Template:Csa Interest summ

Interest Payer and Payee

If you can work out who the {{{{{1}}}|Interest Payer}} is, then {{{{{1}}}|Interest Payee}} is the other guy. Written in this elliptical way because, what with {{{{{1}}}|Negative Interest}}, it isn’t always intuitive who is paying and who is receiving interest.

Interest Payment

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 {{{{{1}}}|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 {{{{{1}}}|Delivery Amount}} by the {{{{{1}}}|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 {{{{{1}}}|Transferee}}’s {{{{{1}}}|Exposure}} and the {{{{{1}}}|Value}} of the {{{{{1}}}|Transferor}}’s {{{{{1}}}|Credit Support Balance}} stayed the same as it was when variation margin was last called, the arrival of interest on any part of that {{{{{1}}}|Credit Support Balance}} increases its value and, since it was calibrated to equal an exposure exactly, ought to be spirited back to the {{{{{1}}}|Transferor}}: the {{{{{1}}}|Transferee}} otherwise would become indebted for the value of that interest to the {{{{{1}}}|Transferor}}, which for variation margin is not the idea.

But as we know, {{{{{1}}}|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 {{{{{1}}}|Transferee}}’s {{{{{1}}}|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 premium content nutshell JC has tried to simplify the drafting but I am a bit jet-lagged and it is testing even my patience. But know this: {{{{{1}}}|Interest Payment}} is a fiddly, time-and resource-consuming pain which will inevitably lead to error, confusion and name-calling. {{{{{1}}}|Interest Adjustment}} — just adding accrued interest to your {{{{{1}}}|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.

When you might want Interest Payment

Now there is a “use-case” for the Interest Payment method — it’s pretty niche, though — which we will talk about over at the premium JC.

Interest Period

Sometimes known as a “calculation period”, a more general term that can refer to other, non-interest-related determinations, an “interest period” is the space in time between interest payments on an interest-bearing financial instrument. Common ones: annual and semi-annual (especially for fixed rate products, since QED the interest rate doesn’t periodically change so there’s no particular market risk consequence for paying interest more frequently and operationally it is a hassle). Now there is a credit risk consequence, credit being a function of duration, but it is, all told, at the short end and it relates to interest and not principal.

Anyhow: fixed rates tend to pay annually, semi-annually or quarterly and floating rates, being path-dependent and more susceptible to intra-period volatility, are more commonly, monthly, weekly or daily.

You may see some fastidious operations teams asking to modify this to be a calendar month thing. You have to wonder why.