Credit Support Document - 1992 ISDA Provision
1992 ISDA Master Agreement
Section Credit Support Document in a Nutshell™
Full text of Section Credit Support Document
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No changes between the versions of this rather unnecessary definition. The men and women of ISDA’s crack drafting squad™ must have stood back and admired the handiwork of their 1992 forebears, high-fived each other and gone, “nice job, dudes and dudettes”.
The 1995 English Law CSA is not a Credit Support Document...
Among the countless good examples of just how contrived, over-engineered, and fiddly for the sake of being fiddly the ISDA canon is, there is none better than the fact that a New York law Credit Support Annex is a Credit Support Document, while the English law equivalent is not. If that were not silly enough, according to User’s Guide best practice one should not designate the counterparties themselves as Credit Support Providers to either, though it unclear which portion of the sky would fall in if one did.
A CSA is not a Credit Support Document, and you should not list it as one in Part 4 of the Schedule, however satisfying it might be to do so. I mean it sounds like one, right? But no: the counterparty cannot be its own Credit Support Provider. The 1995 English Law CSA is, rather, a Transaction under the ISDA Master Agreement. This is rather important to the whole issue of close-out netting. Deep ISDA lore.
But the 1994 New York law CSA is a Credit Support Document: because it is a security financial collateral arrangement arrangement and not a title transfer collateral arrangement, transfer of credit support under a 1994 New York law CSA does not change the net liabilities between the parties, the 1994 New York law CSA (and its regulatory VM successor, the 2016 NY Law VM CSA is a Credit Support Document and not a transaction under the ISDA Master Agreement. But, because the parties cannot be their own Credit Support Providers, there are no Credit Support Providers under a New York law CSA. It is like some kind of self-animating poltergeist. Fun, huh?
Guarantees and the ISDA Master Agreement: why Transaction-specific guarantees don’t work
Should a client request a transaction-specific parental guarantee (or letter of credit) for a Transaction under an ISDA Master Agreement instead of the usual “all obligations” guarantee of all the counterparty’s obligations under the ISDA Master Agreement, hit the alarm button.
You should never agree to the guarantee of individual Transactions (nor accept a letter of credit with respect to individual Transactions) under an ISDA Master Agreement. If you do, because of the way ISDA Master Agreements are closed out under Section 6(e) — or rather, aren’t closed out, you might find that just when you want your guarantee to pay, the Transaction it is guaranteeing isn’t there anymore:
On a close-out, each Transaction is terminated, the individual close-out amounts are determined, they’re aggregated up to a single net sum (i.e. negative exposures are netted off against positive ones) and a single Close Out Amount is payable with respect to all terminated Transactions under 6(e) (Payments on Early Termination) of the ISDA Master Agreement.
That is to say, payments following termination of a Transaction are not payable under the Transaction at all - they are payable under the ISDA Master Agreement itself. Therefore, if the guarantee relates to the single Transaction, at the point you wish to rely on it (i.e., upon the party’s default), it will have gone, with no payment required. Vanished, like tears in the rain.
- and its VM update, the 2016 English law VM CSA.
- and its VM update, the 2016 NY Law VM CSA.
- The ISDA Master Agreement itself is never actually terminated, but carries impotently on in undead twilight, roaming the badlands like Nosferatu or the Flying Dutchman, unloved, unredeemed, until the end of days.