Transfers, Calculations and Exchanges - CSA Provision

ISDA 1995 English Law Credit Support Annex A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: →NY OG →Eng OG →NY VM →EngVM →Eng IM Transfers, Calculations and Exchanges 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: Paragraph 3. Transfers, Calculations and Exchanges 3(a) Transfers. All transfers under this Annex of any Eligible Credit Support, Equivalent Credit Support, Interest Amount or Equivalent Distributions shall be made in accordance with the instructions of the Transferee or Transferor, as applicable, and shall be made: 3(a)(i) in the case of cash, by transfer into one or more bank accounts specified by the recipient; 3(a)(ii) in the case of certificated securities which cannot or which the parties have agreed will not be delivered by book-entry, by delivery in appropriate physical form to the recipient or its account accompanied by any duly executed instruments of transfer, transfer tax stamps and any other documents necessary to constitute a legally valid transfer of the transferring party's legal and beneficial title to the recipient; and 3(a)(iii) in the case of securities which the parties have agreed will be delivered by book-entry, by the giving of written instructions (including, for the avoidance of doubt, instructions given by telex, facsimile transmission or electronic messaging system) to the relevant depository institution or other entity specified by the recipient, together with a written copy of the instructions to the recipient, sufficient, if complied with, to result in a legally effective transfer of the transferring party's legal and beneficial title to the recipient. Subject to Paragraph 4 and unless otherwise specified, if a demand for the transfer of Eligible Credit Support or Equivalent Credit Support is received by the Notification Time, then the relevant transfer will be made not later than the close of business on the Settlement Day relating to the date such demand is received; if a demand is received after the Notification Time, then the relevant transfer will be made not later than the close of business on the Settlement Day relating to the day after the date such demand is received. 3(b) Calculations. All calculations of Value and Exposure for purposes of Paragraphs 2 and 4(a) will be made by the relevant Valuation Agent as of the relevant Valuation Time. The Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) of its calculations not later than the Notification Time on the Local Business Day following the applicable Valuation Date (or, in the case of Paragraph 4(a), following the date of calculation). 3(c) Exchanges. 3(c)(i) Unless otherwise specified in Paragraph 11, the Transferor may on any Local Business Day by notice inform the Transferee that it wishes to transfer to the Transferee Eligible Credit Support specified in that notice (the “New Credit Support”) in exchange for certain Eligible Credit Support (the “Original Credit Support”) specified in that notice comprised in the Transferor’s Credit Support Balance. 3(c)(ii) If the Transferee notifies the Transferor that it has consented to the proposed exchange, (A) the Transferor will be obliged to transfer the New Credit Support to the Transferee on the firstSettlement Day following the date on which it receives notice (which may be oral telephonic notice) from the Transferee of its consent and (B) the Transferee will be obliged to transfer to the Transferor Equivalent Credit Support in respect of the Original Credit Support not later than the Settlement Day following the date on which the Transferee receives the New Credit Support, unless otherwise specified in Paragraph 11(d) (the “Exchange Date”); provided that the Transferee will only be obliged to transfer Equivalent Credit Support with a Value as of the date of transfer as close as practicable to, but in any event not more than, the Value of the New Credit Support as of that date. 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 ᐅ to expand: 1994 NY CSA 1995 CSA 2016 VM CSA

Overview

security interest CSAs: There is no such exact provision in the security interest CSAs. The equivalent provision is Paragraph 4, Conditions Precedent, Transfer Timing, Calculations and Substitutions, but it works quite differently on account of it being a pledge and not title transfer.

title transfer CSAs: Aside from the tedious suffix action on the defined terms, the 2016 VM CSA provision is largely the same as for the 1995 CSA. They have binned a long doubt-avoiding disquisition about telexes and faxes in 3(a)(iii) and to compensate have indulged in some unnecessary details in 3(b) about what values and inputs the Valuation Agent may use in coming up with a valuation. A salutary thanks-for-phoning-in kind of effort.

Note, however, differences that are created by the different definitions of Settlement Day in the ’95, versus Regular Settlement Day in the ’16.

Summary

We have set out the transfer timings — no small minefield — in the premium section, since it was really painful to do. Freeloaders: just be aware of the slippage due to the Notification Time, the mindwarp that is the definition of Settlement Day and Regular Settlement Day, and the fact that the relevant Local Business Day is in the place of receipt, not Transmission, and so on.

The reality is that collateral operations teams have got most of this taped, automated, and if anything were to foul up they would have long since ironed it out. And the move to call-cash daily margining has probably decomplicated things, too.

Exchanges

A counterparty who has posted one form of Eligible Credit Support and can ask the Transferee to switch it for something else. The Transferee doesn’t have to, but derivatives counterparties being the reasonable commercial fellows they are — and their operations teams being no-nonsense pragmatists they are — they will generally allow this as part of the normal ebb and flow of collateral operations. Probably less of a thing now 2016 VM CSAs tend to be cash only and base currency cash at that, but the possibility remains, and as, to our enduring regreet, we know, ISDA’s crack drafting squad™ is not usually one to let unexplored possibilities go undocumented.

Note here the Transferor can ask for an exchange, but the Transferee is not obliged to accept it. This is a fundamental provision of “title transfer”: once the Eligible Credit Support is delivered under a title-transfer 1995 CSA, the Transferee owns it absolutely. It only has to return Equivalent Credit Support. This is a special, legal ninja use of the word “equivalent”. It means “fungible”; exactly the same as ~; not “broadly similar to ~”.

This is important also from a pricing (and operational) perspective: otherwise the Transferor would have a “worst-of” option and would be entitled to continually switch into the "cheapest to deliver" of the Eligible Credit Support. Needless to say, the increased collateral flows would also increase the operational burden.

Delivery Amounts: Contrast this with Delivery Amounts, where a Transferor has the option to deliver the cheapest of the Eligible Credit Support specified in the 1995 CSA.

Return Amounts: A Transferee does have a (limited) option in terms of selecting the Return Amount should there be a requirement to return posted credit support: it can select the cheapest to deliver of all the Eligible Credit Support that has been posted to it which currently comprises its Credit Support Balance.

Questions

Demand Date not a Local Business Day: What if the Demand Date is not a Local Business Day? E.g., what if it is received after the Notification Time on a Friday, meaning the Settlement Day takes place on the date on which a trade, effected on a Saturday, would have been settled in accordance with customary practice?

• Securities: For securities this is ok: a trade effected on a non-business day would be deemed to be effected on the next following Local Business Day anyway, so it would pick this up.
• Cash: For cash, not so clear.

What happens if the transferred credit support changes in value on the Settlement Day?

What happens to Exposures if the Settlement Day is a long time after the Demand Date? Is the demand, if answered with irrevocable instructions to deliver, treated as having been met, or does the Exposure stay outstanding until the collateral actually comes in? The answer (counterintuitive, given that the Transferee remains subject to the credit exposure during this time) is YES, thanks to the definitions of Delivery Amount and Return Amount, both of which include the words:

“...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).”

What if I have to pay out a Transaction termination amount which the counterparty is already holding all or some of by way of variation margin? Since it will owe me that back, we can just off set those and call it quits, right? Wrong. See our separate article on that issue.

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See also

• Transaction terminations and VM for a more in-depth discussion of the interaction of transaction termination amounts and adjustments to the Credit Support Balance that they create.