06.12.2013
By Terry Flanagan

Isda Publishes Credit Support Annex

The International Swaps and Derivatives Association has announced the publication of the 2013 Standard Credit Support Annex (SCSA).

The SCSA seeks to standardize market practices in collateral management for over-the-counter (OTC) derivatives. It removes embedded optionality in the existing CSA, promotes the adoption of overnight index swap (OIS) discounting, and aligns the mechanics and economics of collateralization between the bilateral and cleared OTC derivative markets. In addition, the SCSA seeks to create a homogeneous valuation framework, reducing current barriers to resolving novations and valuation disputes.

“The Standard CSA is part of ISDA’s continuing efforts to increase efficiency and improve standardization in the OTC derivatives markets,” said Robert Pickel, ISDA CEO. “The SCSA simplifies market processes regarding collateralization by promoting consistent and transparent valuations while making assignment and risk transfer in the bilateral and cleared space more efficient.”

The SCSA retains the operational mechanics of the current CSA but amends the collateral calculation so that derivative exposures and offsetting collateral are grouped into like currencies, or “silos”. The SCSA contemplates the sole use of cash as eligible collateral for variation margin (securities will still be permitted for initial margin). Each currency silo is evaluated independently to generate a required movement of collateral in the relevant currency. This aligns bilateral collateral structures and economics to be more consistent with margin approaches adopted by global clearing houses.

“The SCSA is an important industry-driven response to the evolving public and private sector thinking on the topic of risk mitigation,” said R. Martin Chavez, managing director and global co‐COO, equities at Goldman, Sachs. “It is another step in the ongoing efforts of ISDA and market participants to standardize OTC derivatives practices and processes.”

Collateralization remains among the most widely used methods to mitigate counterparty credit risk in the OTC derivatives market, and market participants have increased their reliance on collateralization over the years. According to ISDA’s most recent Margin Survey, 84 percent of all transactions are now executed with the support of a collateral agreement at large dealer firms.

“The development of the SCSA reinforces the growing market consensus towards the use of overnight index swap discounting for derivatives,” said Richard Herman, global head of institutional sales at Deutsche Bank AG. “It also represents a major step forward in developing a consistent collateral valuation framework for market participants.”

In the credit derivatives markets, 93 percent of all trades executed were subject to collateral arrangements in 2011.
The role of central counterparties (CCPs) in clearing trades and in managing collateral is also of growing importance. According to ISDA’s Mid-Year 2012 Market Analysis, about 54 percent of the adjusted IRS volume was centrally cleared as of June 30, 2012. A substantial amount of CDS clearing has also occurred since 2009. The primary source of bilateral uncollateralized transactions is highly rated counterparties, such as central banks, debt management offices and sovereigns.

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