Credit Support Obligations - VM CSA Provision

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2016 ISDA VM CSA Anatomy


In a NutshellTM Section 2:

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(c)(vi)(B)) to the Transferee. The “Delivery Amount” is the amount by which the Transferee’s Exposure exceeds the Value of the Transferor’s Credit Support Balance on that Valuation Date (adjusted for pending but unsettled transfers).
2(b) Return Amount (VM). When, for any Valuation Date, the Transferor demands a Return Amount (VM) of at least the Transferee’s Minimum Transfer Amount, the Transferee must transfer to the Transferee the Equivalent Credit Support (VM) it specified with a Value of that Return Amount (VM) (rounded as per Paragraph 11(c)(vi)(B)) and the Credit Support Balance (VM) will be proportionately reduced.

A Transferee’s “Return Amount (VM)” on any Valuation Date will be the amount by which:

(i) the Value of the Transferor’s Credit Support Balance (VM) (adjusted to treat any scheduled but as yet uncompleted transfers as not having been made)
exceeds
(ii) the Transferee’s Exposure.

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2016 ISDA VM CSA full text of Section 2:

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

(i) the Transferee’s Exposure
exceeds
(ii) the Value as of that Valuation Date of the Transferor’s Credit Support Balance (VM) (adjusted to include any prior Delivery Amount (VM) and to exclude any prior Return Amount (VM) , the transfer of which, in either case, has not yet been completed and for which the relevant Regular Settlement Day falls on or after such Valuation Date).

2(b) Return Amount (VM). Subject to Paragraphs 3 and 4, upon a demand made by the Transferor on or promptly following a Valuation Date, if the Return Amount (VM) for that Valuation Date equals or exceeds the Transferee’s Minimum Transfer Amount, then the Transferee will transfer to the Transferor Equivalent Credit Support (VM) 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 (VM) (rounded pursuant to Paragraph 11(c)(vi)(B)) and the Credit Support Balance (VM) will, upon such transfer, be reduced accordingly. Unless otherwise specified in Paragraph 11(c)(i)(B), the “Return Amount (VM)” 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 (VM) (adjusted to include any prior Delivery Amount (VM) and to exclude any prior Return Amount (VM), the transfer of which, in either case, has not yet been completed and for which the relevant Regular Settlement Day falls on or after such Valuation Date)
exceeds
(ii) the Transferee’s Exposure.

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Related Agreements
Click here for the text of Section 2 in the 1995 English Law CSA
Click here for the text of Section 2 in the 2016 English Law VM CSA
Click [[{{{3}}} - NY VM CSA Provision|here]] for the text of the equivalent, Section [[{{{3}}} - NY VM CSA Provision|{{{3}}}]] in the 2016 NY Law VM CSA
Comparisons
1995 English Law CSA and 2016 English law VM CSA: click for comparison
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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)

The key difference: No Credit Support Amount. Instead, it just references the Counterparty’s Exposure.

Ok, so where is the Credit Support Amount?

1995 ISDA CSA

Under a 1995 ISDA CSA the Credit Support Amount is the total amount one counterparty 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.

No equivalent in the 2016 ISDA VM CSA

There is no concept of a Credit Support Amount in the 2016 ISDA 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 English law VM CSA. In the old 1995 English Law CSA one had to consider any pertinent Independent Amounts and the agreed Threshold.

No Independent Amounts

Life is much simpler in the world of regulatory variation margin for which the 2016 ISDA VM CSA is designed. Its only concern is variation margin. That is, there are no Independent Amounts.[1] In the old 1995 English Law CSA, Independent Amounts were there to protect counterparties against potential swings in Exposure that might happen before the next margin call: that is, they are a buffer against the risk of market moves.

But in the old world, Independent Amounts were transferred outright to the Transferee, by title transfer.[2] This created a conceptual issue for regulators, who were trying to minimise credit exposure between the parties: a title transfer of collateral 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.[3]

All that said, there is a custom-built addition in Paragraph 11[4] that lets you build an Independent Amount concept back in if you really want one. And who, in their right chicken-lickeny mind, wouldn’t?

No Threshold either

And what about the Threshold? Well, there shouldn’t be one of those either: The thrust of the margin reforms in the different jurisdictions 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 concept altogether. There is usually some flex in the regulations, and don’t be surprised to see your more tempestuous counterparties hotly insisting on a Threshold, even just a nominal one.

So the Credit Support Amount vanishes, in a puff of logic and existential redundancy.

References

  1. Well, alright, should be no Independent Amounts.
  2. Under Engliush law CSAs, at any rate. But the effect was the same where rehypothecation was allowed under a 1994 ISDA CSA (NY law) too.
  3. Hence, regulatory initial margin cannot be cash, and must be pledged and not title transferred.
  4. For more information see Credit Support Amount (VM/IA).