Credit Support Annex
ISDA framework
Legal and Regulatory Scenario
 Credit Support
Agreement & Credit Support Annex
 Netting and Close-Out Netting Provisions under
ISDA Master Agreement
 Whether Close-out Netting enforceable in India
 Legal Position in India
 Regulatory Scenario on CSA
 Perspective of ISDA
ISDA Master + Schedule
Derivative Transactions
Need for Margin / Credit Support
(Cash / Securities) - Collateral
ISDA Master Agreement + Schedule
Credit Support Deed (CSD) under English Laws
Credit Support Annex (CSA) under English Laws
CSD – Security Agreement
CSA – Direct Transfer
(CSA does not create a Charge or Security Interest)
Features of CSA:
 Nature of Collaterals
 Amount
 How determined
 Periodicity
 Its an Annex i.e exchange of Collateral is a
“Transaction” under ISDA Agreement
 No separate governing law and jurisdiction, as it
shall be governed by the law agreed under ISDA
Payment Netting (7 5 = 2)
combining offsetting cash flow obligations between two parties on a
given day in a given currency into a single net payable or receivable;
payment netting is essentially the same as set-off
 Closing Out Netting
a process involving termination of obligations under a contract with
a defaulting party and subsequent combining of positive and
negative replacement values into a single net payable or receivable.
Basic elements of Close-out Netting :
a. Early Termination,
b. Valuation of the Terminated Transactions
c. Settlement and Set off
 Whether close-out
netting under ISDA is
enforceable in India ?
a. Companies
b. Private Banks
c. Foreign Banks (Indian Branch)
d. PSBs / SBI
Close-out Netting :
 Whether there is any specific legislation in India which
permits the same ?
 Is there any “direct” High Court or Supreme Court
Judgement in India which recognises this concept for
derivatives or other transactions/ entities and
overruling the application of law of liquidation ?
(other than Judgements from which attempt can be
been made to draw a distant corollary to enable one
to form such view ?)
RBI circulars on Netting :
 2011 RBI Circular on Prudential Norms for OffBalance Sheet Exposures of banks states – “law is
not unambiguously clear”
 2012 Master RBI Circular on Prudential Guidelines
on Capital Adequacy – “No Netting exposure for
regulatory capital purposes is not permitted”
 Margining is required to be on gross and not on
net exposures
Basel Requirement on netting :
 Basel III permits regulatory capital netting, if
regulator is satisfied that written and reasoned
legal opinion in said jurisdiction permits close-out
Discussion-Divergent Views
In view of the different laws and statutes under
which various companies, banks and financial
institutions are incorporated/ set up in India, do
the present legislations read as a whole, have place
for a consolidated all pervading “Netting-Act” ?
has to be qualified one i.e. compliant with
Committee on Payment and Settlement Systems
(CPSS)- International Organisation of Securities
Commission (IOSCO)’s Principles for Financial
Market Infrastructures (FMI Principles)
 (FMI Principles have to be adopted by a Country
for implementation. )
 If CCP is not Qualified, 20% - 150 %, risk weight for
trade exposure may apply