Template:Csa interest amount capsule: Difference between revisions

It really ought to be quite simple, and in the {{csa}} it is: if a {{csaprov|Transferor}} has posted [[cash]] — probably less likely back in the day, but in the world of [[regulatory margin]], ''de rigueur'' nowadays — then you get [[interest]] on it — as long as paying interest wouldn’t, in itself, trigger a call for 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 interest on any part of that {{{{{1}}}prov|Credit Support Balance}} increases its value and, since it was calibrated to equal an exposure exactly, ought to be spirited back to the {{{{{1}}}prov|Transferor}}: the {{{{{1}}}prov|Transferee}} otherwise would become indebted for the value of that interest to the {{{{{1}}}prov|Transferor}}, which for variation margin is not the idea.

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 interest might serve to fill a hole in the existing coverage, in which case, why pay it away only to ask for it back again?  

{{vmcsaprov|Interest Adjustment}} is a far simpler method: incoming interest is just added to the {{vmcsaprov|Credit Support Balance}}. If, on your next margin call, net, the {{vmcsaprov|Credit Support Balance}} exceeds your counterparty’s {{vmcsaprov|Exposure}} to you, you get your interest back through the normal mechanism of calling for a {{vmcsaprov|Return Amount}}. All the netting and offsetting happens automatically. The only contingency — and well spotted, {{icds}}, for this one is truly for details freaks — is if you receive ''negative'' interest on your Credit Support Balance such that it wipes out the {{vmcsaprov|Credit Support Balance}} entirely and is ''still'' unsatisfied, then the {{vmcsaprov|Interest Payer}} — and in the case of negative interest, this is the person {{vmcsaprov|Transferor}}, not the {{vmcsaprov|Transferee}} — has to pay the balance. But if you are accruing interest and calling for margin daily, the likelihood of that happening is extremely low, and it is hard to see why you couldn’t just add this to the usual margin call process as well (since it is likely to be a daily process). <br>