Template:Csa distributions capsule: Difference between revisions
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This part simply requires the holder of credit support to manufacture income back to the poster of credit support — as long as doing so wouldn’t create in itself trigger a further {{{{{1}}}prov|Delivery Amount}} by the {{{{{1}}}prov|Transferor}} — thus precipitating a (short) game of operational ping-pong between the two parties’ back office teams. | This part simply requires the holder of credit support to manufacture income back to the poster of credit support — as long as doing so wouldn’t create in itself trigger a further {{{{{1}}}prov|Delivery Amount}} by the {{{{{1}}}prov|Transferor}} — thus precipitating a (short) game of operational ping-pong between the two parties’ back office teams. | ||
How would that happen? [[All other things being equal|All other things staying equal]], it couldn’t: if the {{{{{1}}}prov|Transferee}}’s {{{{{1}}}prov|Exposure}} and the {{{{{1}}}prov|Value}} of the {{{{{1}}}prov|Transferor}}’s {{{{{1}}}prov|Credit Support Balance}} stayed the same as it was when [[variation margin]] was last called, the arrival of income on any part of that {{{{{1}}}prov|Credit Support Balance}} ought to be spirited back to the {{{{{1}}}prov|Transferor}}: as long as the {{{{{1}}}prov|Transferee}} was still holding it, the {{{{{1}}}prov|Transferee}} would | How would that happen? [[All other things being equal|All other things staying equal]], it couldn’t: if the {{{{{1}}}prov|Transferee}}’s {{{{{1}}}prov|Exposure}} and the {{{{{1}}}prov|Value}} of the {{{{{1}}}prov|Transferor}}’s {{{{{1}}}prov|Credit Support Balance}} stayed the same as it was when [[variation margin]] was last called, the arrival of income on any part of that {{{{{1}}}prov|Credit Support Balance}} ought to be spirited back to the {{{{{1}}}prov|Transferor}}: as long as the {{{{{1}}}prov|Transferee}} was still holding it, the {{{{{1}}}prov|Transferee}} otherwise would become indebted for the value of that income to the {{{{{1}}}prov|Transferor}}. | ||
But as we know, {{{{{1}}}prov|Exposure}}s don’t just quietly sit there. If they did, there wouldn’t be any need for initial margin, and collecting even variation margin would be less fraught. So if the {{{{{1}}}prov|Transferee}}’s {{{{{1}}}prov|Exposure}} has increased, the arrival of that income might serve to fill a hole in the existing coverage, in which case, why pay it away only to ask for it back again? Similarly, the value of a pending income payment will be priced into the value of securities | But as we know, {{{{{1}}}prov|Exposure}}s ''don’t'' just quietly sit there. If they did, there wouldn’t be any need for initial margin, and collecting even variation margin would be less fraught. So if the {{{{{1}}}prov|Transferee}}’s {{{{{1}}}prov|Exposure}} has increased, the arrival of that income might serve to fill a hole in the existing coverage, in which case, why pay it away only to ask for it back again? Similarly, the value of a pending but as-yet-unpaid income payment will be priced into the value of the [[securities]] generating it.<ref>It will trade “[[dirty price|dirty]]” until the distribution is paid, at which point it will trade clean.</ref> So even if the {{{{{1}}}prov|Exposure}} ''hasn’t'' changed in the mean time, the arrival of a [[coupon]] or [[dividend]] will reduce the {{{{{1}}}prov|Value}} of those [[securities]] on which it was paid, so — [[all other things being equal]] — the {{{{{1}}}prov|Transferee}} might expect to hang onto the {{{{{1}}}prov|Distribution}}. <br> | ||
Latest revision as of 10:02, 6 January 2020
Paragraph {{{{{1}}}prov|5(c)(i)}} is identical in the 1995 CSA and the 2016 VM CSA. It is only in Paragraph {{{{{1}}}prov|5(c)(ii)}} that things start getting a bit funky.
This part simply requires the holder of credit support to manufacture income back to the poster of credit support — as long as doing so wouldn’t create in itself trigger a further {{{{{1}}}prov|Delivery Amount}} by the {{{{{1}}}prov|Transferor}} — thus precipitating a (short) game of operational ping-pong between the two parties’ back office teams.
How would that happen? All other things staying equal, it couldn’t: if the {{{{{1}}}prov|Transferee}}’s {{{{{1}}}prov|Exposure}} and the {{{{{1}}}prov|Value}} of the {{{{{1}}}prov|Transferor}}’s {{{{{1}}}prov|Credit Support Balance}} stayed the same as it was when variation margin was last called, the arrival of income on any part of that {{{{{1}}}prov|Credit Support Balance}} ought to be spirited back to the {{{{{1}}}prov|Transferor}}: as long as the {{{{{1}}}prov|Transferee}} was still holding it, the {{{{{1}}}prov|Transferee}} otherwise would become indebted for the value of that income to the {{{{{1}}}prov|Transferor}}.
But as we know, {{{{{1}}}prov|Exposure}}s don’t just quietly sit there. If they did, there wouldn’t be any need for initial margin, and collecting even variation margin would be less fraught. So if the {{{{{1}}}prov|Transferee}}’s {{{{{1}}}prov|Exposure}} has increased, the arrival of that income might serve to fill a hole in the existing coverage, in which case, why pay it away only to ask for it back again? Similarly, the value of a pending but as-yet-unpaid income payment will be priced into the value of the securities generating it.[1] So even if the {{{{{1}}}prov|Exposure}} hasn’t changed in the mean time, the arrival of a coupon or dividend will reduce the {{{{{1}}}prov|Value}} of those securities on which it was paid, so — all other things being equal — the {{{{{1}}}prov|Transferee}} might expect to hang onto the {{{{{1}}}prov|Distribution}}.