Transfers, Calculations and Exchanges - CSA Provision: Difference between revisions
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Latest revision as of 12:07, 26 March 2024
ISDA 1995 English Law Credit Support Annex
A Jolly Contrarian owner’s manual™ Go premium
Crosscheck: 3 in a Nutshell™ Original text:
Resources and Navigation
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Overview
Aside from the tedious “(VM)” suffix action on the defined terms, the 2016 VM CSA provision is largely the same as for the 1995 CSA.
The ’squad binned a long for the avoidance of doubt disquisition about telexes and faxes in 3(a)(iii) and instead have indulged in some unnecessary details in 3(b) about what values and inputs the Valuation Agent may use in coming up with a valuation. In a nutshell, it has to be reasonable.
There are differences created by the definitions of Settlement Day in the ’95, and Regular Settlement Day in the ’16.
Summary
We have set out the transfer timings — no small minefield — in the premium section, since it was really painful to do. Freeloaders: just be aware of the slippage due to the Notification Time, the mindwarp that is the definition of Settlement Day and Regular Settlement Day, and the fact that the relevant Local Business Day is in the place of receipt, not Transmission, and so on.
The reality is that collateral operations teams have got most of this taped, automated, and if anything were to foul up they would have long since ironed it out. And the move to call-cash daily margining has probably decomplicated things, too.
Exchanges
A counterparty who has posted one form of Eligible Credit Support and can ask the Transferee to switch it for something else. The Transferee doesn’t have to, but derivatives counterparties being the reasonable commercial fellows they are — and their operations teams being no-nonsense pragmatists they are — they will generally allow this as part of the normal ebb and flow of collateral operations. Probably less of a thing now 2016 VM CSAs tend to be cash only and base currency cash at that, but the possibility remains, and as, to our enduring regreet, we know, ISDA’s crack drafting squad™ is not usually one to let unexplored possibilities go undocumented.
Note here the Transferor can ask for an exchange, but the Transferee is not obliged to accept it. This is a fundamental provision of “title transfer”: once the Eligible Credit Support is delivered under a title-transfer 1995 CSA, the Transferee owns it absolutely. It only has to return Equivalent Credit Support. This is a special, legal ninja[1] use of the word “equivalent”. It means “fungible”; exactly the same as ~; not “broadly similar to ~”.
This is important also from a pricing (and operational) perspective: otherwise the Transferor would have a “worst-of” option and would be entitled to continually switch into the "cheapest to deliver" of the Eligible Credit Support. Needless to say, the increased collateral flows would also increase the operational burden.
Delivery Amounts: Contrast this with Delivery Amounts, where a Transferor has the option to deliver the cheapest of the Eligible Credit Support specified in the 1995 CSA.
Return Amounts: A Transferee does have a (limited) option in terms of selecting the Return Amount should there be a requirement to return posted credit support: it can select the cheapest to deliver of all the Eligible Credit Support that has been posted to it which currently comprises its Credit Support Balance.
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- JC’s “nutshell” summary of the clause
- Background reading and long-form essays
- A blow by blow run through of the timings of a collateral demands
- Some FAQs