ISDA Emphasizes Need for International Co-ordination in Development of Standard Credit Support Annex
Jonathan D. Gupta | Bloomberg Law
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
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.
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.
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.
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