Credit Support Obligations - CSA Provision

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ISDA 1995 English Law Credit Support Annex

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For corresponding provisions in other CSAs see the table 👇

Credit Support Obligations in a Nutshell

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Original text:

Paragraph 2. Credit Support Obligations
2(a) Delivery Amount. Subject to Paragraphs 3 and 4, upon a demand made by the Transferee on or promptly following a Valuation Date, if the Delivery Amount for that Valuation Date equals or exceeds the Transferor’s Minimum Transfer Amount, then the Transferor will transfer to the Transferee Eligible Credit Support having a Value as of the date of transfer at least equal to the applicable Delivery Amount (rounded pursuant to Paragraph 11(b)(iii)(D)). Unless otherwise specified in Paragraph 11(b), the “Delivery Amount” applicable to the Transferor for any Valuation Date will equal the amount by which:

(i) the Credit Support Amount
exceeds
(ii) 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).

2(b) Return Amount. Subject to Paragraphs 3 and 4, upon a demand made by the Transferor on or promptly following a Valuation Date, if the Return Amount for that Valuation Date equals or exceeds the Transferee’s Minimum Transfer Amount, then the Transferee will transfer to the Transferor Equivalent Credit Support specified by the Transferor in that demand having a Value as of the date of transfer as close as practicable to the applicable Return Amount (rounded pursuant to Paragraph 11(b)(iii)(D)) and the Credit Support Balance will, upon such transfer, be reduced accordingly. Unless otherwise specified in Paragraph 11(b), the “Return Amount” applicable to the Transferee for any Valuation Date will equal the amount by which:

(i) 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)
exceeds
(ii) the Credit Support Amount.
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 - 7
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:

Overview

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Between US and English law

Here is a comparison between the 1994 NY CSA and the 1995 CSA. The differences are largely down to the security interest versus title transfer — you know Pledgor versus Transferor and so on.

Betweem OG and VM

The key difference between the OG CSAs and the 2016 VM versions: there is no Credit Support Amount concept in the 2016s, seeing as there is no initial margin to reference. (Right?) Instead, it just references the Counterparty’s Exposure.

Summary

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The overall vibe of a Credit Support annex is self-help.

It is presumed on any day there will be a portfolio of Transactions outstanding under the ISDA (not counting the CSA itself, which under the English law construct, is also a “Transaction”, though it is not under a NY law construct), and these Transactions will each create a market exposure, and when those market exposures are summed, will create an overall “Exposure” owed by one party or the other.

The party to whom the netted amount would be paid were the ISDA Master Agreement closed out on that day can — subject to a few conditions — call for Credit Support from the party who would be due to pay it.

The basic idea is that Credit Support, once paid, would create an offsetting exposure under the CSA which, when set off against the net market exposure under the substantive Transactions, would equal zero, or at any rate an acceptably low number: pre-agreed Thresholds, Independent Amounts, Minimum Transfer Amounts may intervene to make that number something other than zero, and Exposure and the value of posted Credit Support may subsequently change, but it will be in any case near zero.

Each party can run this calculation on, essentially, any Local Business Day. Once Credit Support has been posted, the person holding it must factor this Credit Support Balance into its demand. Where a party is seeking to “call back” Credit Support it has already posted, that is called a “Return Amount”. Where it is seeking new Credit Support to cover its own outright Exposure, that is a “Delivery Amount”.

(There is not much of a difference, but there is some: where you are calling back Credit Support under a Return Amount, the Transferee gets to choose which bit of Credit Support the Transferor sends back, out of what the Transferee originally posted. When the Transferee is calling for new Credit Support to cover an outright exposure, the Transferor gets to choose what Credit Support it sends from the agreed Eliigible Credit Support in the elections paragraph).

The self-help element is this: you don’t have to call for credit support. You are entitled to, but it is up to you to run the calculations and make the demand. If you don’t, the other party is not obliged to send you anything.

Each party therefore also “marks its own homework”. Should they not agree on their respective valuations, there is a dispute resolution process set out in Paragraph 4.

Title transfer versus pledge

The English law CSAs generally operate under a title transfer construct, where the Credit Support is delivered outright against a contingent obligation on the Transferee to return “equivalent” — meaning fungible — Credit Support. As such, the Transferor has no legal or beneficial interest in Credit Support it has posted: it has only a debt claim against the Transferee for its return (which would be netted off against the Transferee’s debt claim against it under the ISDA Master Agreement). This is why an English law CSA is treated as a Transaction: it is, in every sense, identical to a physically settled asset swap.

The New York law CSAs operate as a security interest in the form of a pledge: Credit Support is posted by way of security, and the Transferee takes only legal title, holding beneficial interest in the Credit Support for the Transferor. This markedly changes the netting analysis. But — unless the option has been disapplied in the elections paragraph, the holder of pledged Credit Support is entitled to “rehypothecate” it — transfer it outright to a third party, against an obligation to return a fungible asset — and while U.S. attorneys may beg to differ this, to a jaundiced English lawyer, makes a NY law CSA materially identical to an English law one. Both are effectively, title transfer.

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  • JC’s “nutshell” summary of the clause
  • Background reading and long-form essays
  • A deeper dive into the reason the Credit support Amount disappeared from the VM CSAs.

See also

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References