Disputed Calculations or Valuations - CSA Provision
1995 CSA in a Nutshell™ (4(a) edition)
4(a) Disputed Calculations or Valuations. If a Disputing Party disputes any collateral call (the Value of either the Exposure or the Credit Support being transferred):
- it must give notice by close of business on the following Local Business Day:
- it must transfer any undisputed amount by close of business on the following Settlement Day;
- the parties will try resolve the dispute. If by the Resolution Time they haven’t:
- Disputes as to Exposure: the Valuation Agent will recalculate any disputed Exposure as of the Recalculation Date by averaging the mid-market quotations from those Reference Market-makers who will provide one (if none will, the Valuation Agent’s original calculations will stand); and calculating the outstanding Credit Support Balance as per Paragraph 11(e)(ii);
- Disputes as to Credit Support Value: recalculating the Value as of the date of transfer.
The Valuation Agent will notify each party by the Notification Time on the Local Business Day following the Resolution Time. Then the appropriate transfer has to be made.
A topic that could unfurl like the flower of a deadly insect-eating nightshade if you let it. The
The dispute can be a valuation of two things:
- The Transaction value (when calculating Exposure); or
- or the Value of posted collateral (or to-be-transferred Eligible Credit Support.
Let's take the easy one first: if you are a smart fellow and have moved to a cash-only single-currency 2016 VM CSA then there's not really much to argue about in terms of the Value of the posted credit support.
The Transaction exposure has a different complexion. Some asset classes (FX, synthetic equity) are pretty observable, and again, there is not much to argue about. Others are not - the less liquid they are, the more likely the broker is to refuse any dispute rights when carrying out its Calculation Agent function under the ISDA.
But doesn't the self-help valuation model under the CSA drive a coach and horses through the carefully constructed Calculation Agent language on which the broker counterparty has just insisted, to the point of threatening to die in a ditch about it?
It may seem so, but in practice no. Firstly, the dispute mechanism in the CSA, while fulsome, reflects the uncynical attitude of yesteryear in its asiprations for what third parties will be prepared to do. it depends on the better angels of a Reference Market-maker’s nature — neigh, four of the blighters — in providing firm quotations to be dissected, arithmetically averaged and arranged for the delight of all. But a moment’s reflection should tell you that Reference Market-makers don’t have a better nature. They are almost certain not to provide a quote, which brings them no benefit (they can’t get a trade out of it) and - and for synthetic equity, FX etc that is pretty observable (just take the day's closing price) which in this case is cash. so (a) the practical likelihood of dispute is low to nil and (b) the means of resolving set out in the CSA, though conceptually painful (prevailing on the better nature ofaveraging quotes and so on) in practice won’t work (precisely because ) and the default if nooine will give a quote is the Valuation Agent's calculation.
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CSA Anatomy™
4(a) Disputed Calculations or Valuations. If a party (a “Disputing Party”) reasonably disputes (I) the Valuation Agent’s calculation of a Delivery Amount or a Return Amount or (II) the Value of any transfer of Eligible Credit Support or Equivalent Credit Support, then:
Following a recalculation pursuant to this Paragraph, the Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) as soon as possible but in any event not later than the Notification Time on the Local Business Day following the Resolution Time. The appropriate party will, upon demand following such notice given by the Valuation Agent or a resolution pursuant to (3) above and subject to Paragraph 3(a), make the appropriate transfer.
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