Scope of this Annex and the Other CSA - VM CSA Provision
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2016 ISDA Credit Support Annex (VM) (English law)
Paragraph 1(b) in a Nutshell™ Use at your own risk, campers!
Full text of Paragraph 1(b)
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Content and comparisons
In the year of our Lord 2016, it is gratifying to see that the good people of ISDA and their friends, relations, cherubim and seraphin, gog and magog etc., are all still as fearful of the language they learned at their mothers' knees as ever. “If any” makes four appearances in an eight line clause which doesn’t say much in the first place.
Summary
Covered Transaction
As a concept, “Covered Transaction” only arrived in the 2016 VM CSA, in Paragraph 1(b). It is in the 2016 NY Law VM CSA, too, in Paragraph 1(c).
In the 1990s versions of the CSA, the neatest way of describing whether a given set of Transactions is covered or not is to say something like:
“[SPECIFY] Transactions will [not] be relevant for purposes of determining “Exposure” under the Credit Support Annex.”
But what does “Other CSA” mean?
This “Other CSA” talk has in mind those who, in 2016, wished to “grandfather” Transactions which were already live when the regulatory margin obligations came into force, but which therefore preceded it and were out of scope for it.
Cue a monstrously painful dual-CSA regime where new transactions were margined under a new, regulatory margin-compliant 2016 VM CSA, and old ones were allowed to roll off on the clapped-out (but somehow better, right?) “other” 1995 CSA.
No doubt this made sound commercial sense in 2016. But a few years later, for all except those with 30-year inflation swaps on the books, all this “Other CSA” chat is just barnacle-encrusted confusion for everyone.
General discussion
Weird exclusion alert
What is with that exception at the end? Somehow initial margin[1] for Covered Transactions under this 2016 VM CSA might be documented under some Other CSA, when you have just gone to tedious lengths to exclude it from having any impact on this 2016 VM CSA?
At first, the JC thought this might be a typo in his transcription of the 2016 VM CSA — he’s never claimed to be a details guy — so was a critical “not” missing? A cursory google suggests no such error on his part. So could this have somehow been missed by even the crowd-wise pedants of ISDA’s crack drafting squad™?
Again, no. Our best guess is that this is deliberate. Why? Because the 2016 VM CSA has no provision at all to deal with initial margin. It being assumed one has put a 2016 VM CSA in place only reluctantly, under protest because the meddling regulator told you to, and that you already had a 1995 CSA which you were happy with, which did have some initial margin provisions. So, since your shiny new 2016 VM CSA has nothing to say about initial margin you continue to levy this under the existing Other CSA.
See also
References
- ↑ “Independent Amount” is just isdaspeak for initial margin, remember