Credit Support Obligations - CSA Provision

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1995 ISDA Credit Support Annex (English Law)
A Jolly Contrarian owner’s manual

Paragraph 2 in a Nutshell
Use at your own risk, campers!

2 Credit Support Obligations
2(a) Delivery Amount. If the Transferee demands a Delivery Amount at least equal to the Transferor’s Minimum Transfer Amount on a Valuation Date, the Transferor must transfer Eligible Credit Support with a Value of the Delivery Amount (rounded under Paragraph 11(b)(iii)(D)) to the Transferee. The “Delivery Amount” is the amount by which the Transferee’s Credit Support Amount exceeds the Value of the Transferor’s Credit Support Balance on that Valuation Date (adjusted for pending but unsettled transfers).
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Paragraph 2 in full

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.

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Related agreements and comparisons

Related Agreements
Click here for the text of Section 2 in the 2016 English Law VM CSA
Click here for the text of Section 3 in the 1994 New York law CSA
Click here for the text of Section 3 in the 2016 New York law CSA
Comparisons
1995 English Law CSA and 2016 English law VM CSA: click for comparison
1994 New York law CSA and 1995 English Law CSA: click for comparison
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Resources and navigation

Resources Full wikitext | Nutshell wikitext
Navigation 1 (Interpretation) | 2 (Credit Support Obligations) | 3 (Transfers, Calculations and Exchanges) | 4 (Dispute Resolution) | 5 (Title Transfer etc) | 6 (Default) | 7 (Representation) | 8 (Expenses) | 9 (Miscellaneous) | 10 (Definitions) | 11 (Elections and Variables)

Index — Click the ᐅ to expand:

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Content and comparisons

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Summary

Timing of transfers under a CSA

This is how the timing works for CSA transfers:

Demand Date
On any date, be it a Local Business Day or not, (call it a “Demand Date”, but note per 2(a) or 2(b) it must be made “on or promptly following a Valuation Date”), a party may demand a Transfer under para 2(a) (for a Delivery Amount) or 2(b) (for a Return Amount).

Valuation Time - Exposure
The point at which the valuation is made is the Valuation Time. This keys off the Valuation Date:

Valuation Time - Eligible Credit Support
Per para 2(a) the Transferor will transfer Eligible Credit Support having a Value equal to the Delivery Amount as of the date of transfer. Under the Calculations provision all calculations of Value happen at the relevant Valuation Time. Fluctuations in value in the credit support actually delivered after that time won’t invalidate the transfer amount, but they may mean a party can immediately call for more Credit Support (that is, have another Demand Date).

Transfer Date
Under para 3(a) (Transfers) if the demand is received before the Notification Time on a Local Business Day) on that Demand Date, the transfer will be made not later than close of business on the related Settlement Day (under the 1995 English Law CSA) or Regular Settlement Day (under the 2016 English law VM CSA. If received after the Notification Time, or at any time on day that isn’t a Local Business Day), the transfer must be made by close of business on the Settlement Day/Regular Settlement Day relating to the day (note: ordinary day, not Local Business Day) after the Demand Date.

Settlement Day
Here is where things differ materially between the ’96 and the ’16 versions of the CSA.
1995 English Law CSA: The Settlement Day for any day (whether or not it is a Local Business Day) is:

  • Cash: for cash, the next Local Business Day and,
  • Securities: for securities, the Local Business Day after the date on which a trade in the relevant security, if effected on the day in question, would have been settled in accordance with customary practice.

2016 English law VM CSA: In the new world we have the new concept of the Regular Settlement Day, and this is the same Local Business Day as the Demand Date. The run-off text at the end of Paragraph 3(a) gives you a little more flex: if the demand came after the Notification Time, then you must make the transfer by close on the Regular Settlement Day for the next day.[1]

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?[2] 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).”

This leads to some rather anomalous results.
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General discussion

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See also

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References

  1. Just how the business days interact under the ISDA and CSA is about as complicated as string theory, by the way. For a cheat’s guide, see How business days work under the CSA. You’re welcome!
  2. As it may well be, under a 1995 English Law CSA, if the collateral is corporate bonds held in a clearing system