Transfers, Calculations and Exchanges - VM CSA Provision

ISDA 2016 English Law VM Credit Support Annex A Jolly Contrarian owner’s manual™ Go premium Crosscheck: For corresponding provisions in other CSAs see the table 👇 Transfers, Calculations and Exchanges in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. Original text: edit Paragraph 3. Transfers, Calculations and Exchanges 3(a) Transfers. All transfers under this Annex of any Eligible Credit Support (VM), Equivalent Credit Support (VM), Interest Payment (VM) or Equivalent Distributions will be made in accordance with the instructions of the Transferee or Transferor, as applicable, and will be made: 3(a)(i) in the case of cash, by transfer into one or more bank accounts specified by the recipient; 3(a)(ii) in the case of certificated securities which cannot or which the parties have agreed will not be delivered by book-entry, by delivery in appropriate physical form to the recipient or its account accompanied by any duly executed instruments of transfer, transfer tax stamps and any other documents necessary to constitute a legally valid transfer of the transferring party’s legal and beneficial title to the recipient; and 3(a)(iii) in the case of securities which the parties have agreed will be delivered by book-entry, by causing the relevant depository institution (s) or other securities intermediaries to make changes to their books and records sufficient to result in a legally effective transfer of the transferring party’s legal and beneficial title to the recipient or its agent. Subject to Paragraph 4, and unless otherwise specified in Paragraph 11, if a demand for the transfer of Eligible Credit Support (VM) or Equivalent Credit Support (VM) is received by the Notification Time, then the relevant transfer will be made not later than the close of business on the Regular Settlement Day relating to the date such demand is received; if a demand is received after the Notification Time, then the relevant transfer will be made not later than the close of business on the Regular Settlement Day relating to the day after the date such demand is received. 3(b) Calculations. All calculations of Value and Exposure for purposes of Paragraph 2 and Paragraph 4(a) will be made by the relevant Valuation Agent as of the relevant Valuation Time, provided that, the Valuation Agent may use, in the case of any calculation of (i) Value, Values most recently reasonably available for close of business in the relevant market for the relevant Eligible Credit Support (VM) as of the Valuation Time and (ii) Exposure, relevant information or data most recently reasonably available for close of business in the relevant market(s) as of the Valuation Time. The Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) of its calculations not later than the Notification Time on the Local Business Day following the applicable Valuation Date (or, in the case of Paragraph 4(a), following the date of calculation). 3(c) Exchanges. (i) Unless otherwise specified in Paragraph 11, the Transferor may on any Local Business Day by notice inform the Transferee that it wishes to transfer to the Transferee Eligible Credit Support (VM) specified in that notice (the “New Credit Support (VM)”) in exchange for certain Eligible Credit Support (VM) (the “Original Credit Support (VM)”) specified in that notice comprised in the Transferor’s Credit Support Balance (VM). (ii) If the Transferee notifies the Transferor that it has consented to the proposed exchange, (A) the Transferor will be obliged to transfer the New Credit Support (VM) to the Transferee on the first Settlement Day following the date on which it receives notice (which may be oral telephonic notice) from the Transferee of its consent and (B) the Transferee will be obliged to transfer to the Transferor Equivalent Credit Support (VM) in respect of the Original Credit Support (VM) not later than the Settlement Day following the date on which the Transferee receives the New Credit Support (VM), unless otherwise specified in Paragraph 11(e) (the “Exchange Date”); provided that the Transferee will only be obliged to transfer Equivalent Credit Support (VM) with a Value as of the date of transfer as close as practicable to, but in any event not more than, the Value of the New Credit Support (VM) as of that date. The varieties of ISDA CSA Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng Preamble Pre Pre Pre Pre Pre Interpretation 1 1 1 1 1 Security Interest 2 - 2 - 2 Credit Support Obligations 3 2 3 2 3 Transfers, Calculations and Exchanges - 3 - 3 - Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4 Dispute Resolution 5 4 5 4 5 Holding and Using Posted Collateral 6 - 6 - 6 Transfer of Title, No Security Interest - 5 - 5 - Events of Default 7 6 7 6 7 Rights and Remedies 8 - 8 - 7 Representations 9 7 9 7 9 Expenses 10 8 10 8 10 Miscellaneous 11 9 11 9 11 Definitions 12 10 12 10 12 Elections and Variables 13 11 13 11 13 Resources and Navigation Index: Click ᐅ to expand: 1994 NY CSA 1995 CSA 2016 VM CSA

Overview

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Aside from the tedious suffix action on the defined terms, the 2016 VM CSA provision is largely the same as for the 1995 CSA. They have binned a long doubt-avoiding disquisition about telexes and faxes in 3(a)(iii) and to compensate 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. A salutary thanks-for-phoning-in kind of effort.

