Template:Csa Default under title transfer CSAs nyvmcsaprov

Default under title transfer CSAs

The default paragraph explains how you value the CSA itself — being a Transaction in its own right, of course — when closing out an ISDA Master Agreement. The basic gist is that you treat the Credit Support Balance as of the Early Termination Date — being the total value of the Credit Support you have ponied up at any time — as an Unpaid Amount, rather than treating is as a contingent return obligation, the present value of which would go into the Close-Out Amount (or Loss, or Market Quotation, if you still labour under an antediluvian 1992 ISDA).

Why does it reference “Unpaid Amounts”?

While technically a title transfer CSA is a Transaction in its own right, it is still a weird Transaction. The standard “replacement cost” valuation method doesn’t work brilliantly: whereas a normal Swap Transaction has defined payments upfront, each of which can be valued and discounted back to the present to reveal a present value, payment obligations under a CSA depend on the aggregate discounted cashflows of all the other Transactions under your ISDA Master Agreement which the CSA covers. So good luck determining, in the abstract, the “replacement cost” of something like that.

But the good news is you don’t have to: the Credit Support Balance isn’t calculated by reference to discounted future cashflows: rather, it is just the inverse of the aggregate present value of all the other Transactions under the ISDA Master Agreement. Which figures: that is, after all, what the CSA is suppose to produce. So the “replacement cost” on any day is just the prevailing value of the Credit Support Balance. It’s easier to treat that as an Unpaid Amount (none of this tedious mucking about with replacement costs and so on). But that means you have to deem the Close-Out Amount as zero.

Do not read this following paragraph if you can humanly avoid it as it will make you cry.

Or, if you are under an unmodded 1992 ISDA, the Market Quotation/Loss, as the case may be. Spoddy point: “Loss” includes the “Unpaid Amount” concept in its definition:

“Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made...”

Market Quotation does not include Unpaid Amounts, but no-one in their right mind uses it anyway, and those that do will find there are no Market Quotations, whereupon it defaults to Loss. So there is that.