Independent Amount - CSA Provision
Discussion
To be contrasted with variation margin, initial margin (in the ISDA troposphere known as an “Independent Amount”) is the amount of margin you hold in excess of current mark-to-market exposure. You hold it to cover the risk that the market moves suddenly against your counterparty at the same time as it implodes, all before you have a chance to make a further variation margin call.
If you look at it cold, this looks like a fixed currency amount that is paid at the beginning of a relationship, irrespective of how many Transactions you may have on. But it will be often defined as “an amount agreed between the parties or as otherwise advised by Party X”, which rather kicks the issue in to touch. In practice, it’s likely to be articulated as a multiplier on notional, and will be payable at the start of each Transaction, and may be adjusted on the fly.
Particularly where underlying trades and markets are volatile, expect to see a lot of customisation here.
- The independent amount might be calculated by reference to a given multiplier for a given asset (or type of assets - it is not uncommon to see tiering in FX transactions, for example, where Transactions on currencies in the highest Tier might have a low (say 2%) multiplier, and Transactions on currencies in the lowest Tier might carry a a 100% multiplier).
- Especially where one counterparty is providing access to markets for the other party (so called synthetic prime brokerage) there may be a provision that the calculation agent can adjust tiers, multipliers, and the assets which are elgible for each tier in its discretion, and with effect to existing as well as new transactions. This can have the effect of retroactively adjusting Independent Amounts, in which case the difference can be called under the ordinary Transfer provisions.
See also
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