Independent Amount - CSA Provision
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ISDA 1995 English Law Credit Support Annex
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To be contrasted with variation margin, initial margin (in the ISDA troposphere known as an “Independent Amount”) is the amount of margin you hold in excess of current mark-to-market exposure. You hold it to cover the risk that the market moves suddenly against your counterparty at the same time as it implodes, all before you have a chance to make a further variation margin call.
If you look at it cold, this looks like a fixed currency amount that is paid at the beginning of a relationship, irrespective of how many Transactions you may have on. But it will be often defined as “an amount agreed between the parties or as otherwise advised by Party X”, which rather kicks the issue in to touch. In practice, it’s likely to be articulated as a multiplier on notional, and will be payable at the start of each Transaction, and may be adjusted on the fly.
- For example, a dealer who sets IA by reference to the perceived volatility of the Transaction might reserve the right to increase IA should that volatility unexpectedly change. You can be sure more than one risk officer embarked on an undignified scramble for her margin tables — and put in a desperate call to Legal — the day UK decided Brexit means Brexit[1], for example.
Particularly where underlying trades and markets are volatile, expect to see much customisation.
- The Independent Amount might be calculated by reference to a given multiplier for a given asset class: it is not uncommon to see tiering in FX transactions, for example, where Transactions on currencies in the highest tier might have a lower multiplier that those on the higher tiers.
- Especially where one counterparty is providing access to markets for the other party (so called synthetic prime brokerage) there may be a provision that the calculation agent can adjust tiers, multipliers, and the assets which are eligible for each tier in its discretion, and with effect to existing as well as new transactions. This can have the effect of retroactively adjusting Independent Amounts, in which case the difference can be called under the ordinary Transfer provisions.
Calculating your 1995 CSA
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[2] 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 ETee.
- The Transferor’s Independent Amount: The total Independent Amount Transferor must give the Transferee we will call IATor. 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 IATee. [3]. 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, (ETee + IATor - IATee + Threshold)].
Let’s plug in some numbers. Say:
- The Transferee’s Exposure is 10,000,000
- The Transferor’s Independent Amount IATor is 2,000,000
- The Transferee’s Independent Amount IATee 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, (ETee + IATor - IATee)].
See also
References
- ↑ and sterling gapped down 8%
- ↑ 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.