Credit Support Obligations - CSA Provision

1995 ISDA Credit Support Annex (English Law) A Jolly Contrarian owner’s manual™ Resources and navigation Resources Full wikitext | Nutshell wikitext Navigation 1 (Interpretation) | 2 (Credit Support Obligations) | 3 (Transfers, Calculations and Exchanges) | 4 (Dispute Resolution) | 5 (Title Transfer etc) | 6 (Default) | 7 (Representation) | 8 (Expenses) | 9 (Miscellaneous) | 10 (Definitions) | 11 (Elections and Variables) Index — Click the ᐅ to expand: 1995 CSA Paragraph 2 in a Nutshell™ Use at your own risk, campers! 2 Credit Support Obligations 2(a) Delivery Amount. If the Transferee demands a Delivery Amount at least equal to the Transferor’s Minimum Transfer Amount on a Valuation Date, the Transferor must transfer Eligible Credit Support with a Value of the Delivery Amount (rounded under Paragraph 11(b)(iii)(D)) to the Transferee. The “Delivery Amount” is the amount by which the Transferee’s Credit Support Amount exceeds the Value of the Transferor’s Credit Support Balance on that Valuation Date (adjusted for pending but unsettled transfers). 2(b) Return Amount. If the Transferor demands a Return Amount at least equalling the Transferee’s Minimum Transfer Amount on a Valuation Date, the Transferee must transfer the specified Equivalent Credit Support with a Value of the Return Amount (rounded under Paragraph 11(b)(iii)(D)) to the Transferee and the Credit Support Balance will be proportionately reduced. The “Return Amount” is the amount by which (i) the Value of the Transferor’s Credit Support Balance (adjusted for pending but unsettled transfers) exceeds: (ii) the Credit Support Amount. view template Full text of Paragraph 2 Paragraph 2. Credit Support Obligations 2(a) Delivery Amount. Subject to Paragraphs 3 and 4, upon a demand made by the Transferee on or promptly following a Valuation Date, if the Delivery Amount for that Valuation Date equals or exceeds the Transferor’s Minimum Transfer Amount, then the Transferor will transfer to the Transferee Eligible Credit Support having a Value as of the date of transfer at least equal to the applicable Delivery Amount (rounded pursuant to Paragraph 11(b)(iii)(D)). Unless otherwise specified in Paragraph 11(b), the “Delivery Amount” applicable to the Transferor for any Valuation Date will equal the amount by which: (i) the Credit Support Amount exceeds (ii) the Value as of that Valuation Date of the Transferor’s Credit Support Balance (adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such Valuation Date). 2(b) Return Amount. Subject to Paragraphs 3 and 4, upon a demand made by the Transferor on or promptly following a Valuation Date, if the Return Amount for that Valuation Date equals or exceeds the Transferee’s Minimum Transfer Amount, then the Transferee will transfer to the Transferor Equivalent Credit Support specified by the Transferor in that demand having a Value as of the date of transfer as close as practicable to the applicable Return Amount (rounded pursuant to Paragraph 11(b)(iii)(D)) and the Credit Support Balance will, upon such transfer, be reduced accordingly. Unless otherwise specified in Paragraph 11(b), the “Return Amount” applicable to the Transferee for any Valuation Date will equal the amount by which: (i) the Value as of that Valuation Date of the Transferor’s Credit Support Balance (adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such Valuation Date) exceeds (ii) the Credit Support Amount. view template The varieties of ISDA CSA Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng Preamble Pre Pre Pre Pre Pre Interpretation 1 1 1 1 1 Security Interest 2 - 2 - 2 Credit Support Obligations 3 2 3 2 3 Transfers, Calculations and Exchanges - 3 - 3 - Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4 Dispute Resolution 5 4 5 4 5 Holding and Using Posted Collateral 6 - 6 - 6 Transfer of Title, No Security Interest - 5 - 5 - Events of Default 7 6 7 6 7 Rights and Remedies 8 - 8 - 8 Representations 9 7 9 7 9 Expenses 10 8 10 8 10 Miscellaneous 11 9 11 9 11 Definitions 12 10 12 10 12 Elections and Variables 13 11 13 11 13 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.

Content and comparisons

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Summary

CSA transfer timings

This is how the timing works for CSA transfers.

Terminology check: to make this easy, we refer to both 1995 CSAs and 1995 CSAs as “1995 CSAs”. This cuts out a lot of “Delivery Amount and/or Return Amount as the case may be” nonsense. The date on which someone demands a 1995 CSA we call a “1995 CSA”.

To be clear, neither Demand Date nor 1995 CSA are “ISDA canon”.

Remember the 1995 CSA is simply the person making the demand.

