Delivery Amount - CSA Provision
1995 ISDA Credit Support Annex (English Law)
Paragraph 2(a) in full
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Now the interesting thing here is the difference that pledged collateral under the 1994 New York law CSA makes over title-transferred collateral regime of the 1995 English Law CSA. You will see the difference in the 1994 New York law CSA’s Delivery Amount, which is the positive difference between Secured Party’s Exposure and the value of Posted Credit Support held by the Secured Party — easy, right? — and 1995 English Law CSA’s equivalent provision which is the positive difference between the Transferee’s Exposure and the Credit Support Balance adjusted to exclude any inflight but unsettled collateral movements.
The 1995 English Law CSA is a bit more leaden in how it describes things but these amount to the same thing: you don’t get any credit (support) for collateral until it has landed with the other party. This creates some curious scenarios, as you will see if you read on. 3(a) — 2(a)
Calculating Delivery Amounts and Return Amounts
Differences between 1995 English Law CSA and 2016 English law VM CSA
Note that under a 2016 English law VM CSA there is no Independent Amount or Threshold, so there is no need for a Credit Support Amount (which is Exposure adjusted by applicable Independent Amounts and Thresholds) — everything keys off the plain old Exposure.
Unless, that is, you have retrofitted your 2016 English law VM CSA to include Independent Amounts. The below assumes you have done that. Because some genius in your credit department will have decided this is really important. If you haven’t, it is a bit easier: just substitute “Credit Support Amount” for “Exposure”. For more on this stimulating topic, see Credit Support Amount (VM/IA).
First: work out your Credit Support Amount. This is:
Second: calculate the Value of the Transferor’s Credit Support Balance. This is basically the prevailing value of the Eligible Credit Support (and income on it) that the Transferor has ponied up at that time.
Third: Deduct the Credit Support Balance from the Credit Support Amount. Fourth: If the difference from the sum you did in (3):
- is less than zero, KEEP QUIET. If you are lucky, the other guy won’t ask you for a Return Amount.
- is more than zero but less than the Minimum Transfer Amount, also KEEP QUIET. No Delivery Amount for you today, because you haven’t exceeded the Minimum Transfer Amount, so you are not entitled to one.
- is more than the Minimum Transfer Amount you can demand the whole amount (I.e., not just the bit over the MTA).
What about in-flight Credit Support deliveries?
So yesterday you met a margin call by delivering a bond the standard settlement cycle for which means it won’t arrive till the day after tomorrow. How is this “in-flight collateral” treated for the purpose of today’s margin call? It’s treated as if you have already made it. This is the significance of the parenthetical:
“(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).”
However, if your counterparty fails in the meantime (before the bond has settled, and assuming ultimately it never does), it would count as an Unpaid Amount which would factor into your close-out calculation.
At first blush, this seems an odd result, but the risk is a time value risk associated with the collateral, not a counterparty risk per se. You accepted it when you agreed to Eligible Credit Support with a long a settlement cycle in the first place. If you don’t want that time-value risk, don’t agree to collateral with a long settlement cycle.
Timing of transfers under a CSA
This is how the timing works for CSA transfers:
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).
- under the 1995 English Law CSA the parties specify either close of business on the Valuation Date or the Local Business Day immediately before the Valuation Date), and therefore not necessarily the Demand Date.
- under the 2016 English law VM CSA the Valuation Agent has a bit of flexibility to determine the Valuation Time as at the point it closes its book each day.
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).
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.
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.
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? 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.
- In the 2016 ISDA VM CSA there really shouldn’t be IA as it kind of defeats the regulatory goal of marking actual exposures to market, but there may be, since ISDA caved and retrofitted the 2016 ISDA VM CSA with a an Independent Amount section
- 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!
- As it may well be, under a 1995 English Law CSA, if the collateral is corporate bonds held in a clearing system