Default - CSA Provision

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ISDA 1995 English Law Credit Support Annex

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Events of Default in a Nutshell

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Original text:

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.

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 - 8
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 to expand:


Transatlantic differences

Unlike the English law CSAs, the NY law CSAs, are not “Transactions” under the ISDA Master Agreement but separate Credit Support Documents. This means they need their own Events of Default, with grace periods, and cannot piggy-back off those in the ISDA Master Agreement.


Grace periods

Those of ISDA credit support arrangements that are standalone Credit Support Documents — the 1994 New York law CSA, 2016 NY Law VM CSA and the 2018 English law IM CSD, but not the 1995 CSA and the 2016 VM CSA — bake in their own two Local Business Day grace period into their own customised Events of Default.

The 1995 CSA and 2016 VM CSA, being Transactions, don’t need to and inherit the grace periods for the Events of Default in the ISDA Master Agreement.

That can, at the limit, create a dissonance for Americans and IM posters, as your CSA grace periods do not automatically track your ISDA ones. Two Local Business Days is an LBD longer than the standard one LBD grace period in the 2002 ISDA, and an LBD shorter than the standard 3 LBD grace period baked into the 1992 ISDA.

Which is nice. This is not a problem for the English law Credit Support Annexes that are Transactions.

Including “comprehensive” Termination Events

Consider expanding of the Default 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 6 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. All Transactions would likely be Affected Transactions should a Credit Event Upon Merger or Additional Termination Event occur.

The default paragraph explains how you value the 2016 VM 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 do title transfer CSAs reference “Unpaid Amounts”?

A title transfer 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” of valuation method 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 title transfer CSA depend on the aggregate discounted cashflows of all the other Transactions under the ISDA Master Agreement. So good luck determining, in the abstract, the replacement cost of something like that.

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 (or Market Quotation/Loss, if under a 1992 ISDA) as zero.[1]

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See also

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  1. Spoddy point: “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...”