Exposure - NY VM CSA Provision
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2016 ISDA Credit Support Annex (VM) (New York law)
Paragraph Exposure in a Nutshell™ Use at your own risk, campers!
Full text of Paragraph Exposure
Related agreements and comparisons
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Differences between versions
The difference between the two versions of English law CSA (see link in box for comparison) is that the 1995 CSA assumes you are trading under a 1992 ISDA, using the Market Quotation valuation technique — which kind of figures, since the 2002 ISDA with its Close-out Amount methodology hadn’t then been invented — whereas the 2016 VM CSA version contemplates you having a either a 1992 ISDA or a 2002 ISDA and provides for them in the alternative.
The 2016 NY Law VM CSA tracks the 2016 VM CSA closely with two curious exceptions: Firstly, when imagining its hypothetical termination of all Transactions it doesn’t explicitly carve out the Transaction constituted by the 2016 NY Law VM CSA itself — which is odd, because if you were treating it as a Transaction to be hypothetically included, you necessarily get a value of zero, since its value should be the exact negative of whatever the net mark-to-market value of all the other Transactions are — and secondly it does not hypothetically suppose that the Secured Party is the Unaffected Party, thereby getting to be in the driver’s seat when constructing the necessary valuations.
The reason you don’t have to except a 2016 NY Law VM CSA from hypothetical termination is buried deep in its earthen ontological root system. Are you ready?
Deep ontological differences between NY and English law versions
Unlike a title transfer English law CSA which is expressed to be a Transaction under the ISDA Master Agreement, the 2016 NY Law VM CSA is not: it is instead a “Credit Support Document”: a standalone collateral arrangement that stands aloof and apart from the ISDA Master Agreement and all its little diabolical Transactions. The reason for this is — spoiler: it’s not a very good one — because while a English law CSA, by being a title transfer collateral arrangement, necessarily reverses the indebtedness between the parties outright, an 2016 NY Law VM CSA (and, for that matter, an English law English law CSD) does not: it only provides a security interest. The in-the-money counterparty is still in-the-money. It is just secured for that exposure. The outright exposure between the parties does not change as a result of the pledge of credit support.
This is magical, bamboozling stuff — deep ISDA lore — and, at least where rehypothecation is allowed under Paragraph 6(c) of a 2016 NY Law VM CSA — it pretty much always is — it serves no real purpose, because even though you say you are only pledging the collateral, in the the greasy light of commercial reality, from the moment the Secured Party rehypothecates your pledged assets away into the market, dear Pledgor you have transferred your title outright.