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?