Template:Csa Events of Default summ

Grace periods

Those of ISDA credit support arrangements that are standalone Credit Support Documents — the 1994 NY CSA, 2016 NY Law VM CSA and the 2018 English law IM CSD, but not the 1995 CSA and the 2016 VM CSA — bake in their own two {{{{{1}}}|Local Business Day}} grace period into their own customised Events of Default.

The 1995 CSA and 2016 VM CSA, being Transactions, don’t need to and inherit the grace periods for the Events of Default in the ISDA Master Agreement.

That can, at the limit, create a dissonance for Americans and IM posters, as your CSA grace periods do not automatically track your ISDA ones. Two {{{{{1}}}|Local Business Day}}s is an LBD longer than the standard one LBD grace period in the 2002 ISDA, and an LBD shorter than the standard 3 LBD grace period baked into the 1992 ISDA.

Which is nice. This is not a problem for the English law Credit Support Annexes that are Transactions.

Default

Title transfer versions

The {{{{{1}}}|default}} paragraph explains how you value the CSA itself — being a Transaction in its own right, of course — when closing out an ISDA Master Agreement. The basic gist is that you treat the {{{{{1}}}|Credit Support Balance}} as of the Early Termination Date — being the total value of the {{{{{1}}}|Credit Support}} you have ponied up at any time — as an Unpaid Amount, rather than treating is as a contingent return obligation, the present value of which would go into the Close-Out Amount (or Loss, or Market Quotation, if you still labour under an antediluvian 1992 ISDA).

Why does it reference “Unpaid Amounts”?

While technically a title transfer CSA is a Transaction in its own right, it is still a weird Transaction. The standard “replacement cost” valuation method doesn’t work brilliantly: whereas a normal Swap Transaction has defined payments upfront, each of which can be valued and discounted back to the present to reveal a present value, payment obligations under a {{{{{1}}}}} depend on the aggregate discounted cashflows of all the other Transactions under your ISDA Master Agreement which the {{{{{1}}}}} covers. So good luck determining, in the abstract, the “replacement cost” of something like that.

But the good news is you don’t have to: the {{{{{1}}}|Credit Support Balance}} isn’t calculated by reference to discounted future cashflows: rather, it is just the inverse of the aggregate present value of all the other Transactions under the ISDA Master Agreement. Which figures: that is, after all, what the CSA is suppose to produce. So the “replacement cost” on any day is just the prevailing value of the {{{{{1}}}|Credit Support Balance}}. It’s easier to treat that as an Unpaid Amount (none of this tedious mucking about with replacement costs and so on). But that means you have to deem the Close-Out Amount as zero.

Do not read this following paragraph if you can humanly avoid it as it will make you cry.

Or, if you are under an unmodded 1992 ISDA, the Market Quotation/Loss, as the case may be. Spoddy point: “Loss” includes the “Unpaid Amount” concept in its definition:

“Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made...”

Market Quotation does not include Unpaid Amounts, but no-one in their right mind uses it anyway, and those that do will find there are no Market Quotations, whereupon it defaults to Loss. So there is that.

Including “comprehensive” Termination Events

Consider expanding of the {{{{{1}}}|Default}} provision to include “Termination Events where all Transactions are Affected Transactions”. This is as per Section 3.2 of the 2001 ISDA Margin Provisions which recommend that Paragraph {{{{{1}}}|6}} of the CSA should apply where all Transactions are closed out following an Event of Default or “{{{{{1}}}|Specified Condition}}” — the latter of which is defined to include the Termination Events listed under the ISDA Master Agreement. All Transactions would likely be Affected Transactions should a Credit Event Upon Merger or Additional Termination Event occur.