Value - CSA Provision

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1995 ISDA Credit Support Annex (English Law)
A Jolly Contrarian owner’s manual

Paragraph Value in a Nutshell
Use at your own risk, campers!

The “Value” (bearing in mind dispute provisions of Paragraph 4) of Eligible Credit Support on any Valuation Date is its Base Currency Equivalent, if cash, and, if securities, the Base Currency Equivalent of the bid price the Valuation Agent obtains, in each case multiplied by the relevant Valuation Percentage. The Value of cash and securities in a Credit Support Balance that are not Eligible Credit Support at any time will be zero.
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Paragraph Value in full

Value” means, for any Valuation Date or other date for which Value is calculated, and subject to Paragraph 4 in the case of a dispute, with respect to:

(i) Eligible Credit Support comprised in a Credit Support Balance that is:
(A) an amount of cash, the Base Currency Equivalent of such amount multiplied by the applicable Valuation Percentage, if any; and
(B) a security, the Base Currency Equivalent of the bid price obtained by the Valuation Agent multiplied by the applicable Valuation Percentage, if any; and
(ii) items that are comprised in a Credit Support Balance and are not Eligible Credit Support, zero.

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Related agreements and comparisons

Related Agreements
Click here for the text of Section Value in the 2016 English Law VM CSA
Click here for the text of Section Value in the 1994 New York law CSA
Click here for the text of Section Value in the 2016 New York law CSA
Comparisons
1995 English Law CSA and 2016 English law VM CSA: click for comparison
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2016 English law VM CSA and 2016 NY Law VM CSA: click for comparison
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Resources and navigation

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 the ᐅ to expand:

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Content and comparisons

The 2016 English law VM CSA adds in the FX Haircut Percentage into the multiplier, that being (in some jurisdictions) a fairly hefty surcharge for those people who like to collateralise in a currency other than the one in which their derivatives are denominated, and also (partially) corrects the snafu about ineligible credit support, at least on a Default.

Once there is a Default, you are working things out, and FX Haircut Percentages and Valuation Percentages no longer matter because rather than assigning a notional value for the asset in the Base Currency if liquidated — and therefore giving yourself a little buffer for rainy day and so on — the rainy day has arrived. You are actually liquidating the asset, which will already have yesterday’s haircut applied to it, the counterparty isn’t to be giving you any more, and the money you raise from selling the Credit Support Balance, whether eligible or not, is real money, it really pays down your claim, and you have to account to the Defaulting Party’s administrator for anything left once you have closed out your ISDA.
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Summary

Base Currency Equivalent of bid price

It is not unknown to amend limb (ii) to include "the Base Currency Equivalent of the bid price obtained by the Valuation Agent multiplied by the nominal amount of such security".

This is presumably to cater for the pedantic argument — just the sort of argument that a diligent legal eagle with nothing better to do loves to run — that a “bid price” could be a percentage figure of a nominal amount, instead of a cash value, and this might upset the calculation. I mean, really.

But even if a “price” isn’t necessarily a cash amount — to be sure, trading folk do talk that way sometimes, even if most sensible working folk don’t — the idea of the “Base Currency Equivalent” of that price certainly turns it into one. You can’t exactly have “USD 86%”, can you? And if the Eligible Credit Support includes collateral other than cash or debt instruments (e.g., equities), reference to a nominal amount multiplier is potentially confusing.
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General discussion

Ineligible Credit Support

Credit Support which has been delivered but has subsequently fallen out of eligibililty criteria (and any non-eligible Distributions and Interest Amounts received in respect of Eligible Credit Support) remains part of the Credit Support Balance, but is valued at zero.

While the world is moving towards a predilection for cash only, single currency CSAs, so this objection might soon seem archaic, in the mean time note a whopping great hole in the CSA documentation here. What happens to stuff which, when you posted, was Eligible Credit Support, but after posting it ceases to be eligible? How do you get it back?

On the face of it, it’s straightforward:

the Value of “any items that are comprised in a Credit Support Balance and are not Eligible Credit Support is zero.”

—Definition of Value, CSA

So it doesn’t count to the Credit Support Balance. But just because something has no “Value” under your CSA doesn’t mean it has no value at all. There’s no accounting for taste, after all. If the Transferee doesn’t want it, it should give it back, right?

Sans doubte, that’s what the boxwallahs at ISDA had in mind. But — whoops — that’s not quite what they managed: The mechanism for getting your posted collateral back is to wait for the Exposure to reduce, and then call back equivalent items to those you posted. But even the day your Exposure goes to (or through) zero, you can call only back Equivalent Credit Support with a Value equal to your existing Credit Support Balance - in the eyes of the CSA, that is all you have posted.

But the CSA has no eyes for your previously posted, now ineligible, collateral. It is blind to it: your ineligible collateral has a “Value” of zero, the Transferee discharge its Return Amount obligation without giving any of the ineligible stuff back. It gets trapped in a kind of parallel universe, like the Nosferatu the unposted, it neither lives nor dies, but ceaselessly roams the afterlife, seeking true love and haunting the dreams of every negotiator.

Most houses have long since crafted language to deal with this contingency. I say “crafted” but “congealed” is a better description: the standard formulations are a tedious clutter of masticated paragraphs that interrupt the elegant flow of your elections, impeding the flow like a tacky mess that accumulates around the nozzle of a ketchup dispenser. All you really need to say is this:

If at any time any item comprising a Credit Support Balance ceases to be Eligible Credit Support the Transferee must transfer to the equivalent items of the same type, nominal value, description and amount to the Transferor on the Settlement Day following the demand by the Transferor.

You don’t need to make this transfer conditional on the Transferor ponying up replacement Eligible Credit Support - Q.E.D. this stuff has no Value, so his Credit Support Balance will be suddenly in debit, and the Transferee can call additional Delivery Amount independently of the return of this item.
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See also

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References