Exposure - NY VM CSA Provision

2016 ISDA Credit Support Annex (VM) (New York law)
A Jolly Contrarian owner’s manual™

Resources and navigation

Resources Wikitext \| Nutshell wikitext Navigation 1 (Interpretation) \| 2 (Security Interest) \| 3 (Credit Support Obligations) \| 4 ( Conditions Precedent, Transfer Timing, Calculations and Substitutions) \| 5 (Dispute Resolution) \| 6 (Holding and Using Posted Collateral (VM)) \| 7 (Events of Default) \| 8 (Certain Rights and Remedies) \| 9 (Representations) \| 10 (Expenses) \| 11 (Miscellaneous) \| 12 (Definitions) \| 13 (Elections and Variables) Index: Click ᐅ to expand: 2016 NY VM CSA

Paragraph Exposure in a Nutshell™

Use at your own risk, campers!

A party’s “Exposure” means the amount it would pay (a positive Exposure) or receive (a negative Exposure) if all Covered Transactions were terminated as at the Valuation Time following a Termination Event where the Base Currency was the Termination Currency; and the Valuation Agent made the relevant valuations on the party’s behalf using mid-market estimates of the amounts that would required under the relevant ISDA Master Agreement. view template

Full text of Paragraph Exposure

“Exposure” means, unless otherwise specified in Paragraph 13, for any Valuation Date or other date for which Exposure is calculated and subject to Paragraph 5 in the case of a dispute: (i) if this Agreement is a 1992 ISDA, the amount, if any, that would be payable to a party that is the Secured Party by the other party (expressed as a positive number) or by a party that is the Secured Party to the other party (expressed as a negative number) pursuant to Section 6(e)(ii)(2)(A) of this Agreement as if all Covered Transactions were being terminated as of the relevant Valuation Time on the basis that the Base Currency is the Termination Currency; provided that Market Quotation will be determined by the Valuation Agent on behalf of that party using its estimates at mid-market of the amounts that would be paid for Replacement Transactions (as that term is defined in the definition of “Market Quotation”); and (ii) if this Agreement is an 2002 ISDA or a 1992 ISDA in which the definition of Loss and/or Market Quotation has been amended (including where such amendment has occurred pursuant to the terms of a separate agreement or protocol) to reflect the definition of Close-out Amount from the pre-printed form of the 2002 ISDA as published by ISDA, the amount, if any, that would be payable to a party that is the Secured Party by the other party (expressed as a positive number) or by a party that is the Secured Party to the other party (expressed as a negative number) pursuant to Section 6(e)(ii)(1) (but without reference to clause (3) of Section 6(e)(ii) of this Agreement as if all Covered Transactions were being terminated as of the relevant Valuation Time on the basis that the Base Currency is the Termination Currency; provided that the Close-out Amount will be determined by the Valuation Agent on behalf of that party using its estimates at mid-market of the amounts that would be paid for Transactions providing the economic equivalent of (X) the material terms of the Covered Transactions, including the payments and deliveries by the parties under Section 2(a)(i) in respect of the Covered Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in Section 2(a)(iii)), and (Y) the option rights of the parties in respect of the Covered Transactions. view template

Related agreements and comparisons

Related Agreements Click here* for the text of Section Exposure in the 1994 New York law CSA* Click here* for the text of Section Exposure in the 1995 English Law CSA* Click here* for the text of Section Exposure in the 2016 English Law VM CSA* Comparisons Template:2nycsadiff Exposure 2016 VM CSA and 2016 NY Law VM CSA: click for comparison 1995 CSA and 2016 VM CSA: click for comparison

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Content and comparisons

Differences between versions

The difference between the two versions of English law CSA (see link in box for comparison) is that the 1995 CSA assumes you are trading under a 1992 ISDA, using the Market Quotation valuation technique — which kind of figures, since the 2002 ISDA with its Close-out Amount methodology hadn’t then been invented — whereas the 2016 VM CSA version contemplates you having a either a 1992 ISDA or a 2002 ISDA and provides for them in the alternative.

The 2016 NY Law VM CSA tracks the 2016 VM CSA closely with two curious exceptions: Firstly, when imagining its hypothetical termination of all Transactions it doesn’t explicitly carve out the Transaction constituted by the 2016 NY Law VM CSA itself — which is odd, because if you were treating it as a Transaction to be hypothetically included, you necessarily get a value of zero, since its value should be the exact negative of whatever the net mark-to-market value of all the other Transactions are — and secondly it does not hypothetically suppose that the Secured Party is the Unaffected Party, thereby getting to be in the driver’s seat when constructing the necessary valuations.

The reason you don’t have to except a 2016 NY Law VM CSA from hypothetical termination is buried deep in its earthen ontological root system. Are you ready?

Profound onotological differences

Unlike a title transfer English law CSA which is expressed to be a Transaction under the ISDA Master Agreement, the 2016 NY Law VM CSA is not: it is instead a “Credit Support Document”: a standalone collateral arrangement that stands aloof and apart from the ISDA Master Agreement and all its little diabolical Transactions. The reason for this is — spoiler: it’s not a very good one — because while a English law CSA, by being a title transfer collateral arrangement, necessarily reverses the indebtedness between the parties outright, an 2016 NY Law VM CSA (and, for that matter, an English law English law CSD) does not: it only provides a security interest. The in-the-money counterparty is still in-the-money. It is just secured for that exposure. The outright exposure between the parties does not change as a result of the pledge of credit support.

This is magical, bamboozling stuff — deep ISDA lore — and, at least where rehypothecation is allowed under Paragraph 6(c) of a 2016 NY Law VM CSA — it pretty much always is — it serves no real purpose, because even though you say you are only pledging the collateral, in the the greasy light of commercial reality, from the moment the Secured Party rehypothecates your pledged assets away into the market, dear Pledgor you have transferred your title outright.

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