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The manifold varieties of credit mitigation

ISDA Master Agreement

“Credit support” under an ISDA Master Agreement is handled away from a given Swap Transaction, under a separate credit support annex which references a counterparty’s net exposure across the whole portfolio of Transactions

• 1995 CSA: an English law credit support annex is itself a Transaction under the ISDA Master Agreement, under which the parties exchange Eligible Credit Support (in the olden days, often various kinds of high-grade bonds or cash; more recently, in VM only arrangements, cash only) with a market value designed to exactly offset the net exposure under all the other “real” Transactions.
• 1994 NY CSA: A New York law credit support annex works to all intents and purposes the same way, but it is a pledge and not a title-transfer arrangement, so therefore, at first blush, takes the form of a security interest, and is not therefore a Transaction under the ISDA Master Agreement. However, most 1994 NY CSAs allow the parties to “rehypothecate” pledged Credit Support without limit, which means they function like a title transfer collateral arrangements pretty much from the get-go.

Stock lending

Stock loan arrangements come in two varieties: American ones, and English ones. The standard English law title transfer stock lending agreement, the 2010 GMSLA, has recently spawned a pledge version designed specifically for agent lenders which is a genuine security interest model with no right of rehypothecation.

• English law 2010 GMSLA: Unlike the ISDA Master Agreement, Collateral is posted on a loan-by-loan basis, and Collateral is an integral part of the Loan transaction. That said, Collateral posting and management, day-to-day, is usually handled on a portfolio basis: you don’t make tiny little margin calls; you make one big net one, but there is no separate annex or Transaction representing Collateral flows.
• English law 2018 Pledge GMSLA: ISLA developed the 2018 Pledge GMSLA to deal with punitive capital rules which required financial institutions to risk-weight excess Collateral balances. Solution: financial institution pledges them, rather than title-transferring them. Important: there is no right to rehypothecate, because that would undermine the pledge. Thus a 2018 Pledge GMSLA is a genuine secured lending arrangement.
• New York law Master Securities Lending Agreement: Like the 1994 NY CSA, the Master Securities Lending Agreement is a pledge-with-rehypothecation arrangement: it looks like a security interest, but for practical purposes isn’t. Aside from upsetting your CASS people, it functions practically as if the person holding Collateral at any time is its absolute owner with an obligation to return something equivalent.

Repo

Unlike a stock loan, which a repo resembles in many other respects, the initial exchange is not by way of collateral, but is an outright purchase of the bond in question. Therefore required margin reflects divergences between the prevailing value of the purchased asset and the prevailing Repurchase Price (which is the original Purchase Price with an uplift by way of the repo rate).