1. Value 1995 CSA and 1995 CSA: Firstly, value what you are going to call: the 1995 CSA under para 1995 CSA or 1995 CSA. This is roughly 1995 CSA - 1995 CSA (or vice versa).
   1. Under 1995 CSA, the 1995 CSA will transfer 1995 CSA having a 1995 CSA as of the date of transfer of the 1995 CSA.
   2. Per the 1995 CSA provision, all calculations happen at the 1995 CSA. Fluctuations in value after that time won’t invalidate the 1995 CSA, but they may mean a party can immediately call for more 1995 CSA (that is, have another 1995 CSA).
   3. The 1995 CSA keys off the 1995 CSA.
2. 1995 CSA: On or promptly following any 1995 CSA (it need not be a 1995 CSA) on which the 1995 CSA has moved in its favour, one party may demand a 1995 CSA (para 2(a)) or a 1995 CSA (para 2(b)).
3. 1995 CSA: Under para 1995 CSA (1995 CSA) if the demand is received before the 1995 CSA on a 1995 CSA that is a 1995 CSA the transfer must be made by close of business on the related Regular Settlement Day. If received after the 1995 CSA or on a non-1995 CSA, the transfer must be made by close of business on the Regular Settlement Day relating to the day after the Demand Date.
4. Settlement Day: Here is where things differ materially between the 1995 CSA and the 2016 VM CSA.
   1. 1995 CSA: The Settlement Day for any day (whether or not it is a 1995 CSA) is:
      1. Cash: for cash, the next 1995 CSA and,
      2. Securities: for securities, the 1995 CSA after the date on which a trade in the relevant security, if effected on the day in question, would have been settled in accordance with customary practice.
   2. 2016 VM CSA: In the new world we have the new concept of the Regular Settlement Day, and this is the same Local Business Day as the Demand Date. The run-off text at the end of Paragraph 3(a) gives you a little more flex: if the demand came after the Notification Time, then you must make the transfer by close on the Regular Settlement Day for the next day. Just how the business days interact under the ISDA and CSA is about as complicated as string theory, by the way.

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General discussion

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See also

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References

ISDA 1995 English Law Credit Support Annex A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: →NY OG →Eng OG →NY VM →Eng VM →Eng IM 2 in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. You can even ask questions! Ask about it here. Original text Paragraph 2. Credit Support Obligations 2(a) Delivery Amount. Subject to Paragraphs 3 and 4, upon a demand made by the Transferee on or promptly following a Valuation Date, if the Delivery Amount for that Valuation Date equals or exceeds the Transferor’s Minimum Transfer Amount, then the Transferor will transfer to the Transferee Eligible Credit Support having a Value as of the date of transfer at least equal to the applicable Delivery Amount (rounded pursuant to Paragraph 11(b)(iii)(D)). Unless otherwise specified in Paragraph 11(b), the “Delivery Amount” applicable to the Transferor for any Valuation Date will equal the amount by which: (i) the Credit Support Amount exceeds (ii) the Value as of that Valuation Date of the Transferor’s Credit Support Balance (adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such Valuation Date). 2(b) Return Amount. Subject to Paragraphs 3 and 4, upon a demand made by the Transferor on or promptly following a Valuation Date, if the Return Amount for that Valuation Date equals or exceeds the Transferee’s Minimum Transfer Amount, then the Transferee will transfer to the Transferor Equivalent Credit Support specified by the Transferor in that demand having a Value as of the date of transfer as close as practicable to the applicable Return Amount (rounded pursuant to Paragraph 11(b)(iii)(D)) and the Credit Support Balance will, upon such transfer, be reduced accordingly. Unless otherwise specified in Paragraph 11(b), the “Return Amount” applicable to the Transferee for any Valuation Date will equal the amount by which: (i) the Value as of that Valuation Date of the Transferor’s Credit Support Balance (adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such Valuation Date) exceeds (ii) the Credit Support Amount. The varieties of ISDA CSA Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng Preamble Pre Pre Pre Pre Pre Interpretation 1 1 1 1 1 Security Interest 2 - 2 - 2 Credit Support Obligations 3 2 3 2 3 Transfers, Calculations and Exchanges - 3 - 3 - Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4 Dispute Resolution 5 4 5 4 5 Holding and Using Posted Collateral 6 - 6 - 6 Transfer of Title, No Security Interest - 5 - 5 - Events of Default 7 6 7 6 7 Rights and Remedies 8 - 8 - 8 Representations 9 7 9 7 9 Expenses 10 8 10 8 10 Miscellaneous 11 9 11 9 11 Definitions 12 10 12 10 12 Elections and Variables 13 11 13 11 13 Resources and Navigation Index: Click ᐅ to expand: CSA

Basics

The overall vibe of a Credit Support Annex is self-help.

It is presumed on any day there will be a portfolio of Transactions outstanding under the ISDA (not counting the CSA itself, which under the English law construct, is also a “Transaction”, though it is not under a NY law construct), and these Transactions will each create a market exposure, and when those market exposures are summed, will create an overall “Exposure” owed by one party or the other.

