Credit Support Annex (CSA)

A credit support annex (CSA) is a legal document that governs the posting of collateral between two parties to over-the-counter derivatives. It is published by the International Swaps and Derivatives Association (ISDA) and forms part of the schedule to the ISDA master agreement between the parties. The CSA sets out when collateral must be delivered, what assets are acceptable, how they are valued and what happens to them, so that the party that is owed money on the trades holds assets to cover that amount.

The CSA is the main tool for reducing counterparty risk in OTC derivatives that are not centrally cleared. It is a type of bilateral collateral agreement. Before the 2008 financial crisis its use was optional and its terms were freely negotiated; since then, margin rules in major jurisdictions have made collateral exchange compulsory for most financial firms.

ISDA has published several forms to fit different legal systems. The 1994 Credit Support Annex under New York law creates a security interest: the party posting collateral still owns it and the receiver holds a pledge. The 1995 Credit Support Annex under English law works by title transfer: ownership passes outright to the receiver, which owes back equivalent assets. A separate English law Credit Support Deed creates security instead, and is not strictly an annex.

In 2016 ISDA issued new versions for variation margin that comply with the regulatory margin rules, and separate documents for regulatory initial margin, which must be held in segregated accounts with a third-party custodian.

The parties complete a section of elections that tailors the standard form.

• Eligible collateral. The cash currencies and securities that may be posted, each with a valuation percentage or haircut; see collateral eligibility.
• Threshold. The amount of unsecured exposure a party is willing to bear before any collateral is due. Regulatory variation margin agreements set it at zero.
• Minimum transfer amount. The smallest call that will be made, which avoids moving trivial sums.
• Independent amount. Extra collateral required regardless of current exposure; see independent amount.
• Valuation and timing. The valuation agent, the valuation date (now normally every business day), the notification time and the deadline for transfer.
• Interest and reuse. The rate paid on cash collateral, and whether securities received may be reused, known as rehypothecation.

Each valuation date, the valuation agent calculates the net mark-to-market value of all trades covered by the agreement. This exposure, adjusted for any independent amounts and thresholds, is compared with the collateral already held. If the difference exceeds the minimum transfer amount, the party that is owed makes a margin call, and the other delivers eligible assets, usually by the next business day. If exposure falls, collateral is returned. The detail of the computation is covered under variation margin calculation.

Disagreements over valuations are handled under a dispute resolution clause: the undisputed amount is transferred and the parties seek market quotations for the rest, a process described under collateral dispute. Regular portfolio reconciliation reduces the number of disputes. On default, the collateral is applied against the net amount due after close-out netting.

In 2013 the Basel Committee and the International Organization of Securities Commissions agreed a global framework of margin requirements for non-centrally cleared derivatives, later finalised in 2015. National rules based on it require covered firms to exchange variation margin daily with a zero threshold, and larger firms to post and collect initial margin on a gross basis. Variation margin rules took effect in 2016 and 2017, and initial margin was phased in by size of firm in stages that ended in September 2022.

The terms of a CSA affect the value of the trades under it. The interest rate paid on cash collateral determines the rate at which future cash flows are discounted, which is why collateralised swaps are valued using overnight rates. Where a party may choose among several currencies or assets to post, it will deliver the cheapest, and that option has a value. Trades without a CSA, or with a one-way CSA, carry credit and funding adjustments. For these reasons many firms have simplified their agreements to cash-only collateral in a single currency.

• International Swaps and Derivatives Association