December 24th, 2016 by Michael Beaton
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On 20 December 2016, ISDA published template clauses which allow market participants to include “Independent Amounts” within their Variation Margin CSAs.  The purpose of the amendments is to allow counterparties to create a single CSA which covers both regulatory variation margin and non-regulatory Independent Amounts.

The new provisions work by amending the definitions of “Delivery Amount” and “Return Amount”.  More specifically, they do so by re-embedding an amended version of the “Credit Support Amount” definition into the calculation of the “Delivery Amount” and the “Return Amount”.

The concept of the “Credit Support Amount” had been dropped from both the English law – and New York law – governed versions of the “2016 Credit Support annex for Variation Margin (VM)” due to its redundancy.  Why was this?  In a traditional CSA, the “Credit Support Amount” had been comprised of the concepts of “Exposure”, “Independent Amounts” and “Thresholds”.  However, given that (a) “Independent Amounts” were thought to be irrelevant within the context of a CSA dealing with variation margin only, and (b) Thresholds are required to be zero in a WGMR-compliant variation margin environment, only the concept of “Exposure” remained.  In that sense, the new definitions published by ISDA represent a return (but only half-way) to the definitions of “Delivery Amount” and “Return Amount” which exist in ‘traditional’ CSAs.

The new provisions are by no means necessary, but they are useful tools for those needing to become WGMR-compliant but wishing to salvage “Independent Amount” provisions from legacy documentation.

The evolution of the “Delivery Amount” and “Return Amount” clauses is summarised below.

delivery-amount-return-amount

Where:

‘Credit Support BalanceTfor‘ is the Value of the Transferor’s Credit Support Balance;

‘Credit Support Balance (VM)Tfor‘ is the Value of the Transferor’s Credit Support Balance (VM);

‘ExposureSP/Tfee‘ is the “Exposure” of the Secured Party or Transferee (as the case may be);

‘Independent AmountsPlgor/Tfor‘ is the Independent Amounts applicable to the Pledgor or Transferor (as the case may be)

‘Independent AmountsSP/Tfee‘ is the Independent Amounts applicable to the Secured Party or the Transferee (as the case may be)

‘Posted Credit SupportSP‘ is the Value of all Posted Credit Support (VM) held by the Secured Party; and

‘ThresholdPlgor/Tfor‘ is the “Threshold” applicable to the Pledgor or Transferor (as the case may be).

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