Interest Period - VM CSA Provision

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ISDA 2016 English Law VM Credit Support Annex

A Jolly Contrarian owner’s manual™

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For corresponding provisions in other CSAs see the table 👇

Interest Period in a Nutshell

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Original text:

Interest Period” means the period from (and including) the last day on which:[1]
(i) a party became obliged to transfer an Interest Payment (VM) or
(ii) an Interest Amount (VM) was added to the Credit Support Balance (VM)
(or, if no Interest Payment (VM) or Interest Amount (VM) has yet fallen due or been added to the Credit Support Balance (VM), respectively, the day on which Eligible Credit Support (VM) or Equivalent Credit Support (VM) in the form of cash was transferred to or received by the Transferee)

to (but excluding) the day on which:

(i) a party is obliged to transfer the current Interest Payment (VM) or
(ii) the current Interest Amount (VM) is added to the Credit Support Balance (VM).
The varieties of ISDA CSA
Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng
Preamble Pre Pre Pre Pre Pre
Interpretation 1 1 1 1 1
Security Interest 2 - 2 - 2
Credit Support Obligations 3 2 3 2 3
Transfers, Calculations and Exchanges - 3 - 3 -
Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4
Dispute Resolution 5 4 5 4 5
Holding and Using Posted Collateral 6 - 6 - 6
Transfer of Title, No Security Interest - 5 - 5 -
Events of Default 7 6 7 6 7
Rights and Remedies 8 - 8 - 7
Representations 9 7 9 7 9
Expenses 10 8 10 8 10
Miscellaneous 11 9 11 9 11
Definitions 12 10 12 10 12
Elections and Variables 13 11 13 11 13

Resources and Navigation

Index: Click to expand:

Overview

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Some development from the OG to the 2016 VM CSA that came about when ISDA’s crack drafting squad™, bless them, contrived in Para 5(c)(ii) to design an option no-one in their right mind would have wanted, namely to choose between Interest Transfer — in which you can have interest that accrues on your Credit Support Balances periodically paid to you — or Interest Amount, in which interest accruals are added to the Credit Support Balance, effectively folding all that into the weft and warp of daily transfers that you will be making anyway.

To be fair to them, the OG only contemplated transfer of accrued interest, which in the context of a modern, daily margined swap business, is barking mad, so at least having the option to just capitalise interest is better than not having it.

But better still would be just straight out capitalising interest, with no option to transfer it. Perhaps this is just me.

Summary

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Sometimes known as a “calculation period”, a more general term that can refer to other, non-interest-related determinations, an “interest period” is the space in time between interest payments on an interest-bearing financial instrument. Common ones: annual and semi-annual (especially for fixed rate products, since QED the interest rate doesn’t periodically change so there’s no particular market risk consequence for paying interest more frequently and operationally it is a hassle). Now there is a credit risk consequence, credit being a function of duration, but it is, all told, at the short end and it relates to interest and not principal.

Anyhow: fixed rates tend to pay annually, semi-annually or quarterly and floating rates, being path-dependent and more susceptible to intra-period volatility, are more commonly, monthly, weekly or daily.

Common amendments

You may see some fastidious operations teams asking to modify this to be a calendar month thing. You have to wonder why.

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  • JC’s “nutshell” summary of the clause
  • Background reading and long-form essays

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See also

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Interest Period” as it appears in: 94 NY CSA95 English CSA2016 NY VM CSA2016 English VM CSA2018 English IM CSA

References

  1. The line breaks are for comprehension and do not appear in the original