Presentation on the Presentation on the

ISDA and CSA

to

The Forex Association of India6th April 2013

Single Agreement

Master Agreement

Schedule

Confirmations

Single

AgreementCSA

Paragraph 11

CSA and other collateral

Collateral is by the Party itself Benefits • No separate invocation required• No separate calculation required (pledge of

shares)

Netting is a particularisation of the

principle of mutual dealings and set off

Payment netting - Netting during the

course of transactions

Close out netting - Netting post closing

out (terminating) the transactions

Netting

(Bilateral) Netting for DerivativesISDA MASTER AGREEMENT

Payment Netting (2(c))

Same CurrencySame TransactionMultiple transactions by electionDuring Life of transaction

Close out netting (6(e))On terminationNetting of all o/s amounts payable under ISDA Master Agreement

Set-Off (6(f))

On terminationNetting net amounts under ISDA with all other amountsSame capacity

Payment Netting

PARTY A

PARTY A

PARTY B

PARTY B

Note: payment netting applies to payments:on the same dayin the same currencyIn respect of the same Transaction UNLESS parties elect “Multiple

Transaction Payment Netting” to apply (part 4(i) of the Schedule)

Gross: Rs.100/-

Net: Rs.75/-

Gross: Rs.25/-

As per the ISDA Master Agreement

Close-out netting

PARTY APARTY A

Swap 1

PARTY BPARTY B

Rs.8/-

Swap 2

Swap 3

Rs.10/-

Rs.5/-

Note: Amounts refer to MTM values on close-out, not to payments due

If Close-out netting is enforceable

PARTY APARTY A PARTY BPARTY BRs.3/-(net)

Party A has to pay Rs. 3/- to Party B’s insolvency trustee

If Close-out netting is not enforceable

PARTY APARTY A PARTY BPARTY B

Rs.13/-

Party A has to pay Rs.13/- to Party B’s insolvency trustee.Party A has to file a proof of debt in Party B’s insolvency to claim Rs.10/-

Rs.10/-

Why the CSA?

What’s so different about collateral for

derivatives?

In any event:

(i) Why not use good old pledge / security creation

documentation?

(ii) Why complicate life with the CSA?

CSA - Title Transfer - How it works?

Outright transfer of cash and securities

Conditional obligation to repay cash and re-deliver

fungible securities

Re-delivery obligation

becomes debt obligations

on default

Exposure netted against

the collateral value

Understanding why “the CSA”

EXPOSURE

Kinds of Collateral

Indian Government Securities

Indian Corporate Bonds

Cash FX

INR

Foreign Government Securities

Foreign Debt Securities

CSA - Cash

If INR -

Deposit Regulations

• Where the Bank is the recipient of collateral

• Where the corporate counterparty is the recipient of

collateral

Risk of Re-characterization

• No intention of creating security interest

• Transferee free to deal with collateral

If FX – FEMA Permissions

CSA Issues

Credit Risk on Collateral Taker

Operational feasibility

Perception-Netting will not be enforceable

Negotiation may be a tedious process (but

changing)

Re-characterisation risk in certain jurisdictions

Its been a pleasure!Its been a pleasure!

Thank youThank you