Independent Amount - CSA Provision

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1995 ISDA Credit Support Annex (English Law)
A Jolly Contrarian owner’s manual

Paragraph Independent Amount in a NutshellTM
Use at your own risk, campers!

A party’s “Independent Amount” is the Base Currency Equivalent of the amount specified for it in Paragraph 11(b)(iii)(A) or, if not specified, zero.
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Paragraph Independent Amount in full

Independent Amount” means, with respect to a party, the Base Currency Equivalent of the amount specified as such for that party in Paragraph 11(b)(iii)(A); if no amount is specified, zero.
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Related agreements and comparisons

Related Agreements
Click here for the text of Section Independent Amount in the 2016 English Law VM CSA
Click here for the text of Section Independent Amount in the 1994 New York law CSA
Click here for the text of Section Independent Amount in the 2016 New York law CSA
Comparisons
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1994 New York law CSA and 1995 English Law CSA: click for comparison
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Resources and navigation

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)

Content and comparisons

As of May 2020 this was the most popular page on this whole site. Even more popular than the one about Toto. And Rick Astley. Go figure, my little contrarians.

Anyhow, the only difference between the 1994 ISDA CSA (NY law) and the 1995 ISDA CSA is the reference to Base Currency Equivalent — maybe the Americans just assumed everything would be done in USD. There is no equivalent definition in the regulatory VM versions published in 2016, since they deal only with initial margin and not initial margin, though you will see if you follow what should be a broken link, there is a way of reverse-engineering an IM component back into a reg VM 1995 English Law CSA with some fancy footwork in the elections paragraph.
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Summary

To be contrasted with variation margin, initial margin (in the ISDA troposphere known as an “Independent Amount”) is the amount of margin you hold in excess of current mark-to-market exposure. You hold it to cover the risk that the market moves suddenly against your counterparty at the same time as it implodes, all before you have a chance to make a further variation margin call.

Calculating your 1995 English Law CSA

Superficially things are quite different between the 1995 English Law CSA and the 2016 English law VM CSA, but this all boils down to the fact that the 2016 English law VM CSA is meant to be a zero-threshold, variation margin-only affair, so the concepts of Independent Amount and Threshold, both of which confuse the 1995 English Law CSA, aren’t there to get in the way. Unless you go and put them in anyway, as we shall see...

1995 English Law CSA

How the IA contributes to the Credit Support Amount — being the amount of credit support in total that one party must have given the other at any time[1] under the 1995 English Law CSA can be mind-boggling.

It pans out for a Transferee like so:

This leaves you with a formula for a Transferee’s Credit Support Amount as follows: Max[0, (ETee + IATor - IATee + Threshold)].

Let’s plug in some numbers. Say:

Your Credit Support Amount is therefore the greater of zero and 10,000,000 + 2,000,000 - 0 + 5,000,000) = 7,000,000.

Now, whether you have to pay anything or receive anything as a result — whether there is a Delivery Amount or a Return Amount, in other words — depends whether your Credit Support Amount is greater or smaller than your prevailing Credit Support Balance, by at least the Minimum Transfer Amount.

2016 English law VM CSA with no IA amendment

Since the 2016 English law VM CSA assumes there is no Independent Amounts and no Thresholds, it is quite a lot easier. It is just the Exposure. So much so, that there isn’t even a concept of the “Credit Support Amount” under the 2016 English law VM CSA, unless you have retrofitted one, and who in their right mind would do that?

Oh.

You have, haven’t you. You’ve gone and co-opted the Credit Support Amount (VM/IA) concept in your Paragraph 11 elections. Yes you did. No, don’t blame your credit department; don’t say you were just following orders. You did it.

2016 English law VM CSA with a customised IA amendment

Never mind. Well, just for you, the formula is a sort of half-way house: Under this unholy bastardisation of a 2016 English law VM CSA, a Transferee’s Credit Support Amount will be: Max[0, (ETee + IATor - IATee)].

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General discussion

If you look at it cold, this looks like a fixed currency amount that is paid at the beginning of a relationship, irrespective of how many Transactions you may have on. But it will be often defined as “an amount agreed between the parties or as otherwise advised by Party X”, which rather kicks the issue in to touch. In practice, it’s likely to be articulated as a multiplier on notional, and will be payable at the start of each Transaction, and may be adjusted on the fly.

For example, a dealer who sets IA by reference to the perceived volatility of the Transaction might reserve the right to increase IA should that volatility unexpectedly change. You can be sure more than one risk officer embarked on an undignified scramble for her margin tables — and put in a desperate call to Legal — the day UK decided Brexit means Brexit[3], for example.

Particularly where underlying trades and markets are volatile, expect to see much customisation.

  • The Independent Amount might be calculated by reference to a given multiplier for a given asset class: it is not uncommon to see tiering in FX transactions, for example, where Transactions on currencies in the highest tier might have a lower multiplier that those on the higher tiers.
  • Especially where one counterparty is providing access to markets for the other party (so called synthetic prime brokerage) there may be a provision that the calculation agent can adjust tiers, multipliers, and the assets which are eligible for each tier in its discretion, and with effect to existing as well as new transactions. This can have the effect of retroactively adjusting Independent Amounts, in which case the difference can be called under the ordinary Transfer provisions.

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See also

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References

  1. As opposed to the amount required to be transferred on that day, considering the “Credit Support Balance” the Transferee already holds — that’s the Delivery Amount or Return Amount, as the case may be.
  2. There’s something faintly absurd both parties exchanging Independent Amounts by title transfer — they net off against each other — but that’s as may be. Stupider things have happened. SFTR disclosure, for example.
  3. and sterling gapped down 8%