Interpretation - IM CSD Provision
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2018 ISDA Credit Support Deed (IM) (English law)
A Jolly Contrarian owner’s manual™ Interpretation in a Nutshell™
Original text
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Comparisons
Between the OG CSAs and VM versions: Big change between 1995 and 2016 is the addition of Paragraph 1(b) in the 2016 VM CSA, rabbiting on about Other CSAs, Covered Transactions and so on.
Between English law and New York law: The New York version also has a Para 1(b) to explain what the reference to “Secured Parties” is all about. This is not germane to the title transfer-style English law versions of the Annex.
Between VM and IM: The 2018 English law IM CSD is, unusually for an English law document, a security interest arrangement which does not count as a Transaction. There is a bit to clarify in the Interpretation section as to all of this.
And then there is a sneaky extra bit of interpretation at the back end of the 2018 English law IM CSD in para 11(j). Would you look at that.
Basics
A paragraph of unremarkable, if unnecessary, throat-clearing, the “definitions and inconsistency” clauses are largely the same across all versions of the CSA.
“Transfer”
With one exception: the English law versions, but not the New York law ones, are marred by a bizarre for the avoidance of doubt rider which is both a non sequitur — no one was talking about “transfers” here, much less was in any particular state of doubt about them — but also an own goal: rather than avoiding doubt, this rider does nothing quite so much as introduce it.
Wait: was I meant to be doubting something here? Should I have been confused? Have I missed something?
There is nothing a cheerful attorney likes more than to worry about things, and she will toss sleeplessly for nights on end, fully occupied by questions such as — is “delivery” of cash different from “payment” of it? Is there something legally significant about “payment” that I somehow missed, in Banking Law 302, in 1989?
Tell your legal eagles to relax. It won’t do any good, but you can tell them. To the best the JC can figure out, all this means is that a Transferor must physically part with its collateral, handing it bodily over to the Transferee.
There is an interesting question as to what this might mean if your counterparty is also your banker, and you direct it to transfer credit support into the bank account you maintain with it, meaning that legally the counterparty hasn’t done anything with the cash at all — not an unusual scenario, should you be a hedge fund and the counterparty your prime broker — but this will set your legal eagles off again, and we don’t want that. We are just getting started.
Nomenclature
Being an annex to an ISDA Master Agreement, references to the “Agreement” means that particular ISDA Master Agreement; the “Annex” is the credit support annex and, if you were pedantic enough that you really felt the need to refer to it, the “Schedule” is the schedule to the ISDA Master Agreement.
Covered Transaction
As a concept, “Covered Transaction” only arrived in the 2016 VM CSA, in Paragraph 1(b). It is in the 2016 NY Law VM CSA, too, in Paragraph 1(c).
In the 1990s versions of the CSA, the neatest way of describing whether a given set of Transactions is covered or not is to say something like:
“[SPECIFY] Transactions will [not] be relevant for purposes of determining “Exposure” under the Credit Support Annex.”
But what does “Other CSA” mean?
This “Other CSA” talk has in mind those who, in 2016, wished to “grandfather” Transactions which were already live when the regulatory margin obligations came into force, but which therefore preceded it and were out of scope for it.
Cue a monstrously painful dual-CSA regime where new transactions were margined under a new, regulatory margin-compliant 2016 VM CSA, and old ones were allowed to roll off on the clapped-out (but somehow better, right?) “other” 1995 CSA.
No doubt this made sound commercial sense in 2016. But a few years later, for all except those with 30-year inflation swaps on the books, all this “Other CSA” chat is just barnacle-encrusted confusion for everyone.
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