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Template:ISDA transaction and collateral flows: Difference between revisions
Template:ISDA transaction and collateral flows (view source)
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In a fully margined {{isdama}}, [[all other things being equal]], the termination of a {{isdaprov|Transaction}} will lead to two equal and opposite effects: | In a fully margined {{isdama}}, [[all other things being equal]], the termination of a {{isdaprov|Transaction}} will lead to two equal and opposite effects: | ||
*A final payment or exchange under the {{isdaprov|Transaction}} having a value more or less equal to the [[present value]] of that {{isdaprov|Transaction}}; | *A final payment or exchange under the {{isdaprov|Transaction}} having a value more or less equal to the [[present value]] of that {{isdaprov|Transaction}}; | ||
*A offsetting change in the Exposure under the {{t|CSA}} in exactly the same value. | *A offsetting change in the {{isdaprov|Exposure}} under the {{t|CSA}} in exactly the same value. | ||
The strict sequence of these payments ought to be that the {{isdaprov|Transaction}} termination payment goes first, and the collateral return follows, since it can only really be calculated and called once the termination payment has been made. | The strict sequence of these payments ought to be that the {{isdaprov|Transaction}} termination payment goes first, and the collateral return follows, since it can only really be calculated and called once the termination payment has been made. | ||
I know what you’re thinking. ''Hang on! that means the termination payer pays knowing this will increase its {{isdaprov|Exposure}} for the couple of days it will take for that collateral [[Return Amount (VM) - CSA Provision|return]] to find its way back. That’s '''stupid'''!'' | I know what you’re thinking. ''Hang on! that means the termination payer pays knowing this will increase its {{isdaprov|Exposure}} for the couple of days it will take for that collateral [[Return Amount (VM) - CSA Provision|return]] to find its way back. That’s '''stupid'''!'' | ||
Now, dear reader, have you learned nothing? It might be better, but | What with the regulators’ obsession minimise systemic counterparty credit risk, wouldn’t it be better to apply some kind of [[Netting of Payments - ISDA Provision|settlement netting]] in anticipation, to keep the credit exposure down? | ||
Now, dear reader, have you learned nothing? It might be ''better'', but “better” is not how {{t|ISDA}} documentation rolls. The theory of the ISDA and CSA settlement flows puts the {{isdaprov|Transaction}} payment egg before the [[variation margin]] chicken so, at the moment, {{isdaprov|Transaction}} flows and [[collateral]] flows tend to be handled by different operations teams, and their systems don’t talk. Currently, the payer of a terminating transaction has its heart in its mouth for a day or so. | |||
Industry efforts to date have been targeting at shortening the period between the {{isdaprov|Exposure}} calculation and the final payment of the collateral transfer. <br> | |||