An Overview of Collateralization Fundamentals & the ISDA Credit Support Annex
7 Pages Posted: 19 Sep 2017 Last revised: 5 Feb 2018
Date Written: September 3, 2017
In this paper we discuss the continued transition of financial markets towards trade standardization and the clearing of transactions, outlining the role of central clearing counterparties CCPs in reducing systemic and idiosyncratic risk. We contrast this with a discussion on bespoke non-cleared bilateral trading, the associated credit risk management process and the charging of credit valuation adjustments termed collectively as XVA adjustments, with the principal credit valuation adjustment termed CVA.
The majority of trading counterparties require collateral to be posted to cover bilateral trading positions and have extensive legal documentation in place to govern the collateral calculation and transfer process, of which the ISDA Credit Support Annex or CSA agreement is the most common and market standard.
We discuss both the collateral posting process in detail and outline all the main important terminology and terms outlined in the ISDA CSA. Finally we outline trading features that require special considerations, namely trade break-clauses and physical and cash settlement features.
Keywords: Central Clearing Counterparty, CCP, Central Clearing House, Cleared Transactions, Bilateral Trading, Exposure Profiles, Netting Sets, Counterparty Valuation Adjustments, XVA, CVA, Collateralization, Break-Clauses, Physical and Cash Settlement, ISDA Master Agreement, Credit Support Annex, Credit Thre
JEL Classification: A20, A22, A23, C00, F10, F13, F36, F38, F63, F65, G10, G15, G20, G21, G24, G30, G31, G32, G33, G34
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