Eligible Credit Support - CSA Provision
11(b)(ii) Eligible Credit Support. The following items will qualify as “Eligible Credit Support” for the party specified: In each case with checkboxes are for Party A; Party B; and Valuation Percentage
Ineligible Credit Support
Credit Support which has been delivered but has subsequently fallen out of eligibililty criteria (and any non-eligible Distributions and Interest Amounts received in respect of Eligible Credit Support) remains part of the Credit Support Balance, but is valued at zero.
While the world is moving towards a predilection for cash only, single currency CSAs, so this objection might soon seem archaic, in the mean time note a whopping great hole in the CSA documentation here. What happens to stuff which, when you posted, was Eligible Credit Support, but after posting it ceases to be eligible? How do you get it back?
On the face of it, it’s straightforward:
So it doesn’t count to the Credit Support Balance. But just because something has no “Value” under your CSA doesn’t mean it has no value at all. There’s no accounting for taste, after all. If the Transferee doesn’t want it, it should give it back, right?
Sans doubte, that’s what the boxwallahs at ISDA had in mind. But — whoops — that’s not quite what they managed: The mechanism for getting your posted collateral back is to wait for the Exposure to reduce, and then call back equivalent items to those you posted. But even the day your Exposure goes to (or through) zero, you can call only back Equivalent Credit Support with a Value equal to your existing Credit Support Balance - in the eyes of the CSA, that is all you have posted.
But the CSA has no eyes for your previously posted, now ineligible, collateral. It is blind to it: your ineligible collateral has a “Value” of zero, the Transferee discharge its Return Amount obligation without giving any of the ineligible stuff back. It gets trapped in a kind of parallel universe, like the Nosferatu the unposted, it neither lives nor dies, but ceaselessly roams the afterlife, seeking true love and haunting the dreams of every negotiator.
Most houses have long since crafted language to deal with this contingency. I say “crafted” but “congealed” is a better description: the standard formulations are a tedious clutter of masticated paragraphs that interrupt the elegant flow of your elections, impeding the flow like a tacky mess that accumulates around the nozzle of a ketchup dispenser. All you really need to say is this:
If at any time any item comprising a Credit Support Balance ceases to be Eligible Credit Support the Transferee must transfer to the equivalent items of the same type, nominal value, description and amount to the Transferor on the Settlement Day following the demand by the Transferor.
You don’t need to make this transfer conditional on the Transferor ponying up replacement Eligible Credit Support - Q.E.D. this stuff has no Value, so his Credit Support Balance will be suddenly in debit, and the Transferee can call additional Delivery Amount independently of the return of this item.