Book Review : A Practical Guide to the 2016 ISDA Credit Support Annexes for VM (Under English & New York Law)
Published: 2018, written by Paul Harding and Abigail Harding
Suggested Audience for the book
- Lawyers new to the ISDA CSA documentation set
- People setting up or running an OTC Collateral Management programme
- Technology people implementing collateral systems or legal systems
With the arrival of mandated variation margin for uncleared OTC derivatives (or Uncleared Margin Regulations UMR) most firms using the OTC market need to use a 2016 ISDA CSA. Given that the start of UMR was in March 2017 you’d think the issue was done and dusted, but in fact new trading relationships and some old ones will still need to use the 2016 CSA.
The book starts with a useful recap of the financial crisis from 2007 onwards giving context to why UMR came about. The book provides a useful historical record on the repeal of the Glass-Steagall Act, the invention of securitised mortgages in CDOs, and the rise in US interest rates from 2006 onwards.
We all know the chain of events with the pressure on mortgage repayments leading to large scale defaults, and the failure of CDO modelling to predict the market environment leading to intervention by the US Federal Reserve to rescue AIG, Fannie Mae and Freddie Mac.
For anyone wanting a brief history of the crisis, chapter one is as good an explanation as I’ve seen, and leads to the 2009 Pittsburgh Summit and onwards into UMR via EMIR and the DFA. The Chapter continues with an explanation of how the US regulatory system works, the UMR rules in the US and Europe and then into the ISDA process to kick off implementation of UMR via their VM Protocol.
If you or your firm are new to margining OTC products, this chapter alone gives a plain-English explanation of the UMR and gives a good context for setting up a margining programme.
Chapter two kicks off summarising the history of credit support documentation within the ISDA documentation framework, and how the usage differs between firms subject to UMR and those that aren’t. From then on the chapter is a blow-by-blow guide to every provision in the 2016 English Law CSA.
Whilst this would guide a lawyer in drafting a CSA, in my experience there needs to be firm-wide consideration of policies regarding many provisions in a CSA regarding eligible collateral, thresholds and other provisions provided they remain within the UMR applicable. The book mentions where UMR is relevant, for instance reminding readers of the Minimum Transfer Amount. Page 100 onwards sets out the areas for negotiation and gives guidance on why some firms choose to haggle.
One contentious aspect of the CFTC UMR is the requirement to settle margin calls “same day”, creating a significant timing challenge for US based firms making calls into the Asia Pacific time zone. In Europe the same requirement was softened using the word “provide” rather than “collect” and interpreted to mean that the transfer instructions had to be agreed to meet the regulation, rather than settlement finality.
Chapter 3 covers the New York Law CSA, which in some regards is very similar to the English Law CSA with similar guidance.
Chapter 4 provide another useful forward-looking snapshot of other regulations and background information including the 2017 ISDA Margin Survey, Basel III and capital, Living Wills, the European Banking Recovery and Resolution Directive (BRRD), UK ring fencing, and CCPs from many perspectives. Finally is some coverage of Brexit which ties in with the recent ISDA Brexit FAQ.
Overall this is a well written and practical book, the filling of ISDA CSAs is helpful for anyone involved in negotiating agreements and the bread at the beginning and end gives a tasty wrapper to the overall sandwich. As with any book on OTC derivatives, it’s not cheap, but the expertise that went into it and the circumstances where the book is needed justify your investment.
The book is available from the Harriman House website and one other popular on-line site where discounted copies exist.