Credit Support Balance (VM) - VM CSA Provision
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2016 ISDA Credit Support Annex (VM) (English law)
Paragraph Credit Support Balance (VM) in a Nutshell™ Use at your own risk, campers!
Full text of Paragraph Credit Support Balance (VM)
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Content and comparisons
Except for that cheeky parenthetical “and as adjusted pursuant to Paragraph 5(c)(ii)” — abandon hope all ye who enter there, but knock yourself out if you really must — together with the dreary scattering of “(VM)” all over the shop and a reversion to the archaic expression “thereof”, this is the same in the 1995 CSA as for the 2016 VM CSA.
Summary
The Credit Support Balance is an important part of the recipe when cooking up a Delivery Amount or Return Amount, because it is essentially the amount of credit support you have already posted. The transfer will, therefore, be your Credit Support Amount/Exposure less that sum.
In its own special way it is also a little impish, because it comes and goes depending on how you are doing. If you are doing really well (here’s hoping!) it will be your counterparty’s Credit Support Balance, and you won’t have one.[1] This means, if all the Transactions were terminated and the counterparty settled them in full, you would have to give that Credit Support Balance back. But the moment your luck turns, you don’t have a {Credit Support Balance any more, but your counterparty does. This is all quite hard to explain elegantly, so ISDA’s crack drafting squad™ doesn’t really try, but the unusual nature of a swap as a bilateral agreement is really the problem.
Note that Interest Amounts and Distributions, as long as they (i) have not yet been returned to the Transferor and (ii) are Eligible Credit Support, are included in the Credit Support Balance. Needless to say, amounts that are not Eligible Credit Support aren’t counted towards the Credit Support Balance but an amount due by Transferee to Transferor which would be Unpaid Amounts on an Event of Default etc, and for which Transferor would be an unsecured creditor.
Note, per the definition of Value, “items that are comprised in a Credit Support Balance and are not Eligible Credit Support” are valued at zero.
General discussion
Ineligible Credit Support
Credit Support which has been delivered but has subsequently fallen out of eligibililty criteria (and any non-eligible Distributions and Interest Amounts received in respect of Eligible Credit Support) remains part of the Credit Support Balance, but is valued at zero.
While the world is moving towards a predilection for cash only, single currency CSAs, so this objection might soon seem archaic, in the mean time note a whopping great hole in the CSA documentation here. What happens to stuff which, when you posted, was Eligible Credit Support, but after posting it ceases to be eligible? How do you get it back?
On the face of it, it’s straightforward:
the Value of “any items that are comprised in a Credit Support Balance and are not Eligible Credit Support is zero.”
So it doesn’t count to the Credit Support Balance. But just because something has no “Value” under your CSA doesn’t mean it has no value at all. There’s no accounting for taste, after all. If the Transferee doesn’t want it, it should give it back, right?
Sans doubte, that’s what the boxwallahs at ISDA had in mind. But — whoops — that’s not quite what they managed: The mechanism for getting your posted collateral back is to wait for the Exposure to reduce, and then call back equivalent items to those you posted. But even the day your Exposure goes to (or through) zero, you can call only back Equivalent Credit Support with a Value equal to your existing Credit Support Balance - in the eyes of the CSA, that is all you have posted.
But the CSA has no eyes for your previously posted, now ineligible, collateral. It is blind to it: your ineligible collateral has a “Value” of zero, the Transferee discharge its Return Amount obligation without giving any of the ineligible stuff back. It gets trapped in a kind of parallel universe, like the Nosferatu the unposted, it neither lives nor dies, but ceaselessly roams the afterlife, seeking true love and haunting the dreams of every negotiator.
Most houses have long since crafted language to deal with this contingency. I say “crafted” but “congealed” is a better description: the standard formulations are a tedious clutter of masticated paragraphs that interrupt the elegant flow of your elections, impeding the flow like a tacky mess that accumulates around the nozzle of a ketchup dispenser. All you really need to say is this:
If at any time any item comprising a Credit Support Balance ceases to be Eligible Credit Support the Transferee must transfer to the equivalent items of the same type, nominal value, description and amount to the Transferor on the Settlement Day following the demand by the Transferor.
You don’t need to make this transfer conditional on the Transferor ponying up replacement Eligible Credit Support - Q.E.D. this stuff has no Value, so his Credit Support Balance will be suddenly in debit, and the Transferee can call additional Delivery Amount independently of the return of this item.
See also
Template:M sa 2016 CSA Credit Support Balance (VM)
References
- ↑ Especially if we are on a 2016 VM CSA. If Independent Amounts are involved it is all a bit more confusing, because you may be net in the money, but you have still got a Credit Support Balance.