Exchanges - CSA Provision
1995 ISDA Credit Support Annex (English Law)
Paragraph 3(c) in a Nutshell™
Use at your own risk, campers!
Full text of Paragraph 3(c)
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A counterparty who has posted one form of Eligible Credit Support and can ask the Transferee to switch it for something else. The Transferee doesn’t have to, but derivatives counterparties being the reasonable commercial fellows they are — and their operations teams being no-nonsense pragmatists they are — they will generally allow this as part of the normal ebb and flow of collateral operations. Probably less of a thing now 2016 English law VM CSAs tend to be cash only and base currency cash at that, but the possibility remains, and as, to our enduring regreet, we know, ISDA’s crack drafting squad™ is not usually one to let unexplored possibilities go undocumented.
Note here the Transferor can ask for an exchange, but the Transferee is not obliged to accept it. This is a fundamental provision of “title transfer”: once the Eligible Credit Support is delivered under a title-transfer 1995 English Law CSA, the Transferee owns it absolutely. It only has to return Equivalent Credit Support. This is a special, legal ninja use of the word “equivalent”. It means “fungible”; exactly the same as ~; not “broadly similar to ~”.
This is important also from a pricing (and operational) perspective: otherwise the Transferor would have a “worst-of” option and would be entitled to continually switch into the "cheapest to deliver" of the Eligible Credit Support. Needless to say, the increased collateral flows would also increase the operational burden.
Delivery Amounts: Contrast this with Delivery Amounts, where a Transferor has the option to deliver the cheapest of the Eligible Credit Support specified in the 1995 ISDA CSA.
Return Amounts: A Transferee does have a (limited) option in terms of selecting the Return Amount should there be a requirement to return posted credit support: it can select the cheapest to deliver of all the Eligible Credit Support that has been posted to it which currently comprises its Credit Support Balance.