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Presentation on the ISDA and CSA to The Forex Association of India 6 th April 2013

Presentation on the ISDA and CSA to The Forex Association of India 6 th April 2013. Single Agreement . CSA and other collateral . Collateral is by the Party itself Benefits No separate invocation required No separate calculation required (pledge of shares). Netting.

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Presentation on the ISDA and CSA to The Forex Association of India 6 th April 2013

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  1. Presentation on the ISDA and CSAto The Forex Association of India6th April 2013

  2. Single Agreement

  3. CSA and other collateral • Collateral is by the Party itself • Benefits • No separate invocation required • No separate calculation required (pledge of shares)

  4. Netting 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

  5. (Bilateral) Netting for Derivatives ISDA MASTER AGREEMENT

  6. Payment Netting As per the ISDA Master Agreement Gross: Rs.100/- PARTY A PARTY B Net: Rs.75/- Gross: Rs.25/- • Note: payment netting applies to payments: • on the same day • in the same currency • In respect of the same Transaction UNLESS parties elect “Multiple Transaction Payment Netting” to apply (part 4(i) of the Schedule)

  7. Close-out netting Rs.8/- PARTY A PARTY B Swap 1 Rs.5/- Swap 2 Rs.10/- Swap 3 Note: Amounts refer to MTM values on close-out, not to payments due

  8. If Close-out netting is enforceable PARTY A PARTY B Rs.3/- (net) Party A has to pay Rs. 3/- to Party B’s insolvency trustee

  9. If Close-out netting is not enforceable PARTY A PARTY B Rs.13/- Rs.10/- 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/-

  10. Why the CSA? • What’s so different about collateral for derivatives? • In any event: • Why not use good old pledge / security creation documentation? • Why complicate life with the CSA?

  11. 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

  12. Understanding why “the CSA” EXPOSURE

  13. Kinds of Collateral • Indian Government Securities • Indian Corporate Bonds • Cash • FX • INR • Foreign Government Securities • Foreign Debt Securities

  14. 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

  15. 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

  16. Its been a pleasure!Thank you

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