Return Amount - CSA Provision

ISDA 1995 English Law Credit Support Annex A Jolly Contrarian owner’s manual™ Go premium Crosscheck: For corresponding provisions in other CSAs see the table 👇 2(b) in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. Original text: edit 2(b) Return Amount. Subject to Paragraphs 3 and 4, upon a demand made by the Transferor on or promptly following a Valuation Date, if the Return Amount for that Valuation Date equals or exceeds the Transferee’s Minimum Transfer Amount, then the Transferee will transfer to the Transferor Equivalent Credit Support specified by the Transferor in that demand having a Value as of the date of transfer as close as practicable to the applicable Return Amount (rounded pursuant to Paragraph 11(b)(iii)(D)) and the Credit Support Balance will, upon such transfer, be reduced accordingly. Unless otherwise specified in Paragraph 11(b), the “Return Amount” applicable to the Transferee for any Valuation Date will equal the amount by which: (i) the Value as of that Valuation Date of the Transferor’s Credit Support Balance (adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such Valuation Date) exceeds (ii) the Credit Support Amount. The varieties of ISDA CSA Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng Preamble Pre Pre Pre Pre Pre Interpretation 1 1 1 1 1 Security Interest 2 - 2 - 2 Credit Support Obligations 3 2 3 2 3 Transfers, Calculations and Exchanges - 3 - 3 - Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4 Dispute Resolution 5 4 5 4 5 Holding and Using Posted Collateral 6 - 6 - 6 Transfer of Title, No Security Interest - 5 - 5 - Events of Default 7 6 7 6 7 Rights and Remedies 8 - 8 - 7 Representations 9 7 9 7 9 Expenses 10 8 10 8 10 Miscellaneous 11 9 11 9 11 Definitions 12 10 12 10 12 Elections and Variables 13 11 13 11 13 Resources and Navigation Index: Click ᐅ to expand: 1994 NY CSA 1995 CSA 2016 VM CSA

Overview

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The only differences here are the liberal, but all the same redundant, spraying of “(VM)” all over the shop in the 2016, a single reference to the Regular Settlement Day in place of the, er, regular Settlement Day and the fact that the balance is deducted from the Credit Support Balance in the 1995, but the Transferee’s Exposure in the 2016 (there not being a “Credit Support Amount” in the 2016), for reasons which are explored more fully below).

Summary

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Calculating Delivery Amounts and Return Amounts

Differences between 1995 CSA and 2016 VM CSA

Under a 2016 VM CSA there is no Independent Amount or Threshold, so there is no need for a Credit Support Amount (which is Exposure adjusted by applicable Independent Amounts and Thresholds) — everything keys off the plain old Exposure.

Unless, that is, you have retrofitted your 2016 VM CSA to include Independent Amounts. The below assumes you have done that. Because some genius in your credit department will have decided this is really important. If you haven’t, it is a bit easier: just substitute “Credit Support Amount” for “Exposure”. For more on this stimulating topic, see Credit Support Amount (VM/IA).

Delivery Amounts

First: work out your Credit Support Amount. This is:

Transferee’s Exposure + Net Independent Amounts (IF ANY)

Second: calculate the Value of the Transferor’s Credit Support Balance. This is basically the prevailing value of the Eligible Credit Support (and income on it) that the Transferor has ponied up at that time.
Third: Deduct the Credit Support Balance from the Credit Support Amount. Fourth: If the difference from the sum you did in (3):

is less than zero, KEEP QUIET. If you are lucky, the other guy won’t ask you for a Return Amount.

is more than zero but less than the Minimum Transfer Amount, also KEEP QUIET. No Delivery Amount for you today, because you haven’t exceeded the Minimum Transfer Amount, so you are not entitled to one.

is more than the Minimum Transfer Amount you can demand the whole amount (I.e., not just the bit over the MTA).

Return Amounts

Basically the converse of a Delivery Amount. In this case you deduct the Credit Support Amount from the Credit Support Balance.

What about in-flight Credit Support deliveries?

So yesterday you met a margin call by delivering a bond the standard settlement cycle for which means it won’t arrive till the day after tomorrow. How is this “in-flight collateral” treated for today’s margin call?

It’s treated as if you have already made it. This is the significance of the parenthetical:

“(adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such Valuation Date).”

However, if your counterparty fails in the meantime (before the bond has settled, and assuming ultimately it never does), it would count as an Unpaid Amount which would factor into your close-out calculation.

At first, this seems odd, but the risk is a time value risk associated with the collateral, not a counterparty risk per se. You accepted it when you agreed to Eligible Credit Support with a long settlement cycle in the first place. If you don’t want that time-value risk, don’t agree to collateral with a long settlement cycle.

Picturesque speech

Bonus learning for free: In arithmetic, a sum being subtracted is the “subtrahend” and the sum it is being subtracted from is the “minuend”.

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• JC’s “nutshell” summary of the clause
• Background reading and long-form essays

See also

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• Exposure