Credit Support Document - ISDA Provision

Being the document by which Credit Support is provided by a Credit Support Provider.

Note that a CSA should not be treated as a Credit Support Document, as it is in fact a Transaction under the ISDA Master Agreement.

Note also the pitfalls of providing Guarantees with respect to individual Transactions under an ISDA Master Agreement. It doesn't work. Here's why.

Guarantees under the ISDA Master Agreement and why a Transaction-specific guarantee is a bad idea

Guarantees and the ISDA Master Agreement: why Transaction-specific guarantees don’t work

Should a client request a {{{{{1}}}|transaction}}-specific parental {{{{{1}}}|guarantee}} (or letter of credit) for a {{{{{1}}}|Transaction}} under an ISDA Master Agreement instead of the usual “all obligations” guarantee of all the counterparty’s obligations under the ISDA Master Agreement, hit the alarm button.

You should never agree to the {{{{{1}}}|guarantee}} of individual {{{{{1}}}|Transaction}}s (nor accept a letter of credit with respect to individual {{{{{1}}}|Transactions}}) under an ISDA Master Agreement. If you do, because of the way ISDA Master Agreements are closed out under Section {{{{{1}}}|6(e)}} — or rather, aren’t closed out, you might find that just when you want your guarantee to pay, the {{{{{1}}}|Transaction}} it is guaranteeing isn’t there anymore:

On a close-out, each {{{{{1}}}|Transaction}} is terminated, the individual close-out amounts are determined, they’re aggregated up to a single net sum (i.e. negative exposures are netted off against positive ones) and a single {{{{{1}}}|Close Out Amount}} is payable with respect to all terminated {{{{{1}}}|Transactions}} under {{{{{1}}}|6(e)}} ({{{{{1}}}|Payments on Early Termination}}) of the ISDA Master Agreement.

That is to say, payments following termination of a {{{{{1}}}|Transaction}} are not payable under the {{{{{1}}}|Transaction}} at all - they are payable under the ISDA Master Agreement itself. Therefore, if the guarantee relates to the single {{{{{1}}}|Transaction}}, at the point you wish to rely on it (i.e., upon the party’s default), it will have gone, with no payment required. Vanished, like tears in the rain.

Should a client request a transaction-specific parental guarantee under an ISDA Master Agreement instead of the usual “all obligations” guarantee of all obligations under the ISDA Master Agreement and all transactions under it, escalate immediately.

We should *never* agree to the guarantee of individual Transactions (or accepting Letters of Credit with respect to individual transactions) under an ISDA Master Agreement. The reason relates to the way ISDA Master Agreements are closed out inder Section 6(e):

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• On a close-out, each Transaction is terminated, the individual close-out amounts are determined, they’re aggregated up to a single net sum (i.e. negative exposures are netted off against positive ones) and the single Early Termination Payment is payable under 6(e) (Payments on Early Termination) of the ISDA Master Agreement.

• That is to say, it is *not* payable under the Transaction at all - it's payable under the ISDA Master Agreement itself.

• Therefore, if the guarantee relates to the single Transaction only, at precisely the point you wish to rely on it (i.e., upon the party’s default), it will vanish. Same goes for Letters of Credit.