Default - CSA Provision

2016 VM CSA Anatomy™ →Go uptown In a Nutshell™ Section 6: 6. Default. If there is an Early Termination Date following an Event of Default, the Value of the Credit Support Balance (VM), determined of the Early Termination Date, will be an Unpaid Amount due to the Transferor under Section 6(e). For the Transaction represented by this Annex: (a) any Market Quotation will be zero; (b) any Loss will be limited to the Unpaid Amount representing the Value of the relevant Credit Support Balance (VM) and any unsatisfied Interest Payment (VM) obligations; (c) any Close-out Amount will be zero; and (d) there will be no Unpaid Amount relating to any unsatisfied obligation under Paragraph 2 or Paragraph 3(c). view template 2016 VM CSA full text of Section 6: 6. Default. If an Early Termination Date is designated or deemed to occur as a result of an Event of Default in relation to a party, an amount equal to the Value of the Credit Support Balance (VM), determined as though the Early Termination Date were a Valuation Date, will be deemed to be an Unpaid Amount due to the Transferor (which may or may not be the Defaulting Party) for purposes of Section 6(e). For the avoidance of doubt (a) any Market Quotation determined under Section 6(e) in relation to the Transaction constituted by this Annex will be deemed to be zero, (b) any Loss determined under Section 6(e) in relation to the Transaction constituted by this Annex will be limited to the Unpaid Amount representing the Value of the relevant Credit Support Balance (VM) and any unsatisfied obligations with respect to the transfer of an Interest Payment (VM); (c) any Close-out Amount determined under Section 6(e) in relation to the Transaction constituted by this Annex will be deemed to be zero; and (d) no Unpaid Amount will be determined with respect to an unsatisfied obligation under Paragraph 2 and Paragraph 3(c). view template Related Agreements Click here for the text of Section 6 in the 1995 English Law CSA Click here for the text of Section 6 in the 2016 English Law VM CSA Click [[{{{3}}} - NY VM CSA Provision|here]] for the text of the equivalent, Section [[{{{3}}} - NY VM CSA Provision|{{{3}}}]] in the 2016 NY Law VM CSA Comparisons 1995 CSA and 2016 VM CSA: click for comparison {{nycsadiff {{{3}}}}} Resources Full wikitext | Nutshell wikitext Navigation 1 (Interpretation) | 2 (Credit Support Obligations) | 3 (Transfers, Calculations and Exchanges) | 4 (Dispute Resolution) | 5 (Title Transfer etc) | 6 (Default) | 7 (Representation) | 8 (Expenses) | 9 (Miscellaneous) | 10 (Definitions) | 11 (Elections and Variables) Index: Click ᐅ to expand: 2016 VM CSA 2018 CSD 1995 CSA Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

This clause explains how you value the 1995 CSA itself — being a Transaction in its own right, of course — when closing out an ISDA Master Agreement. The basic gist is that you treat the Credit Support Balance (VM) as of the Early Termination Date — being the total value of the Credit Support you have ponied up at any time — as an Unpaid Amount, rather than treating is as a contingent return obligation, the present value of which would go into the Close-Out Amount.

Why Unpaid Amounts and not Close-out Amounts?

The 1995 CSA is technically a Transaction under the ISDA Master Agreement in its own right — that is deep ISDA lore — but it is still a weird Transaction, and the standard replacement cost methodology doesn’t work brilliantly for it: rather than having defined payments upfront, each of which can be valued and discounted back to a given date to reveal a present value, payment obligations under a 1995 CSA are entirely dependent on the future performance of the other Transactions in the portfolio under your ISDA Master Agreement. So good luck determining the replacement value of something like that.

But the good news is you don’t have to: the Credit Support Balance isn’t calculated by reference to its own discounted future cashflows: rather, it is just the inverse of the aggregate present value of all the other Transactions under the ISDA. So the “replacement cost” on any day is just the prevailing value of the Credit Support Balance. It is therefore easier to treat that as an Unpaid Amount (none of this tedious mucking about with replacement costs and so on). But that means you have to deem the Close-Out Amount<ref>Or Market Quotation, if under a 1992 ISDA. Loss, of course, includes the concept of Unpaid Amounts in the definition: “Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made...” <r/ef> as zero.

Including “comprehensive” Termination Events

Consider expanding of the Default provision under Paragraph 6 of the CSA to include “Termination Events where all Transactions are Affected Transactions”. This is as per Section 3.2 of the 2001 ISDA Margin Provisions which recommend that Paragraph 6 of the CSA should apply where all Transactions are closed out following an Event of Default or “Specified Condition” — the latter of which is defined to include the Termination Events listed under the ISDA Master Agreement. It is likely that all Transactions would be Affected Transactions should a Credit Event Upon Merger or Additional Termination Event occur.