Template:M summ 2002 ISDA 5(a)(iii)

Before you even put your hand up: no, a Credit Support Annex between the two counterparties is not a Credit Support Document, at least under the English law construct: there it is a “Transaction” under the ISDA Master Agreement. It is somewhat different with a 1994 NY CSA, but even there the Users’ Guide cautions against treating a direct swap counterparty as a “Credit Support Provider” — the Credit Support Provider is meant to be a third party: hence references to the party itself defaulting directly under a Credit Support Document.

Therefore, tediously — and we think it was avoiding precisely this tediosity that the Users’ Guide had in mind, but, best laid plans and all that — there is an ontological difference between the mechanics of close out when it comes to a failure under a 1994 New York law CSA when compared to non-payment under a 1995 CSA. A 1995 CSA is a Transaction under the ISDA Master Agreement and is not a Credit Support Document. A failure to meet a margin call under a that annex or any of its modern English-law successors is therefore a Failure to Pay or Deliver under Section 5(a)(i) of the actual ISDA Master Agreement; a failure to post under a 1994 New York law CSA is a Section 5(a)(iii) Credit Support Default.

Does this, in practical point of fact, make any difference at all? It may do, if you have negotiated different grace periods under your CSA than those under your ISDA Master Agreement proper. Before you ask why anyone would ever do that, firstly let us say that far more moronic things than that happen every day in the negotiation of global markets documentation, and secondly that, for example, grace periods for regulatory initial margin may well be standardised — and dealers may not have the capacity or appetite to negotiate them tightly, gien the paper war — so you can quite easily see ISDAs with very brief grace periods, and IM CSDs with longer ones.