Distributions and Interest Amount - CSA Provision

Template:Anattitle-1995)csa →Go uptown In a Nutshell™ Section Template:1995)csaprov: {{Nutshell Template:1995) nutsref CSA 5(c)}} [[Template:Nutshell Template:1995) nutsref CSA 5(c)|view template]] Template:1995)csa full text of Section Template:1995)csaprov: {{ISDA Template:1995) Law Credit Support Annex Template:1995) year 5(c)}} [[Template:ISDA Template:1995) Law Credit Support Annex Template:1995) year 5(c)|view template]] Related Agreements Click here for the text of Section 5(c) in the 1995 English Law CSA Click here for the text of Section 5(c) 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}}}}} Template:Anatresources-1995)csaTemplate:Anatnavigation-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.

From the I’m sorry I asked file. It used to be so simple, until the 2016 VM CSA came along and started confusing everything with all this talk of Interest Adjustments versus Interest Payments.

Note that the Distributions provision of Paragraph 5(c)(i) of the 1995 CSA is self-contained and does not require any adjustment in Paragraph 11, and the reference to "Distributions" in the heading of Paragraph 11(f) simply reflects the heading of Paragraph 5(c), and does not imply you need to add anything.

Paragraph 5(c)(i) is identical in the 1995 CSA and the 2016 VM CSA. It is only in Paragraph 5(c)(ii) that things start getting a bit funky.

This part simply requires the holder of credit support to manufacture income back to the poster of credit support — as long as doing so wouldn’t create in itself trigger a further Delivery Amount by the Transferor — thus precipitating a (short) game of operational ping-pong between the two parties’ back office teams.

How would that happen? All other things staying equal, it couldn’t: if the Transferee’s Exposure and the Value of the Transferor’s Credit Support Balance stayed the same as it was when variation margin was last called, the arrival of income on any part of that Credit Support Balance ought to be spirited back to the Transferor: as long as the Transferee was still holding it, the Transferee otherwise would become indebted for the value of that income to the Transferor.

But as we know, Exposures don’t just quietly sit there. If they did, there wouldn’t be any need for initial margin, and collecting even variation margin would be less fraught. So if the Transferee’s Exposure has increased, the arrival of that income might serve to fill a hole in the existing coverage, in which case, why pay it away only to ask for it back again? Similarly, the value of a pending but as-yet-unpaid income payment will be priced into the value of the securities generating it. So even if the Exposure hasn’t changed in the mean time, the arrival of a coupon or dividend will reduce the Value of those securities on which it was paid, so — all other things being equal — the Transferee might expect to hang onto the Distribution.