Credit Support Amount - CSA Provision
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ISDA 1995 English Law Credit Support Annex
A Jolly Contrarian owner’s manual™ Credit Support Amount in a Nutshell™
Original text
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Comparisons
Redlines
- 1994 ⇒ 1995: Redline of the ’94 NY vs. the ’95 English: comparison (and in reverse)
- 1995 ⇒ 2016: Redline of the ’95 English vs. the ’16 VM English: comparison (and in reverse)
I will try to get round to the others later.
Discussion
OG CSAs
Under the OG CSAs the Credit Support Amount is the total amount one party must have delivered to the other at any time: the combination of the Exposure to that party and the net Independent Amounts it must post, minus any agreed Threshold. As between the 1994 NY CSA and the 1995 CSA, the major differences reflect the pledge construct favoured by the Yanks as against the title transfer of the Limey version.
No equivalent of Credit Support Amount in the VM CSAs
There is no concept of a Credit Support Amount in the 2016 VM CSA or the 2016 NY VM CSA because the Credit Support Amount a party may require is no more than its Exposure to the other party — as already defined in the 2016 VM CSA. In the OG CSAs one had to consider any pertinent Independent Amounts and the agreed Threshold...
... So if you are doing a special VM CSA with an IA bit tacked on to it you will still have a Credit Support Amount, only it will be a bit simpler as, in the regulatory margin world, there are no Thresholds to speak of.
Basics
No Independent Amounts
Life is much simpler in the world of regulatory variation margin for which the 2016 VM CSA is designed. Its only concern is variation margin. That is, there are no Independent Amounts to confuse the picture about Exposure. Well, alright: there should be none. In the OG CSAs, {csaprov|Independent Amount}}s were there to protect counterparties against potential swings in Exposure that might happen between one margin call and the next: that is, they are a buffer against the risk of market moves within a “liquidity period”.
Also in the old world, Independent Amounts were transferred outright to the Transferee, by either by title transfer under a 1995 CSA or rehypothecated pledge under a 1994 NY CSA.
This created a conceptual issue for Regulators who, after the global meltdown of 2008 were trying to minimise credit exposure between dealer and customer. But Independent Amounts were not amounts owed, but provisions against amounts that might be owed. Transferring them outright to cover an Exposure that doesn’t yet, and might never exist creates a negative Exposure, because the holder of an Independent Amount would be indebted to the Transferor for its return.
For the same reason Regulatory IM cannot be cash, must be pledged to a neutral third party and cannot be reused.
So: OG CSAs have a Credit Support Amount, which is the non-Independent Amount bit of the Exposure. Modern CSAs don’t, because without an Independent Amount, the Credit Support Amount is just the Exposure. So the Credit Support Amount vanishes, in a puff of logic and existential redundancy.
This leaves us with the custom-built fiddle that some people add to Paragraph 11of a Modern CSA to add in an Independent Amount.
No Threshold, either
And what about the Threshold? Well, under a Modern CSA, there shouldn’t be one of those either: the thrust of the regulatory margin reforms was to require counterparties to collateralise their total mark-to-market exposure, not just most of it, so in a rush of uncharacteristic blood to the head, ISDA did away with the Threshold concept altogether.
There is usually some flex in the regulations, and don’t be surprised to see your more tempestuous counterparties hotly insisting on wiring in a Threshold, even just a nominal one.
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See also
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