Value - VM CSA Provision
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ISDA 2016 English Law VM Credit Support Annex
A Jolly Contrarian owner’s manual™ Valuation in a Nutshell™
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Comparisons
This is a collection of provisions relating to “valuation”. Clearly a pretty important part of a credit support arrangement, most of the operative provisions land in the Calculations and Dispute Resolution sections.
“Valuation ~” versus “Calculation ~”
You know that feeling you sometimes get that a business you are obliged to transact with — an insurer or a low-cost airline, for example — is deliberately making things hard for you to understand or challenge, in the hope that a large proportion of the customers simply won’t bother leaving the business to be able to charge for the service without actually providing it? Well, it seems like ISDA’s crack drafting squad™ are doing that here. For in the “Annex” versions of the CSA, ancient and modern, the Dates, Times, Locations and Agents which concern themselves with assessing the Value of the components of Credit Support are rejoice under the adjective “Valuation”. For reasons only known to a cruel almighty, the IM CSD uses the word “Calculation”. Why, readers? Why?
Value
The 2016 VM CSA adds in the FX Haircut Percentage into the multiplier, that being (in some jurisdictions) a fairly hefty surcharge for those people who like to collateralise in a currency other than the one in which their derivatives are denominated, and also (partially) corrects the snafu about ineligible credit support, at least on a Default.
Once there is a Default, you are working things out, and FX Haircut Percentages and Valuation Percentages no longer matter because rather than assigning a notional value for the asset in the Base Currency if liquidated — and therefore giving yourself a little buffer for rainy day and so on — the rainy day has arrived. You are actually liquidating the asset, which will already have yesterday’s haircut applied to it, the counterparty isn’t to be giving you any more, and the money you raise from selling the Credit Support Balance, whether eligible or not, is real money, it really pays down your claim, and you have to account to the Defaulting Party’s administrator for anything left once you have closed out your ISDA.
Valuation/Calculation Date
The Valuation terms as between 1994 NY CSA and 1995 CSA didn’t change a great deal: here is a comparison. It got a bit more hinky with the arrival of the Modern CSAs: here’s a comparison between the 1995 and the 2016 VM CSAs.
Whereas the OG CSAs are kind of laissez-faire — yo, dudes, put whatever you like in the elections para, you know — because a credit support annex back then was a bit of a wheeze, and no-one really understood it — in the intervening 21 years ISDA’s crack drafting squad™ got all nudgy.
So they say “every business day” unless you specify something else and, like, you are not going to specify something else, are you, because regulatory rules say it has to be every day.
Note also the introduction in 2016 of a Template:VmcsaprovValuation Date Location: each party gets to choose one, being its own hometown. If you’re off dancing the maypole, or whatever collective cultural tradition you follow in your part of the world (In the Czech Republic, I am told, at Easter the boys chase the girls round the kitchen table with riding crops. Which sounds kind fun), then you should have no fear you’ll get called on to make a collateral transfer.
Valuation/Calculation Time
The Template:VmcsaprovValuation Time definition loosens up somewhat in the Modern CSAs. More discussion of that below, and here is a comparison, for the fiendishly interested.
Basics
“Valuation Agent”
Just why one needs to call the person making a demand for Credit Support under a CSA a Valuation Agent, and not — well, the Party making the demand — seeing as that person is acting for themselves is not in any sense anyone’s agent (no, you can’t be your own agent, however much legal eagles would like that to be so. The principle — which I just made up but based off a real Latinism, is nemo agens in causa sua.)[1]
The starting proposition, which hasn’t really changed since the salad days of the First Men at the dawn of the Age of Swaps, is that if you are a big enough boy to trade derivatives, you are big enough — short hand for “have a treasury function of some kind competent enough” — to calculate your own margin requirements. This largely remains the case, though there are a few categories of financial services fauna who are not: Repackaging vehicles, for one, and investment funds who have outsourced their asset management to an investment adviser for another — and those margin borrowers and hedgies with prime brokerage relationships may find them being obliged to hand over the margin function, all for fairly sensible reasons.
And show me the legal eagle who doesn’t like a multi-level waterfall replacement Valuation Agents, reference dealers, law society presidents, professional arbitrators and other fallback waifs and strays should the parties not enjoy their agents’ valuations, should they not be forthcoming in a timely way etc.
Calculation/Valuation Date
Each day on which you can expect to exchange variation margin under a Credit Support Annex, which is:
- 1994 NY CSA and 1995 CSA: Whatever you specified in your elections paragraph and, the older your document is, the more likely it is to be an arbitrary and quite unnervingly long period.
- 2016 NY VM CSA and 2016 VM CSA: Unless otherwise specified in the elections paragraph, every day on which you’re both in the office in at least one of your Valuation Date Locations. Should the parties specify otherwise in their elections? No. Why would they? Will they? Experience suggests, for a dogged minority, they just might. Don’t be that guy.
Valuation/Calculation Time
A bit of an evolution in the concept of the Valuation/Calculation Time between the OG CSAs and Modern CSAs.
In the OG CSAs, the Valuation Time defaulted to one of close of business on the Valuation Date — which figures, intuitively — or close of business on the Local Business Day immediately before the Valuation Date — which doesn’t, as a matter of cold semantic logic make sense, but okay, the time by reference to which you calculate a value, does not have to be on the same day that you actually calculate it, as long as it has already happened. Fine. When you think about it the Template:VmcsaprovValuation Time being at the close of business on a Template:VmcsaprovValuation Date implies that the point in the day at which you are actually performing your valuation calculations is, well, after closing time: the bell has rung and everyone has started drifting home. That doesn’t make a lot of sense either. But hey ho.
In the Modern CSAs the Template:VmcsaprovValuation Time is quite a lot looser. If you haven’t fiddled with it, the Template:VmcsaprovValuation Time is the Template:VmcsaprovValuation Agent’s normal time for calculating end-of-day valuations — which need not, therefore, be the actual end of the day — or any other commercially reasonable time “on the relevant day”. “Day”, not “date”, and not Template:VmcsaprovValuation Date, so it could still be the preceding day, but logically it doesn’t make a lot of sense (we think) to presume it could be afterwards.
Valuation Percentage
To be differentiated from an Independent Amount, the Valuation Percentage is the haircut applied to the valuation of any assets posted as Credit Support. So it is a deduction in the value of credit support provided, whereas an Independent Amount is an addition to the mark-to-market exposure under a Transaction.
“Base Currency Equivalent of bid price”
It is not unknown to amend limb (ii) to include “the Base Currency Equivalent of the bid price obtained by the Template:VmcsaprovValuation Agent multiplied by the nominal amount of such security”.
This is presumably to cater for the pedantic argument — just the sort of argument that a diligent legal eagle with nothing better to do loves to run — that a “bid price” could be a percentage figure of a nominal amount, instead of a cash value, and this might upset the calculation. I mean, really.
But even if a “price” isn’t necessarily a cash amount — to be sure, trading folk do talk that way sometimes, even if most sensible working folk don’t — the idea of the “Base Currency Equivalent” of that price certainly turns it into one. You can’t exactly have “USD 86%”, can you? And if the Eligible Credit Support includes collateral other than cash or debt instruments (e.g., equities), reference to a nominal amount multiplier is potentially confusing.
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See also
References
- ↑ See: nemo iudex in causa sua