Return Amount - CSA Provision
1995 ISDA Credit Support Annex (English Law)
Paragraph 2(b) in a Nutshell™ Use at your own risk, campers!
Full text of Paragraph 2(b)
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Content and comparisons
The only differences here are the liberal, but all the same redundant, spraying of “(VM)” all over the shop in the 2016, a single reference to the Regular Settlement Day in place of non-Regular — that is to say, regular — Settlement Day (which goes pretty much without saying anyway, per our nutshell version) and the fact that the balance is deducted from the Credit Support Balance in the 1995, but the Transferee’s Exposure in the 2016 (there not being a concept of a Credit Support Amount in the 2016), for reasons which are explored more fully below).
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.
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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).
- Under 1995 CSA, the 1995 CSA will transfer 1995 CSA having a 1995 CSA as of the date of transfer of the 1995 CSA.
- 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).
- The 1995 CSA keys off the 1995 CSA.[1]
- 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)).
- 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.[2] 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[3] after the Demand Date.
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Settlement Day: Here is where things differ materially between the 1995 CSA and the 2016 VM CSA.
- 1995 CSA: The Settlement Day for any day (whether or not it is a 1995 CSA) is:
- 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. For a cheat’s guide, see How business days work under the CSA. You’re welcome!
General discussion
1995 CSA
Under a 1995 CSA the Credit Support Amount is the total amount one counterparty must have delivered to the other at any time: the combination of the Exposure to that party and the net Independent Amounts it must post, minus any agreed Threshold.
No equivalent in the 2016 VM CSA
There is no concept of a Credit Support Amount in the 2016 VM CSA because the Credit Support Amount a party may require is no more than its Exposure to the other party — as already defined in the 2016 VM CSA. In the old 1995 CSA one had to consider any pertinent Independent Amounts and the agreed Threshold.
No Independent Amounts
Life is much simpler in the world of regulatory variation margin for which the 2016 VM CSA is designed. Its only concern is variation margin. That is, there are no Independent Amounts.[4] In the old 1995 CSA, Independent Amounts were there to protect counterparties against potential swings in Exposure that might happen before the next margin call: that is, they are a buffer against the risk of market moves.
But in the old world, Independent Amounts were transferred outright to the Transferee, by title transfer.[5] This created a conceptual issue for regulators, who were trying to minimise credit exposure between the parties: a title transfer of collateral to cover an Exposure that doesn’t yet — and might never — exist creates a negative exposure, because the holder of an Independent Amount would be indebted to the Transferor for its return.[6]
All that said, there is a custom-built addition in Paragraph 11[7] that lets you build an Independent Amount concept back in if you really want one. And who, in their right chicken-lickeny mind, wouldn’t?
No Threshold either
And what about the Threshold? Well, there shouldn’t be one of those either: The thrust of the margin reforms in the different jurisdictions was to require counterparties to collateralise their total mark-to-market exposure, not just most of it, so in a rush of uncharacteristic blood to the head, ISDA did away with the concept altogether. There is usually some flex in the regulations, and don’t be surprised to see your more tempestuous counterparties hotly insisting on a Threshold, even just a nominal one.
So the Credit Support Amount vanishes, in a puff of logic and existential redundancy.
See also
References
- ↑ Under the 1995 CSA you may specify either close of business on the Valuation Date or the Local Business Day immediately before it. Under the 2016 VM CSA you have flexibility to determine the Valuation Time as at the point you close your book each day.
- ↑ The “Settlement Day” under the 1995 CSA is slightly different.
- ↑ Note: ordinary day, not Local Business Day
- ↑ Well, alright, should be no Independent Amounts.
- ↑ Under Engliush law CSAs, at any rate. But the effect was the same where rehypothecation was allowed under a 1994 NY CSA too.
- ↑ Hence, regulatory initial margin cannot be cash, and must be pledged and not title transferred.
- ↑ For more information see Credit Support Amount (VM/IA).