Note, however, differences that are created by the different definitions of Settlement Day in the ’95, versus Regular Settlement Day in the ’16.

Summary

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Transfer timing under a CSA

This is how the timing works for CSA transfers. Remember the Valuation Agent is simply the person making the demand. Terminology check: to make this easy we refer to both Delivery Amounts and Return Amounts as “Transfer Amounts”. The date on which someone actually demands a Transfer Amount we call a “Demand Date”.

Valuation of Exposure and Credit Support Balance: Firstly, you must value what you are going to call, which will be the Transfer Amount under para 2(a) or 2(b). This is roughly Credit Support Balance - Exposure (or vice versa).

Per para 2(a) the Transferor will transfer Eligible Credit Support having a Value equal to the Transfer Amount as of the date of transfer. Under the Calculations provision all calculations happen at the relevant Valuation Time. Fluctuations in value after that time won’t invalidate the Transfer Amount, but they may mean a party can immediately call for more Credit Support (that is, have another Demand Date). The Valuation Time in turn keys off the Valuation Date.

Demand Date: On any date that is (or promptly follows) a Valuation Date in which the Exposure has moved in its favour, one party may demand a Delivery Amount or a Return Amount.

Transfer Date: Under para 3(a) (Transfers) if the Demand Date is a Local Business Day and demand is received before the Notification Time, the transfer must be made not later than close of business on the related Regular Settlement Day. If received after the Notification Time (or at any time on a non-Local Business Day), the transfer must be made by close of business on the Regular Settlement Day relating to the day after the Demand Date.

Settlement Day: Here is where things differ materially between the 1995 CSA and the 2016 VM CSA.
1995 CSA: The Settlement Day for any day (whether or not it is a Local Business Day) is:

• Cash: for cash, the next Local Business Day and,
• Securities: for securities, the Local Business Day after the date on which a trade in the relevant security, if effected on the day in question, would have been settled in accordance with customary practice.

2016 VM CSA: In the new world we have the new concept of the Regular Settlement Day, and this is the same Local Business Day as the Demand Date. The run-off text at the end of Paragraph 3(a) gives you a little more flex: if the demand came after the Notification Time, then you must make the transfer by close on the Regular Settlement Day for the next day.

Questions

Demand Date not a Local Business Day: What if the Demand Date is not a Local Business Day? E.g., what if it is received after the Notification Time on a Friday, meaning the Settlement Day takes place on the date on which a trade, effected on a Saturday, would have been settled in accordance with customary practice?

• Securities: For securities this is ok: a trade effected on a non-business day would be deemed to be effected on the next following Local Business Day anyway, so it would pick this up.
• Cash: For cash, not so clear.

What happens if the transferred credit support changes in value on the Settlement Day?

What happens to Exposures if the Settlement Day is a long time after the Demand Date? Is the demand, if answered with irrevocable instructions to deliver, treated as having been met, or does the Exposure stay outstanding until the collateral actually comes in? The answer (counterintuitive, given that the Transferee remains subject to the credit exposure during this time) is YES, thanks to the definitions of Delivery Amount and Return Amount, both of which include the words:

“...the Value as of that Valuation Date of the Transferor’s Credit Support Balance (adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such Valuation Date).”

What if I have to pay out a Transaction termination amount which the counterparty is already holding all or some of by way of variation margin? Since it will owe me that back, we can just off set those and call it quits, right? Wrong. See our separate article on that issue.

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• JC’s “nutshell” summary of the clause
• Background reading and long-form essays

See also

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• Transaction terminations and VM for a more in-depth discussion of the interaction of transaction termination amounts and adjustments to the Credit Support Balance that they create.