Credit Support Document - ISDA Provision: Difference between revisions
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{{fullanat|isda|Credit Support Document |2002}} | {{fullanat|isda|Credit Support Document |2002}} | ||
Being the document by which {{isdaprov|Credit Support}} is provided by a {{isdaprov|Credit Support Provider}}. | Being the document by which {{isdaprov|Credit Support}} is provided by a {{isdaprov|Credit Support Provider}}. | ||
===The {{csa}} is ''not'' a Credit Support Document=== | |||
Note that a {{tag|CSA}} is '''not''' a {{isdaprov|Credit Support Document}}, and you should not list it as one in Part 4 of the Schedule, however tempting it might be. I mean it sounds like one, right? But no: the counterparty cannot be its own {{isdaprov|Credit Support Provider}}. The {{csa}} is, rather, a {{isdaprov|Transaction}} under the {{isdama}}. This is rather important to the whole issue of [[close-out netting]]. Deep [[ISDA lore]]. | |||
===[[Guarantees]] under the {{isdama}}: why {{isdaprov|Transaction}}-specific {{isdaprov|guarantee}}s don't work=== | |||
===[[Guarantees]] under the {{isdama}} | |||
{{isdaguaranteewarning}} | {{isdaguaranteewarning}} | ||
Should a client request a transaction-specific [[parental guarantee]] under an {{isdama}} instead of the usual [[all obligations guarantee|“all obligations” guarantee]] of all the counterparty’s obligations under the {{isdama}}, hit the alarm button. | |||
You should *never* agree to the {{isdaprov|guarantee}} of individual {{isdaprov|Transaction}}s (nor accept a [[letter of credit]] with respect to individual {{isdaprov|Transactions}}) under an {{isdama}}. If you do, because of the way {{isdama}}s are closed out under Section {{isdaprov|6(e)}} — or rather, ''aren't'' closed out, you might find that just when you want your guarantee to pay, the {{isdaprov|Transaction}} it is guaranteeing isn’t there anymore: | |||
{{ | |||
On a close-out, each {{isdaprov|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 {{isdaprov|Close Out Amount}} is payable with respect to ''all terminated {{isdaprov|Transactions}}'' under {{isdaprov|6(e)}} ({{isdaprov|Payments on Early Termination}}) of the {{isdama}}.<ref>The {{isdama}} itself is never actually terminated, but carries impotently on in undead twilight, roaming the badlands like [[Nosferatu]] or the [[Flying Dutchman]], unloved, unredeemed, until the [[end of days]].</ref> | |||
*That is to say, it is *not* payable under the {{isdaprov|Transaction}} at all - it's payable under the {{isdama}} itself. | *That is to say, it is *not* payable under the {{isdaprov|Transaction}} at all - it's payable under the {{isdama}} itself. | ||
*Therefore, if the guarantee relates to the single {{isdaprov|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 | *Therefore, if the guarantee relates to the single {{isdaprov|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]]. | ||
{{ | {{ref}} | ||
Revision as of 08:41, 25 June 2019
Being the document by which Credit Support is provided by a Credit Support Provider.
The 1995 CSA is not a Credit Support Document
Note that a CSA is not a Credit Support Document, and you should not list it as one in Part 4 of the Schedule, however tempting it might be. I mean it sounds like one, right? But no: the counterparty cannot be its own Credit Support Provider. The 1995 CSA is, rather, a Transaction under the ISDA Master Agreement. This is rather important to the whole issue of close-out netting. Deep ISDA lore.
Guarantees under the ISDA Master Agreement: why Transaction-specific guarantees don't work
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.[1]
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 the counterparty’s obligations under the ISDA Master Agreement, hit the alarm button.
You should *never* agree to the guarantee of individual Transactions (nor accept a letter of credit with respect to individual Transactions) under an ISDA Master Agreement. If you do, because of the way ISDA Master Agreements are closed out under Section 6(e) — or rather, aren't closed out, you might find that just when you want your guarantee to pay, the Transaction it is guaranteeing isn’t there anymore:
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 a single Close Out Amount is payable with respect to all terminated Transactions under 6(e) (Payments on Early Termination) of the ISDA Master Agreement.[2]
- 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.
References
- ↑ The ISDA Master Agreement itself is never actually terminated, but carries impotently on in undead twilight, roaming the badlands like Nosferatu or the Flying Dutchman, unloved, unredeemed, until the end of days.
- ↑ The ISDA Master Agreement itself is never actually terminated, but carries impotently on in undead twilight, roaming the badlands like Nosferatu or the Flying Dutchman, unloved, unredeemed, until the end of days.