Template:ISDA transaction and collateral flows: Difference between revisions
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==={{isdaprov|Transaction}} flows and [[collateral]] flows=== | ==={{isdaprov|Transaction}} flows and [[collateral]] flows=== | ||
In a fully margined {{isdama}}, [[all other things being equal]], the termination of a {{isdaprov|Transaction}} will lead to two equal and opposite effects: | In a fully margined {{isdama}}, [[all other things being equal]], the termination of a {{isdaprov|Transaction}} will lead to two equal and opposite effects: | ||
*A final payment or exchange under the {{isdaprov|Transaction}} having a value more or less equal to the | *A final payment or exchange under the {{isdaprov|Transaction}} having a value more or less equal to the [[present value]] of that {{isdaprov|Transaction}}; | ||
*A offsetting change in the Exposure under the {{t|CSA}} in exactly the same value. | *A offsetting change in the Exposure under the {{t|CSA}} in exactly the same value. | ||
The strict sequence of these payments ought to be that the {{isdaprov|Transaction}} termination payment goes first, and the collateral payment | The strict sequence of these payments ought to be that the {{isdaprov|Transaction}} termination payment goes first, and the collateral return follows, since it can only really be calculated and called once the termination payment has been made. | ||
I know what you’re thinking. Hang on! that means the termination payer pays out knowing this will increase its {{isdaprov|Exposure}} for the couple of days it will take for that collateral return to find its way back. That’s stupid! What with the regulators’ obsession minimise systemic counterparty credit risk, wouldn’t it be better to apply some kind of [[Netting of Payments - ISDA Provision|settlement netting]] in anticipation, to keep the credit exposure down? | |||
Now, dear reader, have you learned nothing? Of course not. Now there is a burgeoning DTCC product designed to do that — it is in its infancy — but the theory of the ISDA and CSA settlement flows puts egg before chicken and, at the moment, {{isdaprov|Transaction}} flows and [[collateral]] flows tend to be handled by different operational parts of an institution, and their systems don’t talk. | |||
Anyway, currently, the payer of a terminating transaction has its heart in its mouth for a day or so. <br> | Anyway, currently, the payer of a terminating transaction has its heart in its mouth for a day or so. <br> | ||
Revision as of 09:32, 3 April 2018
Transaction flows and collateral flows
In a fully margined ISDA Master Agreement, all other things being equal, the termination of a Transaction will lead to two equal and opposite effects:
- A final payment or exchange under the Transaction having a value more or less equal to the present value of that Transaction;
- A offsetting change in the Exposure under the CSA in exactly the same value.
The strict sequence of these payments ought to be that the Transaction termination payment goes first, and the collateral return follows, since it can only really be calculated and called once the termination payment has been made.
I know what you’re thinking. Hang on! that means the termination payer pays out knowing this will increase its Exposure for the couple of days it will take for that collateral return to find its way back. That’s stupid! What with the regulators’ obsession minimise systemic counterparty credit risk, wouldn’t it be better to apply some kind of settlement netting in anticipation, to keep the credit exposure down?
Now, dear reader, have you learned nothing? Of course not. Now there is a burgeoning DTCC product designed to do that — it is in its infancy — but the theory of the ISDA and CSA settlement flows puts egg before chicken and, at the moment, Transaction flows and collateral flows tend to be handled by different operational parts of an institution, and their systems don’t talk.
Anyway, currently, the payer of a terminating transaction has its heart in its mouth for a day or so.