Template:M summ 1995 CSA 11(b)(ii)

What is, or is not, acceptable to post as credit support. In the olden days this was all a bit fraught, and accounted for much of the practical complication of the CSA as a document, and which (in the JC’s eyes, made it a sort of primordial smart contract, before there were such things as smart contracts.

The CSA governs a deterministic, but highly complicated flow of securities and currencies back and forth between counterparties daily, based on the Exposure of their portfolios. Who has to pay whom on any day, and what, is derivative — I know, right — of a load of extraneous factors besides that Exposure as a bare number: the “shape” of the derivatives book, the state of the market, the composition and market valuations of the Credit Support Balance already posted. Even a small firm will have multiple brokerage counterparties; a brokerage will have hundreds of thousands. There is simply no way of monitoring and accurately performing an arrangement as complicated as a Credit Support Annex manually. Only computers can do it. Hence, it is rather like a smart contract, and not just superficially, but practically: the “contract” as a meaningful thing is the operational reality, not the document. It lives in the configurations the parties operations teams punch into their respective collateral management applications.

If a number is mis-punched, or the application does not or cannot reflect what is stipulated on paper in the Credit Support Annex, no-one will ever know. At least, not until it is too late.

If your counterparty is a smoking ruin and you find out the Credit Support Balance you are holding comprises of illiquid pref shares listed on the Manila bourse, while the CSA prescribes only G7 on-the-run government securities, then guess what.