What is credit support and how is it used in the ISDA credit support documentation?

Credit support is a means of providing collateral or a security interest for payment obligations under derivative transactions. It is a way for a party to reduce its credit risk on its counterparty. Credit support arrangements may be referred to as “financial collateral arrangements”, "margin arrangements”, “collateralization” and “credit enhancement”.

One (or both) parties will deliver or otherwise make available assets (known as collateral or margin) to the other party (known as the collateral taker) to secure or support its present or future obligations. In the event the credit support provider defaults, the collateral taker can rely on the collateral provided by the defaulting party to secure any debt outstanding. Collateral may be provided by one party only (ie where one party is higher rated than the other, it may take collateral) or may be provided by both parties.

Collateral in this context refers to the assets that are provided under a credit support arrangement. These can be:

• • cash; or
• • securities.

The International Swaps and Derivatives Association, Inc (ISDA) has produced standard form credit support documentation which either takes the form of:

• • a credit support annex — known as a CSA; or
• • a credit support deed — known as a CSD.

It is usual, although not mandatory, to select a credit support document with a governing law that matches the governing law of the relevant master agreement.

This guidance note considers what form credit support will take and what are the benefits or problems with using credit support. It further explains key terms found in the ISDA credit support documents and looks at how collateral is transferred under these documents. Further, it references useful additional ISDA documentation which will assist in understanding this process.

See What is credit support and how is it used in the ISDA credit support documentation?

ISDA Credit Support Annex: transfer — English law

There are three forms of credit support documentation published by ISDA which are governed by English law. This guidance note describes the 1995 English law ISDA Credit Support Annex. This document:

• • does not create a security interest — it constitutes an outright transfer of title to collateral;
• • forms part of the Schedule to the Master Agreement; and
• • constitutes a Transaction (as defined in the ISDA Master Agreement).

The guidance note also looks at the 2016 ISDA Credit Support Annex for Variation Margin (VM) Title Transfer — English law (the English Law VM Annex) and further ISDA margin requirements for uncleared derivatives.

See ISDA Credit Support Annex: transfer — English law.

ISDA Credit Support Deed: security interest — English law

There are three forms of credit support documentation published by ISDA which are governed by English law. This guidance note describes the 1995 ISDA English law Credit Support Deed. This document:

• • creates a security interest in the collateral;
• • does not form part of the Schedule to the Master Agreement — it is a stand-alone agreement; and
• • constitutes a Credit Support Document (as defined in the ISDA Master Agreement).

Also considered in this guidance note is the Phase One IM Credit Support Deed for Initial Margin produced by ISDA in 2016 which updates the English Law Deed.

See ISDA Credit Support Deed: security interest — English law.