Credit Support Obligations - CSA Provision
1995 ISDA Credit Support Annex (English Law)
Paragraph 2 in a Nutshell™ Use at your own risk, campers!
Full text of Paragraph 2
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Content and comparisons
Template:M comp disc 1995 CSA 2
Summary
CSA transfer timings
This is how the timing works for CSA transfers.
Terminology check: to make this easy, we refer to both 1995 CSAs and 1995 CSAs as “1995 CSAs”. This cuts out a lot of “Delivery Amount and/or Return Amount as the case may be” nonsense. The date on which someone demands a 1995 CSA we call a “1995 CSA”.
To be clear, neither Demand Date nor 1995 CSA are “ISDA canon”.
Remember the 1995 CSA is simply the person making the demand.
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Value 1995 CSA and 1995 CSA: Firstly, value what you are going to call: the 1995 CSA under para 1995 CSA or 1995 CSA. This is roughly 1995 CSA - 1995 CSA (or vice versa).
- Under 1995 CSA, the 1995 CSA will transfer 1995 CSA having a 1995 CSA as of the date of transfer of the 1995 CSA.
- Per the 1995 CSA provision, all calculations happen at the 1995 CSA. Fluctuations in value after that time won’t invalidate the 1995 CSA, but they may mean a party can immediately call for more 1995 CSA (that is, have another 1995 CSA).
- The 1995 CSA keys off the 1995 CSA.[1]
- 1995 CSA: On or promptly following any 1995 CSA (it need not be a 1995 CSA) on which the 1995 CSA has moved in its favour, one party may demand a 1995 CSA (para 2(a)) or a 1995 CSA (para 2(b)).
- 1995 CSA: Under para 1995 CSA (1995 CSA) if the demand is received before the 1995 CSA on a 1995 CSA that is a 1995 CSA the transfer must be made by close of business on the related Regular Settlement Day.[2] If received after the 1995 CSA or on a non-1995 CSA, the transfer must be made by close of business on the Regular Settlement Day relating to the day[3] after the Demand Date.
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Settlement Day: Here is where things differ materially between the 1995 CSA and the 2016 VM CSA.
- 1995 CSA: The Settlement Day for any day (whether or not it is a 1995 CSA) is:
- 2016 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. 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!
General discussion
See also
References
ISDA 1995 English Law Credit Support Annex
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Overview
Summary
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
See also
References
- ↑ Under the 1995 CSA you may specify either close of business on the Valuation Date or the Local Business Day immediately before it. Under the 2016 VM CSA you have flexibility to determine the Valuation Time as at the point you close your book each day.
- ↑ The “Settlement Day” under the 1995 CSA is slightly different.
- ↑ Note: ordinary day, not Local Business Day