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{{ | Behold, the theory of the {{isda}}. There is this framework agreement, the {{isdama}}, that provides the superstructure under which two parties may execute swap “{{isdaprov|Transaction}}s” but until they ''have'' executed swap Transactions, which they will do under a Confirmation, then no gears are engaged and the {{isdama}} does nothing. It is merely a relationship contract. | ||
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This dynamic changes upon default: on close-out all the Transaction values are totted up, netted down, and a single {{isdaprov|Early Termination Amount}} becomes payable not under those now defunct {{isdaprov|Transaction}}s — they have been wiped away — but under the [[single agreement]] itself. | |||
In the meantime, the credit support arrangement is designed to mitigate the frightful risks the parties present to each other by obliging them regularly to cash up their net exposures to each other. The “credit support” they post offsets, as closely as possible, what the out-of-the-money party would owe were the ISDA closed out and all Transactions terminated each day. | |||
Now, English lawyers like to collateralise by [[title transfer]], and Americans by [[pledge]]. We do not know exactly why this is: it seems to be a matter of tradition and market practice. This leads to some profound conceptual differences between the forms of CSA, even if the practical differences are minimal. | |||
Since collateral passes under a {{ukcsa}}s by title transfer, it is not a [[security]] arrangement as such: rather, the parties agree to transfer collateral to each other outright, with no expectations beyond the recipient’s conditional obligation to return something ''economically [[equivalent]]'' when trading circumstances require it. This return obligation is a debt claim against the recipient and not any kind of [[bailment]] or custody arrangement. | |||
Indeed, it resembles an odd, highly personalised swap Transaction. And, sure enough, {{Ukcsa}}s ''are'' treated as “{{isdaprov|Transaction}}s” and not “{{isdaprov|Credit Support Document}}s” under the {{isdama}}. Their effectiveness as a credit support device depends on close-out netting of the CSA {{isdaprov|Transaction}} against the net value of all the other Transactions under the Agreement. | |||
Because they ''are'' traditional security arrangements, the {{uscsa}}s (and the English law {{csd}}) are “{{isdaprov|Credit Support Document}}s” but are ''not'' “{{isdaprov|Transaction}}s” under the {{isdama}}. | |||
So a {{ukcsa}}, works by eliminating the out-of-the-money’s indebtedness by creating an equal offsetting [[indebtedness]]. A {{uscsa}} by granting a traditional [[security interest]] for the indebtedness, but not otherwise affecting it. | |||
This is magical, bamboozling stuff — deep ISDA lore — and, at least where [[rehypothecation]] is allowed — it pretty much always is — it makes no real difference, because from the moment of reuse, the pledgor ''has'' only credit claim for return of assets. | |||