Credit Support Obligations - IM CSD Provision
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2018 ISDA Credit Support Deed (IM) (English law)
A Jolly Contrarian owner’s manual™ Credit Support Obligations in a Nutshell™
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Comparisons
Between US and English law
Here is a comparison between the 1994 NY CSA and the 1995 CSA. The differences are largely down to the security interest versus title transfer — you know Pledgor versus Transferor and so on.
Betweem OG and VM
The key difference between the OG CSAs and the 2016 VM versions: there is no Credit Support Amount concept in the 2016s, seeing as there is no initial margin to reference. (Right?) Instead, it just references the Counterparty’s Exposure.
Delivery Amount
Now the interesting thing here is the difference that pledged collateral under the New York law versions of the CSA makes over title-transferred collateral regime of the English law versions. You will see the difference in the NY law version’s Delivery Amount, which is the positive difference between Secured Party’s Exposure and the value of Posted Credit Support held by the Secured Party — easy, right? — and the equivalent provision in the English law versions which is the positive difference between the Transferee’s Exposure and the Credit Support adjusted to exclude any inflight but unsettled collateral movements.
The English law versions are a bit more leaden in how they describe things but these amount to the same thing: you don’t get any credit (support) for collateral until it has landed with the other party.
This creates some curious scenarios, as you will see.
Return Amount
The only differences here are the liberal, but all the same redundant, spraying of “(VM)” all over the shop in the 2016, a single reference to the Regular Settlement Day in place of the, er, regular Settlement Day and the fact that the balance is deducted from the Credit Support Balance in the 1995, but the Transferee’s Exposure in the 2016 (there not being a “Credit Support Amount” in the 2016), for reasons which are explored more fully below).
Basics
The overall vibe of a 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 “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 Eligible Credit Support from the party who would be due to pay it.
Title transfer versus pledge
English law CSAs are title transfer CSAs. Credit Support is delivered outright against a contingent obligation on the Transferee to return “equivalent” — meaning fungible — Credit Support. As such, the Transferor has no legal or beneficial interest in Credit Support it has posted: it has only a debt claim against the Transferee for its return (which would be netted off against the Transferee’s debt claim against it under the ISDA Master Agreement). This is why an English law CSA is treated as a Transaction: it is, in every sense, identical to a physically settled asset swap.
New York law CSAs are security interest CSAs: Credit Support is posted by way of security, and the Transferee takes only legal title, holding beneficial interest in the 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 arrangements.
English law Credit Support Deeds, such as the 2018 English law IM CSD, are security interest CSAs. They do not generally allow reuse: for the Ancient version, it wouldn’t make any sense to take under a pledge/custody model, mark yourself in scope for CASS and all that carry on, and then deliver away the collateral: if you wanted to do that it would be better tpo just use a normal title transfer CSA. As a result the 1995 ISDA Credit Support Deed is seldom spoken of, an even more seldom seen. The 2018 English law IM CSD, being a regulatory IM document, specifically forbids reuse of collateral. The whole point of reg IM is that someone sensible is meant to sit on it at all times.
Credit Support Balance v Posted Credit Support
Quick terminology check: “Eligible Credit Support”, once delivered to the person demanding it under a title transfer CSA is called the “Credit Support Balance” and under a security interest CSA is called “Posted Credit Support”. This seems annoying, and is, but ISDA’s crack drafting squad™ has its reasons, as ever. The difference reflects their differing ontological statuses. True.
Collateral posted under a title transfer CSA goes outright, leaving the deliveror only a simple debt claim for an equivalent asset. There is no sense of custody; no bailment; no lingering interest in what has been sent away. It is not like it has been posted into a cubby-hole to be kept safe and sound and later returned. Hence, it is just a “Credit Support Balance”.
Collateral posted under a security interest CSA is “posted” on that basis; there is a (conditioned) expectation of getting back the same thing you sent. This expectation is annihilated by the act of rehypothecation, but still, in theory, it is for an instant there. Hence what you have is “Posted Credit Support”.
However compelling the intellectual grounds for the distinction, in practice it is annoying, especially if you happen to be speaking generally about ISDA Credit Support Annexes of either kind, as the JC is. For ease of deference to his usual slapdash way of thinking about things JC will refer to either as simply “Credit Support”. that can probably apply loosely to Eligible Credit Support, which is te universe of collateral which, by rights, could be posted under the CSA even if it has not necessarily been yet.
The Basic Idea
The basic idea is that Credit Support creates an offsetting value under the CSA which, when set off against the net market exposure under the ISDA Master Agreement proper, would equal zero, or at any rate an acceptably low number: pre-agreed Thresholds, Independent Amounts, Minimum Transfer Amounts may intervene to make that number something other than zero, and Exposure and the value of extant 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. The person holding Credit Support must factor its value into its demand.
Where a party is seeking new Credit Support to cover its own outright Exposure, that is a “Delivery Amount”. Where it is seeking to “call back” Credit Support it has already delivered, that is called a “Return Amount”.
The difference between Delivering and Returning
There is not much of a difference, but there is some: with a Return Amount, the Transferee gets to choose which bit of Credit Support the Transferor sends back, out of what the Transferee originally delivered. When the Transferee is calling for a Delivery Amount the Transferor gets to choose from the agreed Eligible Credit Support table in the elections paragraph.
The self-help element is this: you don’t have to call for Credit Support. You may be 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 the parties not agree on their respective valuations, there is a dispute resolution process set out in Paragraph 4.
Paragraph 3(c) of the 2018 IM Credit Support Deed on margin mechanics
There is quite a lot in Paragraph 3 of the 2018 English law IM CSD, and rather than setting it all here, we have created a whole page for Paragraph 3(c), seeing as it has no equivalent in the variation margin CSAs.
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See also
- Credit Support Amount (if you have an OG CSA)