Exposure - CSA Provision

CSA Anatomy™

“Exposure” means, with respect to a party on a Valuation Date and subject to Paragraph 4 in the case of a dispute, the amount, if any, that would be payable to that party by the other party (expressed as a positive number) or by that party to the other party (expressed as a negative number) pursuant to Section 6(e)(ii)(1) of this Agreement if all Transactions (other than the Transaction constituted by this Annex) were being terminated as of the relevant Valuation Time, on the basis that (i) that party is not the Affected Party and (ii) the Base Currency is the Termination Currency; provided that Market Quotations will be determined by the Valuation Agent on behalf of that party using its estimates at mid-market of the amounts that would be paid for Replacement Transactions (as that term is defined in the definition of “Market Quotation”).

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Resources Full wikitext \| Nutshell wikitext English Law \| 1 Interpretation \| 2 Credit Support Obligations \| 3 Transfers, Calculations and Exchanges \| 4 Dispute Resolution \| 5 Transfer of Title, No Security Interest, Distributions and Interest Amount \| 6 Default \| 7 Representation \| 8 Expenses \| 9 Miscellaneous \| 10 Definitions \| 11 Elections and Variables · Base Currency and Eligible Currency · Credit Support Obligations · Valuation and Timing · Exchange Date · Dispute Resolution · Distributions and Interest Amount · Addresses for Transfers · Credit Support Offsets · Other CSA 2018 ISDA Credit Support Deed for Initial Margin Index: Click ᐅ to expand: CSA

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Note - cleverly, Exposure omits the mark-to-market exposure of the transaction comprising the 1995 CSA itself, because that would entirely jigger things up: the MTM of an ISDA including the CSA is, of course, more or less zero.

Discussion

Market Quotation? But I have a 2002 ISDA:Note the references to Market Quotation and other 1992 ISDA specific things. If you are under a 2002 ISDA, these should be corrected. Of you could sign up to the 2002 ISDA Master Agreement Protocol and that would do it for you.
Mid-market?: A slight cognitive dissonance: It talks about your 6(e)(ii) amount - which is generally your replacement cost, at your side of the market, but then goes on to say determined at the mid-market price...

Calculating your {{{{{1}}}|Credit Support Amount}}

Superficially things are quite different between the 1995 CSA and the 2016 VM CSA, but this all boils down to the fact that the 2016 VM CSA is meant to be a zero-threshold, variation margin-only affair, so the concepts of Independent Amount and Threshold, both of which confuse the 1995 CSA, aren’t there to get in the way. Unless you go and put them in anyway, as we shall see...

1995 CSA

How the IA contributes to the Credit Support Amount — being the amount of credit support in total that one party must have given the other at any time^[1] under the 1995 CSA can be mind-boggling.

It pans out for a Transferee like so:

The Transferee’s Exposure: the net mark-to-market value the Transferor would owe the Transferee under all outstanding Transactions if they were closed out (not counting, of course, the 1995 CSA itself). Call this E_Tee.
The Transferor’s Independent Amount: The total Independent Amount Transferor must give the Transferee we will call IA_Tor. You can add this to the Transferee’s Exposure, but then you must remember to deduct ...
The Transferee’s Independent Amount: Any Independent Amount the Transferee has to pay the Transferor. Call this IA_Tee. ^[2]. Lastly don’t forget to take into account ...
The Transferor’s Threshold: Any Threshold that applies to the Transferor being the Exposure it is allowed to represent before it has to post variation margin in the first place.

This leaves you with a formula for a Transferee’s Credit Support Amount as follows: Max[0, (E_Tee + IA_Tor - IA_Tee + Threshold)].

Let’s plug in some numbers. Say:

The Transferee’s Exposure is 10,000,000
The Transferor’s Independent Amount IA_Tor is 2,000,000
The Transferee’s Independent Amount IA_Tee is 0
The Transferor’s Threshold is 5,000,000

Your Credit Support Amount is therefore the greater of zero and 10,000,000 + 2,000,000 - 0 + 5,000,000) = 7,000,000.

Now, whether you have to pay anything or receive anything as a result — whether there is a Delivery Amount or a Return Amount, in other words — depends whether your Credit Support Amount is greater or smaller than your prevailing Credit Support Balance, by at least the Minimum Transfer Amount.

2016 VM CSA with no IA amendment

Since the 2016 VM CSA assumes there is no Independent Amounts and no Thresholds, it is quite a lot easier. It is just the Exposure. So much so, that there isn’t even a concept of the “Credit Support Amount” under the 2016 VM CSA, unless you have retrofitted one, and who in their right mind would do that?

Oh.

You have, haven’t you. You’ve gone and co-opted the Credit Support Amount (VM/IA) concept in your Paragraph 11 elections. Yes you did. No, don’t blame your credit department; don’t say you were just following orders. You did it.

2016 VM CSA with a customised IA amendment

Never mind. Well, just for you, the formula is a sort of half-way house: Under this unholy bastardisation of a 2016 VM CSA, a Transferee’s Credit Support Amount will be: Max[0, (E_Tee + IA_Tor - IA_Tee)].

References

↑ As opposed to the amount required to be transferred on that day, considering the “Credit Support Balance” the Transferee already holds — that’s the Delivery Amount or Return Amount, as the case may be.
↑ There’s something faintly absurd both parties exchanging Independent Amounts by title transfer — they net off against each other — but that’s as may be. Stupider things have happened. SFTR disclosure, for example.

[1] As opposed to the amount required to be transferred on that day, considering the “Credit Support Balance” the Transferee already holds — that’s the Delivery Amount or Return Amount, as the case may be.

[2] There’s something faintly absurd both parties exchanging Independent Amounts by title transfer — they net off against each other — but that’s as may be. Stupider things have happened. SFTR disclosure, for example.

[1]

[2]