Template:Exposure under csa

Relevance of Section 6 to the peacetime operation of the 1995 CSA

The calculation of Exposure under the 1995 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 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 Exposure.

Now, on the day you are meant to pay that final payment, which when (ahem — if) settled, you would expect to reduce your Exposure to reduce, but you will call for your Delivery Amount or Return Amount assuming it has not (yet) been paid. By the time the credit support adjustment has been settled, it will have been paid, meaning the person who paid that adjustment will be out of pocket, and will need to call it back (using the same process).

Fun times in the world of collateral operations.