Default - CSA Provision

From The Jolly Contrarian
(Redirected from 6 - CSA Provision)
Jump to navigation Jump to search

1995 ISDA Credit Support Annex (English Law)
A Jolly Contrarian owner’s manual

Paragraph 6 in a Nutshell
Use at your own risk, campers!

Paragraph 6. Default.
If there is an Early Termination Date following an Event of Default on a party the Credit Support Balance, determined as if the Early Termination Date were a Valuation Date, will be an Unpaid Amount owed to the Transferor under Section 6(e). For the avoidance of doubt, if Market Quotation applies then the Market Quotation for the Transaction constituted by this Annex will be zero; if Loss applies, the Loss for the Transaction will be just the Unpaid Amount representing the Credit Support Balance.
view template

Paragraph 6 in full

Paragraph 6. Default.
If an Early Termination Date is designated or deemed to occur as a result of an Event of Default in relation to a party, an amount equal to the Value of the Credit Support Balance, determined as though the Early Termination Date were a Valuation Date, will be deemed to be an Unpaid Amount due to the Transferor (which may or may not be the Defaulting Party) for purposes of Section 6(e). For the avoidance of doubt, if Market Quotation is the applicable payment measure for purposes of Section 6(e), then the Market Quotation determined under Section 6(e) in relation to the Transaction constituted by this Annex will be deemed to be zero, and, if Loss is the applicable payment measure for purposes of Section 6(e), then the Loss determined under Section 6(e) in relation to the Transaction will be limited to the Unpaid Amount representing the Value of the Credit Support Balance.
view template

Related agreements and comparisons

Related Agreements
Click here for the text of Section 6 in the 2016 English Law VM CSA
Click here for the text of Section 7 in the 1994 New York law CSA
Click here for the text of Section 7 in the 2016 New York law CSA
Comparisons
1995 English Law CSA and 2016 English law VM CSA: click for comparison
Template:Oldcsadiff 6
2016 English law VM CSA and 2016 NY Law VM CSA: click for comparison
Template:2nycsadiff 7

Resources and navigation

Resources Full wikitext | Nutshell wikitext
Navigation 1 (Interpretation) | 2 (Credit Support Obligations) | 3 (Transfers, Calculations and Exchanges) | 4 (Dispute Resolution) | 5 (Title Transfer etc) | 6 (Default) | 7 (Representation) | 8 (Expenses) | 9 (Miscellaneous) | 10 (Definitions) | 11 (Elections and Variables)

Index — Click the ᐅ to expand:

Get in touch
Comments? Questions? Suggestions? Requests? Sign up for our newsletter? Questions? We’d love to hear from you.
BREAKING: Get the new weekly newsletter here Old editions here

Content and comparisons

Template:M comp disc 1995 CSA 6
Template

Summary

The default paragraph explains how you value the 1995 English Law CSA itself — being a Transaction in its own right, of course — when closing out an ISDA Master Agreement. The basic gist is that you treat the Credit Support Balance as of the Early Termination Date — being the total value of the Credit Support you have ponied up at any time — as an Unpaid Amount, rather than treating is as a contingent return obligation, the present value of which would go into the Close-Out Amount (or Loss, or Market Quotation, if you still labour under an antediluvian 1992 ISDA).

Why does it reference “Unpaid Amounts”?

The 1995 English Law CSA is technically a Transaction under the ISDA Master Agreement in its own right — that is deep ISDA lore — but it is still a weird Transaction, and the standard “replacement cost” method of valuation doesn’t work brilliantly: rather than having defined payments upfront, each of which can be valued and discounted back to now to reveal a present value, payment obligations under a 1995 English Law CSA depend on the aggregate discounted cashflows of all the other Transactions under your ISDA Master Agreement which the 1995 English Law CSA covers. So good luck determining, in the abstract, the replacement cost of something like that.

But the good news is you don’t have to: the Credit Support Balance isn’t calculated by reference to its own discounted future cashflows: rather, it is just the inverse of the aggregate present value of all the other Transactions under the ISDA Master Agreement. So the “replacement cost” on any day is just the prevailing value of the Credit Support Balance. It’s easier to treat that as an Unpaid Amount (none of this tedious mucking about with replacement costs and so on). But that means you have to deem the Close-Out Amount[1] as zero.

Including “comprehensive” Termination Events

Consider expanding of the 1995 English Law CSA provision to include “Termination Events where all Transactions are Affected Transactions”. This is as per Section 3.2 of the 2001 ISDA Margin Provisions which recommend that Paragraph 1995 English Law CSA of the CSA should apply where all Transactions are closed out following an Event of Default or “Specified Condition” — the latter of which is defined to include the Termination Events listed under the ISDA Master Agreement. It is likely that all Transactions would be Affected Transactions should a Credit Event Upon Merger or Additional Termination Event occur.
Template

See also

Template

References

  1. Or Market Quotation/Loss, if under a 1992 ISDA. Spoddy point: the definition of “Loss” in the 1992 ISDA includes the “Unpaid Amount” concept in the definition: “Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made...”