Equivalent Credit Support - CSA Provision

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Commentary

Tricks for the young players: “Equivalent Credit Support” is meant only to capture assets which are fungible with assets forming part of posted Credit Support Balance (exactly the same ISIN) – the point of “equivalence” is to buttress the 1995 CSA’s title transfer analysis by allowing return of a security which isn’t the exact security that was delivered in the first place, but another one from the same issue.

If you had to redeliver the same one, the “transfer of title” is in danger of being recharacterised into a pledge/loan, which has a bunch of unwanted knock-on effects.

I have come across a couple of instances (in OTC Clearing/CCP space) where the CSA definition of “Equivalent Credit Support” has been modified to capture not just fungible securities of the same Series/ISIN, but “similar ones” – same issuer but different maturity, and under a different ISIN etc.

This may have been based on a misapprehension that “Equivalent Credit Support” is already intended to allow redelivery of non-fungible securities of a similar type, and the modification is only clarificatory.

There may be a need for the “similar securities” concept in the OTC to CCP space, but we should call it something else – perhaps “Similar Credit Support” – to differentiate it from “Equivalent Credit Support” which is still needed in the CSA to support the title transfer analysis.

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