Credit Support Annex (CSA)

What Is a Credit Support Annex (CSA)?

A credit support annex (CSA) is a document that characterizes the terms for the provision of collateral by the parties in derivatives transactions. It is one of four parts of a standard contract or master agreement developed by the International Swaps and Derivatives Association (ISDA).

ISDA master agreements are required between any two parties trading derivative securities in a privately-arranged or over-the-counter (OTC) agreement rather than through a laid out exchange. The majority of derivatives trading is finished through private agreements.

How a CSA Works

The fundamental purpose of a CSA is to characterize and record the collateral offered by the two players in a derivatives transaction to guarantee that they can cover any losses.

Derivatives trading conveys high risks. A derivatives contract is an agreement to buy or sell a specific number of shares of a stock, a bond, an index, or some other asset at a specific date. The amount paid upfront is a small portion of the value of the underlying asset. In the interim, the value of the contract vacillates with the price of the underlying asset.

As a matter of fact, OTC derivatives are riskier than derivatives traded through exchanges. The market is less regulated and less standardized than exchange markets.

OTC derivatives are in many cases traded as a speculation. They likewise are traded as a hedge against risk. In that capacity, many major corporations take part in derivatives trades to safeguard their organizations against losses brought about by currency price vacillations or sudden changes in raw materials costs.

In view of the high risk of losses on the two sides, derivatives traders generally give collateral as credit support to their trades.

Why Collateral Is Required

In view of the high risk of losses on the two sides, derivatives traders generally give collateral as credit support to their trades. That is, each party saves collateral as a guarantee that it can meet any losses.

Collateral, by definition, can be cash or any property of value that can be effectively changed over completely to cash. In derivatives, the most common forms of collateral are cash or securities.

In derivatives trading, the collateral is observed daily as a safeguard. The CSA document characterizes the amount of the collateral and where it will be held.

ISDA Master Agreement

A master agreement is required to trade derivatives, albeit the CSA is definitely not a mandatory part of the overall document. Beginning around 1992, the master agreement has been utilized to characterize the terms of a derivatives trade and make them binding and enforceable. Its distributer, the ISDA, is an international trade association for participants in the futures, options, and derivatives markets.

Highlights

• This document characterizes the terms of the collateral put up by the two players to the transaction.
• A CSA is part of a contract agreement required for any privately-arranged derivatives trade.
• Collateral is typically required due to the high risk of losses associated with derivatives trading.