Template:Csa Credit Support Obligations summ

The overall vibe of a {{{{{1}}}|Credit Support}} annex is self-help.

It is presumed on any day there will be a portfolio of Transactions outstanding under the ISDA (not counting the CSA itself, which under the English law construct, is also a “Transaction”, though it is not under a NY law construct), and these Transactions will each create a market exposure, and when those market exposures are summed, will create an overall “{{{{{1}}}|Exposure}}” owed by one party or the other.

The party to whom the netted amount would be paid were the ISDA Master Agreement closed out on that day can — subject to a few conditions — call for {{{{{1}}}|Credit Support}} from the party who would be due to pay it.

The basic idea is that {{{{{1}}}|Credit Support}}, once paid, would create an offsetting exposure under the CSA which, when set off against the net market exposure under the substantive Transactions, would equal zero, or at any rate an acceptably low number: pre-agreed {{{{{1}}}|Threshold}}s, {{{{{1}}}|Independent Amount}}s, {{{{{1}}}|Minimum Transfer Amount}}s may intervene to make that number something other than zero, and {{{{{1}}}|Exposure}} and the value of posted {{{{{1}}}|Credit Support}} may subsequently change, but it will be in any case near zero.

Each party can run this calculation on, essentially, any Local Business Day. Once {{{{{1}}}|Credit Support}} has been posted, the person holding it must factor this {{{{{1}}}|Credit Support}} Balance into its demand. Where a party is seeking to “call back” {{{{{1}}}|Credit Support}} it has already posted, that is called a “{{{{{1}}}|Return Amount}}”. Where it is seeking new {{{{{1}}}|Credit Support}} to cover its own outright Exposure, that is a “{{{{{1}}}|Delivery Amount}}”.

(There is not much of a difference, but there is some: where you are calling back {{{{{1}}}|Credit Support}} under a {{{{{1}}}|Return Amount}}, the {{{{{1}}}|Transferee}} gets to choose which bit of {{{{{1}}}|Credit Support}} the {{{{{1}}}|Transferor}} sends back, out of what the {{{{{1}}}|Transferee}} originally posted. When the {{{{{1}}}|Transferee}} is calling for new {{{{{1}}}|Credit Support}} to cover an outright exposure, the {{{{{1}}}|Transferor}} gets to choose what {{{{{1}}}|Credit Support}} it sends from the agreed Eliigible {{{{{1}}}|Credit Support}} in the elections paragraph).

The self-help element is this: you don’t have to call for credit support. You are entitled to, but it is up to you to run the calculations and make the demand. If you don’t, the other party is not obliged to send you anything.

Each party therefore also “marks its own homework”. Should they not agree on their respective valuations, there is a dispute resolution process set out in Paragraph {{{{{1}}}|4}}.

Title transfer versus pledge

The English law CSAs generally operate under a title transfer construct, where the {{{{{1}}}|Credit Support}} is delivered outright against a contingent obligation on the Transferee to return “equivalent” — meaning fungible — {{{{{1}}}|Credit Support}}. As such, the {{{{{1}}}|Transferor}} has no legal or beneficial interest in {{{{{1}}}|Credit Support}} it has posted: it has only a debt claim against the {{{{{1}}}|Transferee}} for its return (which would be netted off against the {{{{{1}}}|Transferee}}’s debt claim against it under the ISDA Master Agreement). This is why an English law CSA is treated as a {{{{{1}}}|Transaction}}: it is, in every sense, identical to a physically settled asset swap.

The New York law CSAs operate as a security interest in the form of a pledge: {{{{{1}}}|Credit Support}} is posted by way of security, and the {{{{{1}}}|Transferee}} takes only legal title, holding beneficial interest in the {{{{{1}}}|Credit Support}} for the Transferor. This markedly changes the netting analysis. But — unless the option has been disapplied in the elections paragraph, the holder of pledged Credit Support is entitled to “rehypothecate” it — transfer it outright to a third party, against an obligation to return a fungible asset — and while U.S. attorneys may beg to differ this, to a jaundiced English lawyer, makes a NY law CSA materially identical to an English law one. Both are effectively, title transfer.