Credit Support Annex
Encyclopedia
A Credit Support Annex, or CSA, is a legal document which regulates credit support (collateral) for derivative transactions. It is one of the four parts that make up an ISDA Master Agreement
but is not mandatory. It is possible to have an ISDA agreement without a CSA but normally not a CSA without an ISDA.
A CSA defines the terms or rules under which collateral is posted or transferred between swap counterparties to mitigate the credit risk
arising from "in the money" derivative positions.
If on any Valuation Date, the Delivery Amount equals or exceeds the Pledgor's Minimum Transfer Amount, the Pledgor must transfer Eligible Collateral with a Value at least equal to the Delivery Amount. The Delivery Amount is the amount the Credit Support Amount exceeds the Value of all posted Collateral held by the Secured Party. The Credit Support Amount is the Secured Party's Exposure plus Pledgor's Independent Amounts minus Secured Party's Independent Amounts minus the Pledgor's Threshold. The Collateral must meet the Elibibility criteria in the agreement, e.g. which currencies it may be in and what types of bonds are allowed, and the Value will take account of haircuts
. There are also rules for the settlement of disputes arising over valuation of derivative positions.
To distinguish between the Schedule to the Master Agreement
and the Credit Support Annex, the schedules are numbered as Parts and CSA are numbered as Paragraphs. To customise the requirements of an OTC Transaction, the clauses which are required are added as Paragraph 11 (for London Agreements) and as Paragraph 13 (for New York Agreements).
ISDA Master Agreement
The ISDA master agreement is the most commonly used master contract for OTC derivative transactions internationally. It is part of a framework of documents, designed to enable OTC derivatives to be documented fully and flexibly. The framework consists of a master agreement, a schedule,...
but is not mandatory. It is possible to have an ISDA agreement without a CSA but normally not a CSA without an ISDA.
A CSA defines the terms or rules under which collateral is posted or transferred between swap counterparties to mitigate the credit risk
Credit risk
Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....
arising from "in the money" derivative positions.
If on any Valuation Date, the Delivery Amount equals or exceeds the Pledgor's Minimum Transfer Amount, the Pledgor must transfer Eligible Collateral with a Value at least equal to the Delivery Amount. The Delivery Amount is the amount the Credit Support Amount exceeds the Value of all posted Collateral held by the Secured Party. The Credit Support Amount is the Secured Party's Exposure plus Pledgor's Independent Amounts minus Secured Party's Independent Amounts minus the Pledgor's Threshold. The Collateral must meet the Elibibility criteria in the agreement, e.g. which currencies it may be in and what types of bonds are allowed, and the Value will take account of haircuts
Haircut (finance)
In finance, a haircut is a percentage that is subtracted from the market value of an asset that is being used as collateral. The size of the haircut reflects the perceived risk associated with holding the asset...
. There are also rules for the settlement of disputes arising over valuation of derivative positions.
To distinguish between the Schedule to the Master Agreement
ISDA Master Agreement
The ISDA master agreement is the most commonly used master contract for OTC derivative transactions internationally. It is part of a framework of documents, designed to enable OTC derivatives to be documented fully and flexibly. The framework consists of a master agreement, a schedule,...
and the Credit Support Annex, the schedules are numbered as Parts and CSA are numbered as Paragraphs. To customise the requirements of an OTC Transaction, the clauses which are required are added as Paragraph 11 (for London Agreements) and as Paragraph 13 (for New York Agreements).