Credit Support Annex
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CSA Anatomy™
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The credit support annex is annexed to the ISDA Master Agreement and deals with collateralisation. Oddly, it is not itself a Credit Support Document, but instead a Transaction under the ISDA Master Agreement, so frlom the point of view of the ISDA architecture the credit support annex is technically a Confirmation. (Credit Support Documents, by contrast, are discrete things that sit outside the ISDA architecture itself, like guarantees and letters of credit provided by third party Credit Support Providers).
There are three basic varieties of credit support annex: the English law credit support annex, where collateral is provided by title transfer, and is thus a title transfer collateral arrangement, the New York law credit support annex where collateral is provided (in theory) by pledge, and is therefore is (in theory) a security collateral arrangement, and the English law credit support deed where collateral is (in theory) provided by security interest but in practice is not passed at all, because in this day and age, no-one in their right mind uses an English law credit support deed.
In these pages, the varieties of credit support annex will be represented by:
- 1995 CSA: The original English law version of the title transfer credit support annex, published in 1995;
- 2016 VM CSA: The updated English law title transfer credit support annex, published in 2016 to cater for regulatory variation margin; and
- 2016 NY Law VM CSA: The updated New York law 1995 CSA, being an enhanced version of the original 1994 NY CSA updated to cater for regulatory variation margin. I haven’t done the 1994 NY CSA in such detail because, frankly, bite me. Three credit support annexs should be AMPLE.
- Credit support deed: I haven’t done this one either, because as far as I know hardly anyone uses it, because the idea of granting a security interest over derivative variation margin is stupid.[1]
The twain between NY law and English law CSAs: pledge v title transfer
This feels as good a time as any to raise the great subject of title transfer and pledge.
Under a 1994 NY CSA one transfers {{{{{1}}}|Credit Support}} by means of pledge.
Under a English law CSA one transfers {{{{{1}}}|Credit Support}} by title transfer.
What is the difference?
Title transfer
Under a “title transfer collateral arrangement” one party transfers collateral to the other outright and absolutely: it gives it, free of all reversionary interests, to the {{{{{1}}}|Transferee}}.
Securities delivered to {{{{{1}}}|Transferee}} become the {{{{{1}}}|Transferee}}’s property absolutely. There is no custody involved: the {{{{{1}}}|Transferee}} owns them outright, and not to {{{{{1}}}|Transferor}}’s order. The {{{{{1}}}|Transferee}} has only an obligation to redeliver an “equivalent” security — ie one that is fungible with the {{{{{1}}}|Credit Support}} originally posted.
There are no custody/client asset regulatory issues, and nor does it make sense to talk about the {{{{{1}}}|Transferee}}’s right to “reuse” or “rehypothecate” the asset. It owns the asset outright: by definition, it can do what it wants with it.
Pledge
The NY law CSAs and English law CSDs are “security financial collateral arrangements” in that there is a {{{{{1}}}|Pledgor}} who creates a security interest in favour of the {{{{{1}}}|Secured Party}}, but retains beneficial ownership of the assets.
The {{{{{1}}}|Pledgor}} delivers the assets to the {{{{{1}}}|Secured Party}} to hold in custody, subject to the security interest, for the {{{{{1}}}|Pledgor}}. {{{{{1}}}|Secured Party}} holds the assets subject to a security interest securing its payment obligation under the related transaction.
There is a custody arrangement but only while {{{{{1}}}|Secured Party}} holds the security: Under the NY law CSAs, the {{{{{1}}}|Secured Party}} (by default) is entitled to sell the pledged asset absolutely, under a process known as “rehypothecation”. This, we believe, converts the security financial collateral arrangement into a title transfer collateral arrangement — at least from the point of rehypothecation. If so, it makes you wonder why, you know, all the fuss with security interests.
“Transaction” or “Credit Support Document”?
English law Credit Support Annexes are Transactions under the Master Agreement. Therefore they are not Credit Support Documents.
New York law Credit Support Annexes are not Transactions. Explicitly, they are Credit Support Documents, though you should not (according to the ISDA User’s Guide) describe the parties to one as “Credit Support Providers”.
English law Credit Support Deeds (including the 2018 English law IM CSD) — rare birds in the Forest of Bretton — are not Transactions and, explicitly, are Credit Support Documents.
This means that a failure to perform under an English law CSA Transaction is a Failure to Pay or Deliver under Section 5(a)(i). by contrast, a failure to perform under a New York law CSA or an English law CSD is a Credit Support Default under Section 5(a)(iii).
Does this mean anything substantive? Or is the difference only formal?
Enforcement
Because ownership transfers absolutely, a {{{{{1}}}|Transferee}} under an English law CSA doesn’t have to do anything to enforce its collateral. It already owns it outright. Indeed, to the contrary, should the {{{{{1}}}|Exposure}} that the collateral supports disappear, the {{{{{1}}}|Transferor}} will be the creditor of the {{{{{1}}}|Transferee}}. It is as if it were a Transaction under the ISDA where the mark-to-market exposure had flipped around.
As New York law CSAs are not Transactions, they are old-fashioned security arrangements. Therefore they 'are Credit Support Documents in the labyrinthine logic of ISDA’s crack drafting squad™ and must be enforced.
See also
References
- ↑ US attorneys will swear blind that this is not true, but all I can say is rehypothecation.