Template:Exposure under csa

Relevance of Section 6 to the peacetime operation of the Credit Support Annex

The calculation of {{{{{1}}}|Exposure}} under the CSA is modelled on the Section 6(e)(ii) termination methodology following a Termination Event where there is one Affected Party, which in turn tracks the Section 6(e)(i) methodology following an Event of Default, only taking mid-market valuations and not those on the Non-Defaulting Party’s side.

This means you calculate the {{{{{1}}}|Exposure}} as:

(a) the Close-out Amounts for each Terminated Transaction plus

(b) Unpaid Amounts due to the Non-defaulting Party; minus

(c) Unpaid Amounts due to the Defaulting Party.

This is interesting because, as of its Termination Date the Transaction may be no more, but until those final exchanges are settled the obligations they represent — “Unpaid Amounts” in the argot of Section 6(e) — still exist and are included in the calculation of the {{{{{1}}}|Exposure}}.

Now, on the day you are meant to make that final settlement, which when (ahem — if) settled, would reduce your {{{{{1}}}|Exposure}}, you will call for your {{{{{1}}}|Delivery Amount}} or {{{{{1}}}|Return Amount}} assuming it has not (yet) been paid. By the time the Credit Support adjustment has been settled, that final settlement will have happened, meaning the person who paid the adjustment will be out of pocket, and will need to call it back (using the same process), and will be running overnight credit risk that, if she’d had the choice, she probably wouldn’t have.

The thing which, I think, causes all the confusion is the nature of payments under normal Transactions are deterministic and generally specified in the Confirmation, whereas whether you need to make a payment at all under a CSA on any day depends, and how much you need to pay, depends on quite a lot of things and you only find out at the last minute. Therefore CSA payments are due “a regular settlement cycle after they are called” — loosey goosey, right? — whereas normal swap payments are due (say) “on the 15th of March”

Day 1: Party A has an {{{{{1}}}|Exposure}} of 100, and its prevailing {{{{{1}}}|Credit Support Balance}} is 90, so (let’s say, for fun, after the {{{{{1}}}|Notification Time}} on the {{{{{1}}}|Demand Date}}) Party B has called it for a {{{{{1}}}|Delivery Amount}} of 10, which it must pay but Party B owes it a payment of 10, which is due to land tomorrow.

Fun times in the world of collateral operations.