Template:Csa Preamble summ: Difference between revisions

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{{ukcsa}}s are “{{isdaprov|Transaction}}s” and not “{{isdaprov|Credit Support Document}}s” under the {{isdama}}, whereas the {{uscsa}}s and {{csd}} are “{{isdaprov|Credit Support Document}}s” but ''not'' “{{isdaprov|Transaction}}s”. Once you are up and running this won’t matter a jot, but if you are trying to get your poor dishevelled mind around this benighted agreement suite, it will surely do it in. But stick with it: your reward will be in heaven. Possibly.
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.  
===Profound onotological differences===
Unlike a [[title transfer]] {{ukcsa}} which is expressed to be a {{isdaprov|Transaction}} under the {{isdama}}, the {{nyvmcsa}} is ''not'': it is instead a “{{isdaprov|Credit Support Document}}”: a standalone [[collateral]] arrangement that stands aloof and apart from the {{isdama}} and all its little diabolical {{isdaprov|Transaction}}s. The reason for this is — spoiler: it’s not a very good one — because while a {{ukcsa}}, by being a {{ttca}}, necessarily reverses the [[indebtedness]] between the parties outright, an {{nyvmcsa}} (and, for that matter, an [[English law]] {{csd}}) does not: it only provides a [[security interest]]. The [[in-the-money]] counterparty is still [[in-the-money]]. It is just ''secured'' for that [[exposure]]. The outright {{isdaprov|exposure}} between the parties does not change as a result of the pledge of credit support.


This is magical, bamboozling stuff — deep ISDA lore — and, at least where [[rehypothecation]] is allowed under Paragraph {{nyvmcsaprov|6(c)}} of a {{nyvmcsa}} — it pretty much always is — it serves no real purpose, because even though you ''say'' you are only pledging the collateral, in the the greasy light of commercial reality, from the moment the {{nyvmcsaprov|Secured Party}} [[rehypothecate]]s your pledged assets away into the market, dear {{nyvmcsaprov|Pledgor}} you ''have'' transferred your title outright.
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.

Latest revision as of 15:46, 31 March 2024

Behold, the theory of the ISDA. There is this framework agreement, the ISDA Master Agreement, that provides the superstructure under which two parties may execute swap “Transactions” but until they have executed swap Transactions, which they will do under a Confirmation, then no gears are engaged and the ISDA Master Agreement does nothing. It is merely a relationship contract.

This dynamic changes upon default: on close-out all the Transaction values are totted up, netted down, and a single Early Termination Amount becomes payable not under those now defunct Transactions — 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 English law CSAs 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, English law CSAs are treated as “Transactions” and not “Credit Support Documents” under the ISDA Master Agreement. Their effectiveness as a credit support device depends on close-out netting of the CSA Transaction against the net value of all the other Transactions under the Agreement.

Because they are traditional security arrangements, the New York law CSAs (and the English law English law CSD) are “Credit Support Documents” but are not “Transactions” under the ISDA Master Agreement.

So a English law CSA, works by eliminating the out-of-the-money’s indebtedness by creating an equal offsetting indebtedness. A New York law CSA 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.

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