Disputed Calculations or Valuations - CSA Provision

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The actual wording is in the info box lower down on the right-hand side, but you may find it easier to read the nutshell summary, since in its 2016 version CSA ISDA not only passed up the opportunity to make this unused-in-practice language simpler, but bloody-mindedly made it worse, by providing anally-retentive alternatives for 2002 ISDA and 1992 ISDA close-out methodologies. Which is just spectacular.

1995 CSA in a Nutshell™ (4(a) edition)

4(a) Disputed Calculations or Valuations. If a Disputing Party disputes any collateral call (the Value of either the Exposure or the Credit Support being transferred):

The Valuation Agent will notify each party by the Notification Time on the Local Business Day following the Resolution Time. Then the appropriate transfer has to be made.

view template


Disputed Calculations or Valuations is a topic that could unfurl like the flower of a deadly insect-eating nightshade if you let it. DON’T LET IT.

CSA Anatomy™


4(a) Disputed Calculations or Valuations. If a party (a “Disputing Party”) reasonably disputes (I) the Valuation Agent’s calculation of a Delivery Amount or a Return Amount or (II) the Value of any transfer of Eligible Credit Support or Equivalent Credit Support, then:

(1) the Disputing Party will notify the other party and the Valuation Agent (if the Valuation Agent is not the other party) not later than the close of business on the Local Business Day following, in the case of (I) above, the date that the demand is received under Paragraph 2 or, in the case of (II) above, the date of transfer;
(2) in the case of (I) above, the appropriate party will transfer the undisputed amount to the other party not later than the close of business on the Settlement Day following the date that the demand is received under Paragraph 2;
(3) the parties will consult with each other in an attempt to resolve the dispute; and
(4) if they fail to resolve the dispute by the Resolution Time, then:
(i) in the case of a dispute involving a Delivery Amount or Return Amount, unless otherwise specified in Paragraph 11(c), the Valuation Agent will recalculate the Exposure and the Value as of the Recalculation Date by:
(A) utilising any calculations of that part of the Exposure attributable to the Transactions that the parties have agreed are not in dispute;
(B) calculating that part of the Exposure attributable to the Transactions in dispute by seeking four actual quotations at mid-market from Reference Market-makers for purposes of calculating Market Quotation, and taking the arithmetic average of those obtained; provided that if four quotations are not available for a particular Transaction, then fewer than four quotations may be used for that Transaction, and if no quotations are available for a particular Transaction, then the Valuation Agent’s original calculations will be used for the Transaction; and
(C) utilising the procedures specified in Paragraph 11(e)(ii) for calculating the Value, if disputed, of the outstanding Credit Support Balance;
(ii) in the case of a dispute involving the Value of any transfer of Eligible Credit Support or Equivalent Credit Support, the Valuation Agent will recalculate the Value as of the date of transfer pursuant to Paragraph 11(e)(ii).

Following a recalculation pursuant to this Paragraph, the Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) as soon as possible but in any event not later than the Notification Time on the Local Business Day following the Resolution Time. The appropriate party will, upon demand following such notice given by the Valuation Agent or a resolution pursuant to (3) above and subject to Paragraph 3(a), make the appropriate transfer.

(View Template)

4(a) Disputed Calculations or Valuations. If a party (a “Disputing Party”) reasonably disputes (I) the Valuation Agent’s calculation of a Delivery Amount (VM) or a Return Amount (VM) or (II) the Value of any transfer of Eligible Credit Support (VM) or Equivalent Credit Support (VM), then:

(1) the Disputing Party will notify the other party and the Valuation Agent (if the Valuation Agent is not the other party) not later than the close of business on the date that the transfer is due in respect of such Delivery Amount (VM) or Return Amount (VM) in the case of (I) above, or, in the case of (II) above, the Local Business Day following the date of transfer;
(2) in the case of (I) above, the appropriate party will transfer the undisputed amount to the other party not later than the close of business on the date that the transfer is due in respect of such Delivery Amount (VM) or Return Amount (VM);
(3) the parties will consult with each other in an attempt to resolve the dispute; and
(4) if they fail to resolve the dispute by the Resolution Time, then:
(i) in the case of a dispute involving a Delivery Amount (VM) or Return Amount (VM), unless otherwise specified in Paragraph 11, the Valuation Agent will recalculate the Exposure and the Value as of the Recalculation Date by:
(A) utilising any calculations of that part of the Exposure attributable to the Covered Transactions that the parties have agreed are not in dispute;
(B) (I) if this Agreement is a 1992 ISDA Master Agreement, calculating the Exposure for the Covered Transactions in dispute by seeking four actual quotations at midmarket from Reference Market-makers for purposes of calculating Market Quotation, and taking the arithmetic average of those obtained, or (II) if this Agreement is an ISDA 2002 Master Agreement or a 1992 ISDA Master Agreement in which the definition of Loss and/or Market Quotation has been amended (including where such amendment has occurred pursuant to the terms of a separate agreement or protocol) to reflect the definition of Close-out Amount from the pre-printed form of the ISDA 2002 Master Agreement as published by ISDA, calculating that part of the Exposure attributable to the Covered Transactions in dispute by seeking four actual quotations at mid-market from third parties for purposes of calculating the relevant Close-out Amount, and taking the arithmetic average of those obtained; provided that, in either case, if four quotations are not available for a particular Covered Transaction, then fewer than four quotations may be used for that Covered Transaction, and if no quotations are available for a particular Covered Transaction, then the Valuation Agent’s original calculations will be used for the Covered Transaction; and
(C) utilising the procedures specified in Paragraph 11(f)(ii) for calculating the Value, if disputed, of the outstanding Credit Support Balance (VM);
(ii) in the case of a dispute involving the Value of any transfer of Eligible Credit Support (VM) or Equivalent Credit Support (VM), the Valuation Agent will recalculate the Value as of the date of transfer pursuant to Paragraph 11(f)(ii).

Following a recalculation pursuant to this Paragraph, the Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) as soon as possible but in any event not later than the Notification Time on the Local Business Day following the Resolution Time. The appropriate party will, upon demand following such notice given by the Valuation Agent or a resolution pursuant to (3) above and subject to Paragraph 3(a), make the appropriate transfer.

(View Template)


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The dispute can be as to one of two things:

Let's take the easy one first: Eligible Credit Support. If you are a smart sort of fellow who has moved onto a cash-only single-currency 2016 VM CSA then there’s not really much to argue about. What is the Value, in the Base Currency, of an amount in the Base Currency?

The Transaction Exposure has —potentially — a different complexion. While some asset classes (FX, synthetic equity) are pretty observable and, in the same way, there is not much to argue about, others are not. The less liquid a transaction is, the less likely the broker is to refuse any dispute rights when carrying out its Calculation Agent function under the ISDA.

So doesn't the self-help valuation model under the CSA drive a coach and horses through the carefully constructed Calculation Agent language on which the broker counterparty has just insisted, to the point of threatening to die in a ditch about it?

It may seem so, but in practice no. Firstly, the dispute mechanism in the CSA, while fulsome, reflects the uncynical attitude of yesteryear in its aspirations for what Third party Reference Market-Makers will be prepared to do to help a fellow market participant out. It depends on the better angels of a Reference Market-maker’s nature — neigh, four of the blighters — in providing firm quotations to be dissected, arithmetically averaged and arranged for the delight of all. But a moment’s reflection should tell you that a Reference Market-maker doesn’t have a better nature. Such a chap is certain not to provide a quote, which brings them no benefit (they can’t get a trade out of it).

[to be continued]

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