The party to whom the netted amount would be paid were the ISDA Master Agreement closed out on that day can — subject to a few conditions — call for Eligible Credit Support from the party who would be due to pay it.

Title transfer versus pledge

English law CSAs are title transfer CSAs. Credit Support is delivered outright against a contingent obligation on the Transferee to return “equivalent” — meaning fungible — Credit Support. As such, the Transferor has no legal or beneficial interest in Credit Support it has posted: it has only a debt claim against the Transferee for its return (which would be netted off against the Transferee’s debt claim against it under the ISDA Master Agreement). This is why an English law CSA is treated as a Transaction: it is, in every sense, identical to a physically settled asset swap.

New York law CSAs are security interest CSAs: Credit Support is posted by way of security, and the Transferee takes only legal title, holding beneficial interest in the Credit Support for the Transferor. This markedly changes the netting analysis. But — unless the option has been disapplied in the elections paragraph, the holder of pledged Credit Support is entitled to “rehypothecate” it — transfer it outright to a third party, against an obligation to return a fungible asset — and while U.S. attorneys may beg to differ this, to a jaundiced English lawyer, makes a NY law CSA materially identical to an English law one. Both are effectively, title transfer arrangements.

English law Credit Support Deeds, such as the 2018 English law IM CSD, are security interest CSAs. They do not generally allow reuse: for the Ancient version, it wouldn’t make any sense to take under a pledge/custody model, mark yourself in scope for CASS and all that carry on, and then deliver away the collateral: if you wanted to do that it would be better tpo just use a normal title transfer CSA. As a result the 1995 ISDA Credit Support Deed is seldom spoken of, an even more seldom seen. The 2018 English law IM CSD, being a regulatory IM document, specifically forbids reuse of collateral. The whole point of reg IM is that someone sensible is meant to sit on it at all times.

Credit Support Balance v Posted Credit Support

Quick terminology check: “Eligible Credit Support”, once delivered to the person demanding it under a title transfer CSA is called the “Credit Support Balance” and under a security interest CSA is called “Posted Credit Support”. This seems annoying, and is, but ISDA’s crack drafting squad™ has its reasons, as ever. The difference reflects their differing ontological statuses. True.

Collateral posted under a title transfer CSA goes outright, leaving the deliveror only a simple debt claim for an equivalent asset. There is no sense of custody; no bailment; no lingering interest in what has been sent away. It is not like it has been posted into a cubby-hole to be kept safe and sound and later returned. Hence, it is just a “Credit Support Balance”.

Collateral posted under a security interest CSA is “posted” on that basis; there is a (conditioned) expectation of getting back the same thing you sent. This expectation is annihilated by the act of rehypothecation, but still, in theory, it is for an instant there. Hence what you have is “Posted Credit Support”.

However compelling the intellectual grounds for the distinction, in practice it is annoying, especially if you happen to be speaking generally about ISDA Credit Support Annexes of either kind, as the JC is. For ease of deference to his usual slapdash way of thinking about things JC will refer to either as simply “Credit Support”. that can probably apply loosely to Eligible Credit Support, which is te universe of collateral which, by rights, could be posted under the CSA even if it has not necessarily been yet.

The Basic Idea

The basic idea is that Credit Support creates an offsetting value under the CSA which, when set off against the net market exposure under the ISDA Master Agreement proper, would equal zero, or at any rate an acceptably low number: pre-agreed Thresholds, Independent Amounts, Minimum Transfer Amounts may intervene to make that number something other than zero, and Exposure and the value of extant Credit Support may subsequently change, but it will be in any case near zero.

Each party can run this calculation on, essentially, any Local Business Day. The person holding Credit Support must factor its value into its demand.

Where a party is seeking new Credit Support to cover its own outright Exposure, that is a “Delivery Amount”. Where it is seeking to “call back” Credit Support it has already delivered, that is called a “Return Amount”.

The difference between Delivering and Returning

There is not much of a difference, but there is some: with a Return Amount, the Transferee gets to choose which bit of Credit Support the Transferor sends back, out of what the Transferee originally delivered. When the Transferee is calling for a Delivery Amount the Transferor gets to choose from the agreed Eligible Credit Support table in the elections paragraph.

The self-help element is this: you don’t have to call for Credit Support. You may be entitled to, but it is up to you to run the calculations and make the demand. If you don’t, the other party is not obliged to send you anything.

Each party therefore also “marks its own homework”. Should the parties not agree on their respective valuations, there is a dispute resolution process set out in Paragraph 4.

Paragraph 3(c) of the 2018 IM Credit Support Deed on margin mechanics

There is quite a lot in Paragraph 3 of the 2018 English law IM CSD, and rather than setting it all here, we have created a whole page for Paragraph 3(c), seeing as it has no equivalent in the variation margin CSAs.

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