Transaction terminations and VM

2016 VM CSA Anatomy™ →Go uptown CSA transfer timings This is how the timing works for CSA transfers. Terminology check: to make this easy, we refer to both 2016 VM CSAs and 2016 VM CSAs as “2016 VM 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 2016 VM CSA we call a “2016 VM CSA”. To be clear, neither Demand Date nor 2016 VM CSA are “ISDA canon”. Remember the 2016 VM CSA is simply the person making the demand. Value 2016 VM CSA and 2016 VM CSA: Firstly, value what you are going to call: the 2016 VM CSA under para 2016 VM CSA or 2016 VM CSA. This is roughly 2016 VM CSA - 2016 VM CSA (or vice versa). Under 2016 VM CSA, the 2016 VM CSA will transfer 2016 VM CSA having a 2016 VM CSA as of the date of transfer of the 2016 VM CSA. Per the 2016 VM CSA provision, all calculations happen at the 2016 VM CSA. Fluctuations in value after that time won’t invalidate the 2016 VM CSA, but they may mean a party can immediately call for more 2016 VM CSA (that is, have another 2016 VM CSA). The 2016 VM CSA keys off the 2016 VM CSA. 2016 VM CSA: On or promptly following any 2016 VM CSA (it need not be a 2016 VM CSA) on which the 2016 VM CSA has moved in its favour, one party may demand a 2016 VM CSA (para 2(a)) or a 2016 VM CSA (para 2(b)). 2016 VM CSA: Under para 2016 VM CSA (2016 VM CSA) if the demand is received before the 2016 VM CSA on a 2016 VM CSA that is a 2016 VM CSA the transfer must be made by close of business on the related Regular Settlement Day. If received after the 2016 VM CSA or on a non-2016 VM CSA, the transfer must be made by close of business on the Regular Settlement Day relating to the day after the Demand Date. 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 2016 VM CSA) is: Cash: for cash, the next 2016 VM CSA and, Securities: for securities, the 2016 VM 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. 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. 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 ᐅ to expand: 2016 VM CSA 2018 CSD 1995 CSA 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.

Now the timings of the various payments under the ISDA architecture lead to one rather odd effect:

If you have an existing Transaction with a large MTM exposure, that is currently collateralised with variation margin, as it almost certainly will be, and then the in-the-money party decides to realise the value of that Transaction (or — I dunno — the swap just gets to its scheduled termination date, then you have a coupole of opposite things that have to happen.

• The out-of-the-money counterparty has to pay the termination value of the Transaction; and
• The in-the-money counterparty has to repay a corresponding portion of the variation margin it has already posted on the Transaction

These two amounts should be — intra-day market moves permitting — the same. It stands to reason: the point at which I finally pay you your winnings in the swap casino, you must pay me back the cash I gave you as collateral for the value of the position you just won on.

Hang on: but these just offset, don’t they?

Well, you would like to think so. The JC did, the first time someone asked his this question, and when he went to run it down he got quite the surprise. In our modern age of limiting systemic risk, you would like to think cash I had already paid you to reflect the value of your trade would seamlessly offset against the value I would have to pay you on termination: you keep the cash value of that variation margin, maybe there’s a small true up payment to cater for the market movement since the last collateral exchange, I discharge you from returning the VM I have posted you, and we’re all square.

But that’s not how ISDA’s crack drafting squad™ played it. Instead the OTM counterparty must pay out the whole value of the swap mark to market — like, again — then wait for a new opportunity to value the master agreement, tomorrow, and then call for the equivalent credit support back then.

This leads to enormous overnight exposure, but this is the way the market seems to have operated since credit support annexes were a thing.

See also

• Transfers, Calculations and Exchanges - VM CSA Provision
• Archegos
• When variation margin attacks