Template:Csa Dispute Resolution summ

You may see this provision defaulting to the definition of “{{{{{1}}}|Value}}” in Paragraph {{{{{1}}}|10}}.

In the modern CSAs ISDA’s crack drafting squad™ not only passed up the opportunity to make this unused-in-practice language simpler but, rather, made it worse, by providing extravagant alternatives for 2002 ISDA and 1992 ISDA close-out methodologies.

{{{{{1}}}|Disputed Calculations or Valuations}} is a topic that could unfurl like the flower of a deadly insect-eating nightshade if you let it.

DON’T LET IT. The dispute can be as to the value of one of two things: the posted (or to-be-transferred) {{{{{1}}}|Eligible Credit Support}}, or the Transaction {{{{{1}}}|Exposure}}).

Credit Support Value

Let’s take the easy one first: {{{{{1}}}|Eligible Credit Support}}. If you are on a cash-only single-currency VM CSAm then there’s not really much to talk about here. What is the {{{{{1}}}|Value}}, in the {{{{{1}}}|Base Currency}}, of an amount in that {{{{{1}}}|Base Currency}}?. It’s not exactly a stumper, is it?

If you are still on an Original Gangsta CSA or you have insisted upon posting bonds and whatnot as margin, then — depending on how funky the Eligibility criteria are — you have more or less probability of swinging into a dispute. This is why most counterparties prefer liquid, highly-rated corporate and government debt. There is less to get into an argument about.

Transaction Exposure

The Transaction Exposure has — potentially — a different complexion. You can’t solve for it by just taking observable, liquid collateral: it is inherent in the Transaction itself.

While some asset classes (e.g., FX, equity derivatives) are mainly liquid and observable and, in the same way, there is not much to argue about, others are not. The less liquid a transaction is (a tranched CDO³ anyone?), the more likely the broker is to refuse any dispute rights when carrying out its Calculation Agent function under the ISDA.

The logic runs like this:

“Dude, this transaction is insanely complicated and we are marking to our own model. There’s no way some other guy will understand the trade or accurately value it, and in any case, the valuation relies on our proprietary model which is so amazing we’re not going to share with our competitor anyway.”

This is less common now that swap trading is an unglamorous utility in a trading division which is only really there to support your wealth management offering, of course. And, where you do see it, you have a bigger problem: if it is so complex only this guy’s Excel spreadsheet can possibly understand, that is your oh-oh moment right there: tell me: did he show you any backtesting to get you across the line?

The self-help model, coaches and horses etc.

But doesn’t this “self-help” valuation model drive a coach and horses through the carefully constructed Calculation Agent language about which the dealer has just threatened to die in a ditch?

It may seem so, but in practice no.

• The CSA’s dispute mechanism, while fulsome, reflects the uncynical attitude of yesteryear with its quaint aspirations that third party Reference Market-Makers will be prepared to lift the merest finger to help a fellow market participant out.
• They won’t. If you can find one Reference Market-maker to quote you a price, sing hosannahs: if you get four of the blighters to be looking out for further signs of the Rapture. In providing firm quotations to be dissected, arithmetically averaged and arranged for the delight of all we are relying on the better nature of a professional dealer whom a moment’s reflection should tell you doesn’t have a better nature. No Reference Market-maker will provide a quote, as it brings them no benefit (they can’t get a trade out of it) and saddles them with risk, namely the fear that one’s well-intended helping out is later portrayed as bad faith, negligence or has somehow caused compensatable harm to the interests of another market participant you didn’t even know had an interest.

So all this careful language really boils down to “the party calling for collateral decides” which seems wildly one-sided until you realize that a trading relationship is — well — a relationship, and absent a material risk of outright failure (in which case, the value of mark-to-market exposures are a problem only when your counterpart has failed to honour them), the lure of a continued trading relationship, professional courtesy, and being a good egg — the commercial imperative, that is —are the practical mitigants against unconscionable behaviour.