Credit Support Default - ISDA Provision
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2002 ISDA Master Agreement
Section 5(a)(iii) in a Nutshell™ Use at your own risk, campers!
Full text of Section 5(a)(iii)
Related agreements and comparisons
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Content and comparisons
A bit of pedantic flannel found its way into the 2002 ISDA — it captures not just the failure of the Credit Support Document itself, but any security interest granted under it, catering to the legal eagle’s most paranoid fears that a contractual right can have some sort of distinct ontological existence independently from the agreement which gives it breath and enforceable currency in the first place. But otherwise the same.
Summary
Before you even put your hand up: no, a Credit Support Annex between the two counterparties is not a “Credit Support Document”, at least under the English law construct: there it is a “Transaction” under the ISDA Master Agreement that offsets the net mark-to-market value of all the other Transactions, so can’t be a Credit Support Document per se. It is different with a 1994 NY CSA — being a pledge document it is a Credit Support Document, but even there the Users’ Guide cautions against treating a direct swap counterparty as a “Credit Support Provider” — the Credit Support Provider is meant to be a third party: hence references to the party itself defaulting directly under a Credit Support Document.
Therefore, tediously — and we think it was avoiding precisely this tediosity that the Users’ Guide had in mind, but, best-laid plans and all that — there is an ontological difference between the mechanics of close out when it comes to a failure under a New York-law CSA when compared to non-payment under an English-law CSA.
A failure to meet a margin call under an English-law CSA or any of its modern English-law successors is therefore a Failure to Pay or Deliver under Section 5(a)(i) of the actual ISDA Master Agreement; a failure to post under a New York-law CSA is a Section 5(a)(iii) Credit Support Default.
Does this make any difference at all? It may do, if you have negotiated different grace periods under your CSA than those under your ISDA Master Agreement proper.
Now, before you ask why anyone would ever do that, firstly let us say that far stupider things than that happen every freaking day in the negotiation of global markets documentation, and secondly that, for example, grace periods for regulatory initial margin may well be standardised — and dealers may not have the capacity or appetite to negotiate them tightly, given the paper war they will be in in any case — so you can quite easily see 2002 ISDAs with very brief grace periods, and Initial Margin CSDs with longer ones. So won’t this be fun when it comes to closeout.