

Revision as of 19:03, 18 January 2024

To be fair to them, the OG only contemplated transfer of accrued interest, which in the context of a modern, daily margined swap business, is barking mad, so at least having the option to just capitalise interest is better than not having it.

But better still would be just straight out capitalising interest, with no option to transfer it. Perhaps this is just me.

Interest Amounts under the 1995 CSA

It really ought to be quite simple, and in the 1995 CSA it is: if a Transferor has posted cash — probably less likely back in the day, but in the world of regulatory margin, de rigueur nowadays — then you get interest on it — as long as paying interest wouldn’t, in itself, trigger a call for a further Delivery Amount by the Transferor — thus precipitating a (short) game of operational ping-pong between the two parties’ back office teams.

How would that happen? All other things staying equal, it couldn’t: if the Transferee’s Exposure and the Value of the Transferor’s Credit Support Balance stayed the same as it was when variation margin was last called, the arrival of interest on any part of that Credit Support Balance increases its value and, since it was calibrated to equal an exposure exactly, ought to be spirited back to the Transferor: the Transferee otherwise would become indebted for the value of that interest to the Transferor, which for variation margin is not the idea.

But as we know, Exposures don’t just quietly sit there. If they did, there wouldn’t be any need for initial margin, and collecting even variation margin would be less fraught. So if the Transferee’s Exposure has increased, the arrival of that interest might serve to fill a hole in the existing coverage, in which case, why pay it away only to ask for it back again?

Interest Amounts under the 2016 VM CSA

But in the 2016 VM CSA things get a little more complex. There follows an excruciating torture session for innocent and well-loved members of her majesty’s vocabulary, and all to get across a simple point. In the nutshell to the right I have tried to simplify the drafting but I am a bit jet-lagged and it is testing even my patience. But know this: Interest Payment is a fiddly, time-and resource-consuming pain which will inevitably lead to error, confusion and name-calling. Interest Adjustment — just adding accrued interest to your Credit Support Balance — is far simpler and more elegant: none of this Kafkaesque complexity for netting and offsetting individual payments. It all comes out in the wash.

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