Transfers - CSA Provision

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CSA Anatomy


In a Nutshell Section 3(a):

Template:Nutshell 1995 CSA 3(a) view template

1995 ISDA CSA full text of Section 3(a):

3(a) Transfers. All transfers under this Annex of any Eligible Credit Support, Equivalent Credit Support, Interest Amount or Equivalent Distributions shall be made in accordance with the instructions of the Transferee or Transferor, as applicable, and shall 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 the giving of written instructions (including, for the avoidance of doubt, instructions given by telex, facsimile transmission or electronic messaging system) to the relevant depository institution or other entity specified by the recipient, together with a written copy of the instructions to the recipient, sufficient, if complied with, to result in a legally effective transfer of the transferring party's legal and beneficial title to the recipient.

Subject to Paragraph 4 and unless otherwise specified, if a demand for the transfer of Eligible Credit Support or Equivalent Credit Support is received by the Notification Time, then the relevant transfer will be made not later than the close of business on the 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 Settlement Day relating to the day after the date such demand is received.
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Related Agreements
Click here for the text of Section 3(a) in the 1995 English Law CSA
Click here for the text of Section 3(a) in the 2016 English Law VM CSA
Click [[{{{3}}} - NY VM CSA Provision|here]] for the text of the equivalent, Section [[{{{3}}} - NY VM CSA Provision|{{{3}}}]] in the 2016 NY Law VM CSA
Comparisons
Template:Csadiff 3(a)
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Resources Full wikitext | Nutshell wikitext
Navigation 1 (Interpretation) | 2 (Credit Support Obligations) | 3 (Transfers, Calculations and Exchanges) | 4 (Dispute Resolution) | 5 (Title Transfer etc) | 6 (Default) | 7 (Representation) | 8 (Expenses) | 9 (Miscellaneous) | 10 (Definitions) | 11 (Elections and Variables)

Index — Click ᐅ to expand:

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1995 English Law CSA and 2016 English law VM CSA: click for comparison You won’t believe this, but ISDA’s crack drafting squad™ mostly managed to resist the urge to abbreviate the tedious drafting of their predecessors in the ’95.

Timing of transfers under a CSA

This is how the timing works for CSA transfers:

Demand Date
On any date, be it a Local Business Day or not, (call it a “Demand Date”, but note per 2(a) or 2(b) it must be made “on or promptly following a Valuation Date”), a party may demand a Transfer under para 2(a) (for a Delivery Amount) or 2(b) (for a Return Amount).

Valuation Time - Exposure
The point at which the valuation is made is the Valuation Time. This keys off the Valuation Date:

Valuation Time - Eligible Credit Support
Per para 2(a) the Transferor will transfer Eligible Credit Support having a Value equal to the Delivery Amount as of the date of transfer. Under the Calculations provision all calculations of Value happen at the relevant Valuation Time. Fluctuations in value in the credit support actually delivered 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).

Transfer Date
Under para 3(a) (Transfers) if the demand is received before the Notification Time on a Local Business Day) on that Demand Date, the transfer will be made not later than close of business on the related Settlement Day (under the 1995 English Law CSA) or Regular Settlement Day (under the 2016 English law VM CSA. If received after the Notification Time, or at any time on day that isn’t a Local Business Day), the transfer must be made by close of business on the Settlement Day/Regular Settlement Day relating to the day (note: ordinary day, not Local Business Day) after the Demand Date.

Settlement Day
Here is where things differ materially between the ’96 and the ’16 versions of the CSA.
1995 English Law 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 English law 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.[1]

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?[2] 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).”

This leads to some rather anomalous results.

References

  1. Just how the business days interact under the ISDA and CSA is about as complicated as string theory, by the way. For a cheat’s guide, see How business days work under the CSA. You’re welcome!
  2. As it may well be, under a 1995 English Law CSA, if the collateral is corporate bonds held in a clearing system