Margin Amount (IA) - IM CSD Provision
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2018 ISDA Credit Support Deed (IM) (English law)
Paragraph 3(c)(ii) in a Nutshell™ Use at your own risk, campers!
Full text of Paragraph 3(c)(ii)
Related agreements and comparisons
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Content and comparisons
There is no comparison worthy of making. We are in Sinead O’Connor territory here, friends, and no mistake.
Game For A Laugh drafting
From Wikipedia:
British TV show Game For A Laugh revolved around a variety of practical jokes, often as elaborate set-ups on unsuspecting members of the public, either studio-based or shot on location. Studio games included the “Dunk Tank”, “Glube Tube”, “Pie Chair”, and “Comprehend the ISDA clause” in which varying amounts of mess were dealt out. Each segment would end with the hapless victim negotiator being made aware of the joke by a member of ISDA’s crack drafting squad™, who would then announce that negotiator had proved to be “game for a laugh!”
Summary
The difference betwixt
Margin Amount (IA) is the portion of one’s initial margin burden that no-one (except your dealer) made you pay.
As such, you usually transfer Margin Amount (IA) directly to the swap dealer, if you are a limey (or under the influence of the lime-peddlers), by means of title transfer and not pledge, and almost certainly your dealer won’t agree to give you any Margin Amount (IA) for any exposure you feel you have to it. If you are a particularly big or stampy-footed customer, you might persuade your dealer to use the Greater of Margin Flow (IM/IA) Approach, in which case you will pay all this extra non-regulatory initial margin to the Custodian (IM) as well the regulatory initial margin and all of it will be held out of harm’s way, though be careful for what you wish for: your dealer may charge you bigger spreads as a result because it can’t optimise its funding position on initial margin you haven’t physically given it.
Margin Amount (IM) is the snappy, memorable label for that portion of one’s initial margin burden that is imposed directly by one’s local regulators. This is the compulsory part of initial margin that you have to pony up, by law, even if neither you nor your counterparty want to. It would be nice had the drafting said this a little less obliquely — you know, they might have called this “Regulatory IM”, even, but look: I wish feijoas grew in England, and that won’t happen either, so there’s no point getting upset about it.
A Chargor must post Margin Amount (IM) to a third party Custodian (IM) who will hold it out of harm’s way and subject to a security interest in favour of the Secured Party and an account control agreement determining who gets to say what happens to it and and when.
Since it is held out of harm’s way, neither the Chargor nor the Secured Party can use it, and it sits immobilised, a permanent dead weight on the capital efficiency of the world’s financial markets. But everyone is safer that way — unless you are a hardcore modernist, a little redundancy is no bad thing — so we shouldn’t feel too bad about it.
To be contrasted and not, however easy it may be, confused with Margin Amount (IA).
Towards more picturesque drafting™
“... a posting obligation of a Chargor, the Base Currency Equivalent of an amount equal to the sum of the Independent Amounts (as defined in any Other CSA) applicable to the Chargor and any other amounts applicable to the Chargor (other than any amounts in respect of Margin Amount (IM) or Exposure), however described, intended by the parties to operate as an Independent Amount ...”
If that were not bamboozling enough, how about this for the avoidance of doubt incluso which does nothing but introduce doubt into a clause already wracked with enough confusion and bitterness for your average bear:
“For the avoidance of doubt, in order to determine the amounts “applicable to the Chargor” for the purposes hereof, the parties will take into account the effect of any conditions precedent applicable to such amounts.”
My best guess is that this means, “where payment of independent amount depends on something happening, then you only count it if that something has happened.” Like, you don’t say, fellas.
This is the organisation that wants to standardise all financial products across the market, readers.
What a world we live in.