Template:M summ 1995 CSA Independent Amount
To be contrasted with variation margin, initial margin (in the ISDA troposphere known as an “Independent Amount”) is the amount of margin you hold in excess of current mark-to-market exposure. You hold it to cover the risk that the market moves suddenly against your counterparty at the same time as it implodes, all before you have a chance to make a further variation margin call.
Is the Independent Amount different from initial margin?
On the face of it, it looks that way, doesn’t it. But no.
If you look at it cold, the Independent Amount as written in the 1995 CSA looks like a fixed currency amount that is paid at the beginning of a relationship, irrespective of how many Transactions you may have on — even if you have none on. As conventionally understood, “initial margin” is, by contrast, Transaction-specific, being calculated as it is, specifically by reference to the liquidity and volatility of the Transaction to which it relates.
But the 1995 CSA doesn’t have a concept of initial margin, and no-one in their right mind would jhust send their swap dealer a wodge of money, much less a truck load of assets, just to commemorate the signing of an ISDA Master Agreement, exciting though that event may be. ISDA’s crack drafting squad™ of 1994 and 1995 lived in a kinder, more naïve time — one more impressionably swooned by the conclusion of a master agreement than our own, perhaps — or may just have been blitzed when they came up with the idea.
What the market has done is the bend the fantastical verbal engineering of the 1995 CSA into something that works in practice as Transaction specific initial margin. So the Independent Amount will be usually defined as “an amount agreed between the parties in relation to each Transaction, or as otherwise advised by Party X”, which rather kicks the issue in to touch. In practice, it’s likely to be articulated as a multiplier on notional, will be required of the client by the swap dealer and not the other way around, will be payable at the start of each Transaction, and may be adjusted on the fly.
For example, a dealer who sets IA by reference to the perceived volatility of the Transaction might reserve the right to increase IA should that volatility unexpectedly change. You can be sure more than one risk officer embarked on an undignified scramble for her margin tables — and put in a desperate call to Legal — the day UK decided Brexit means Brexit[1], for example.
Particularly where underlying trades and markets are volatile, expect to see much customisation.
- The Independent Amount might be calculated by reference to a given multiplier for a given asset class: it is not uncommon to see tiering in FX transactions, for example, where Transactions on currencies in the highest tier might have a lower multiplier that those on the higher tiers.
- Especially where one counterparty is providing access to markets for the other party (so called synthetic prime brokerage) there may be a provision that the calculation agent can adjust tiers, multipliers, and the assets which are eligible for each tier in its discretion, and with effect to existing as well as new transactions. This can have the effect of retroactively adjusting Independent Amounts, in which case the difference can be called under the ordinary Transfer provisions.