ISDA Emphasizes Need for International Co-ordination in Development of Standard Credit Support Annex

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Jonathan D. Gupta | Bloomberg Law ISDA Press Release (Nov. 3, 2011) The International Swaps and Derivatives Association (ISDA or Association) outlined key provisions of its proposal for a standard credit support annex (SCSA), as part of its efforts to bring efficiency and standardization to over-the-counter (OTC) derivatives markets.1

Three Objectives

ISDA explained that there are potentially millions of combinations of terms under the current form of credit support annex (CSA). ISDA also noted that different approaches by derivative counterparties to booking CSA terms can lead to collateral disputes. The Association emphasized that regulators and legislators are encouraging the standardization of processes in derivatives markets. ISDA explained that the SCSA proposal addresses three primary objectives, namely (1) standardizing market practice by removing optionality in the current CSA, (2) promoting the adoption of overnight index swap discounting to align interest accruals on cash collateral, and (3) aligning the mechanics and economics of collateralization between bilateral and cleared OTC derivatives markets.

Currency Silos

ISDA explained that the mechanics of the SCSA are as in the CSA, but the calculation of collateral is amended so that derivatives exposures and offsetting collateral are grouped into like currencies, or "currency silos". ISDA explained that this approach is more consistent with practices at clearinghouses such as the London Clearing House. Under the SCSA, only cash would be eligible collateral for variation margin, although securities would still be permitted for independent amounts.

Implementation Issues

ISDA emphasized that adoption of the SCSA would follow a flexible and market-driven approach, with firms implementing the document at a pace they deem appropriate. Among other issues, the proposal also takes into account the relationship between the SCSA and existing CSAs, and suggests that trades may be moved from the CSA to the SCSA, but not vice versa. Finally, ISDA emphasized that industry and regulators should co-ordinate internationally on developing SCSAs, to ensure global consistency. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.