Equivalent Credit Support - CSA Provision

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CSA Anatomy

In a Nutshell Section Equivalent Credit Support:

"Equivalent Credit Support” means, for any Eligible Credit Support in the Credit Support Balance, fungible assets having the same nominal value.
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1995 ISDA CSA full text of Section Equivalent Credit Support:

"Equivalent Credit Support” means, in relation to any Eligible Credit Support comprised in the Credit Support Balance, Eligible Credit Support of the same type, nominal value, description and amount as that Eligible Credit Support.
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Related Agreements
Click here for the text of Section Equivalent Credit Support in the 1995 English Law CSA
Click here for the text of Section Equivalent Credit Support 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
Template:Csadiff Equivalent Credit Support
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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)

Index: Click to expand:

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Trick for young players: “Equivalent Credit Support” is meant only to capture assets which are fungible with assets forming part of posted Credit Support Balance (exactly the same ISIN) – the point of “equivalence” is to buttress the 1995 English Law CSA’s title transfer analysis by allowing return of a security which isn’t the exact security that was delivered in the first place, but another one from the same issue.

If you had to redeliver the same one, the “transfer of title” is in danger of being recharacterised into a pledge/loan, which has a bunch of unwanted knock-on effects.

Equivalent” isn’t just “similar”

You may come across someone (in OTC Clearing/CCP space) who wants to modify “equivalent” to mean not just fungible securities of the same Series/ISIN, but “similar ones” – same issuer, but different maturity, and under a different ISIN etc.

Resist this. It is likely to have arisen by way of misapprehension. In most master docs, “equivalent” is carefully defined to be exactly fungible [1]but at the gallop at which most collateral operations managers’ working days pass, they may have missed this, labouring instead under the illusion (based on its ordinary dictionary meaning) that “equivalent” allows redelivery of non-fungible securities of a “similar” type. They may even defend their misapprehension. “Yeah, they may protest, “but what if there’s some illiquidity in the market?”

But — well, you have that exact risk across your entire ISDA collateral book, so it’s a bit late. In practice, if there is a market disruption and you can’t get hold of the necessary collateral, as long as it doesn’t coincide with your own credit deterioration[2], you should be able to hash it out.

And if you are worried about it, go for a cash-only CSA — these days most are — or don’t allow potentially illiquid assets as collateral, or just don’t reuse that asset.

Now there may be a need for the “similar securities” concept in the OTC to CCP space that we haven’t yet divined, doubtful, but let’s say — but we should call that something else – perhaps “Similar Credit Support” – to differentiate it from “Equivalent Credit Support” which is still needed in the CSA to support the title transfer analysis.