Transcript 35mm presentation - International Swaps and Derivatives

Overview of the ISDA Credit Support
Documentation and Brazilian Collateral Issues
Hotel Inter-Continental
Sao Paulo, Brazil
August 6, 2002
Robert G. Pickel
Executive Director and Chief Executive Officer
ISDA
Basics of Collateralization
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
Risk Reduction

Market and Regulatory Forces

Disadvantages of Other Methods - Guarantees,
Credit Insurance or Bond, Letter of Credit, Triple-A
Subs

Drawbacks

Operational systems and legal support

Costs of collateral and support may be
significant

Legal risk : applicable law and procedures may
vary from jurisdiction to jurisdiction
ISDA Credit Support Documents -A Time of Change



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Lessons of 1997-1998

Reduce time frames

Revise dispute resolution process

Broaden the role of ISDA documents
Opportunity to make structural changes

Simplify architecture

Reduce size of document
Result: 2001 ISDA Margin Provisions and
forms of Amendment to existing credit
support documents
Background and Structure of 1994
ISDA Credit Support Annex (NY
Law)





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Bilateral, mark-to-market form
Cash and securities posted as collateral
Parties can add other forms of credit support
Computation and delivery, substitution and return
mechanics
Annex also covers:
 Dispute resolution
 Holding and using collateral; Distributions
 Events of Default; Rights and Remedies
 Representations; Expenses
Background and Structure

Part of Schedule to ISDA Master

Underlying assumption that NY law applies;
NY law ISDA Master

Paragraph 13 of ISDA Credit Support
Annex is equivalent of the Schedule to the
ISDA Master Agreement
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ISDA Agreement Structure 2002
Credit Support Documents:
Offering protection against
credit risk
Confirmations (long form)
Definitions: for use in
documenting Transactions

2000 Definitions (replace the
1991 Definitions (as amended
by the 1998 Supplement)

1999 Credit Derivatives
Definitions (plus three
Supplements published in
2001)

1998 Euro Definitions

1998 FX and Currency Option
Definitions (plus revised
Annex A)
1996 Credit Support Annex

1997 Bullion Definitions
(Japanese Law)

1997 Government Bond Option
Definitions

1996 Equity Derivatives
Definitions

1993 Commodity Derivatives
Definitions (as amended by the
2000 Supplement)

1992 Master Agreement
(Multicurrency-Cross Border)
2001 ISDA Margin Supplement
(incorporating 2001 ISDA
Margin Provisions)
• 1995 Credit Support Annex
(Transfer – English Law)


• 1994 Credit Support Annex
(New York Law)


1995 Credit Support Deed
(Security Interest – English Law)
Protocols: amending Master
Agreement
Confirmations (short form)


• 2001 Euro Protocol
• 2000 EMU Protocol (Greece)
• 1998 EMU Protocol
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Governs the legal and credit
relationship of the parties
Includes representations, events
of default/termination events and
covenants
Incorporates Confirmations
Schedule used to make changes to
standard provisions

Incorporate Definitions
Specify economic terms of each
transaction
Include Transaction-specific
modifications
Paragraph 1
Interpretation
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(a)
Definitions and Inconsistency
(b)
Secured Party and Pledgor
Paragraph 2
Security Interest
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
Grant by Pledgor of first priority security
interest thereon and right of set-off

Immediate release of security interest and
lien upon Transfer of Posted Collateral to
Pledgor
Credit Support Obligations Worksheets
and Examples
The following worksheets and examples demonstrate the
mechanics used in Paragraph 3 of the ISDA Credit Support
Annex to calculate Credit Support Obligations (including
Delivery Amounts and Return Amounts), based on the
following three steps:
 Identify all relevant defined terms (assigned vs.
calculated);

Establish numerical inputs for all “assigned” defined
terms; and

Do the arithmetic to derive all “calculated” defined
terms.
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Delivery Amount Worksheet
“Assigned” Defined Terms
1. Exposure
Secured Party Pledgor (Party B)
(Party A)
A. [
]
B. n/a
2. Independent Amount
A. [
3. Threshold
]
B. [
]
A. n/a
B. [
]
4. Min. Transfer Amount
A. n/a
B. [
]
5. Value of Posted Credit
Support
A. [
]
B. n/a
“Calculated” Defined Terms Secured Party Pledgor (Party B)
(Party A)
6. Credit Support Amount
A. n/a
B. 1A + 2B - 2A - 3B
7. Delivery Amount
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A. n/a
B. 6B - 5A, iff 7B (4B)
Delivery Amount Worksheet
Example 1
“Assigned” Defined Terms
1.
2.
3.
4.
5.
Secured Party
(Party A)
A. 500
A. 0
A. n/a
A. n/a
A. 250
Exposure
Independent Amount
Threshold
Min. Transfer Amount
Value of Posted Credit
Support
“Calculated” Defined Terms Secured Party
(Party A)
6. Credit Support Amount
A. n/a
7. Delivery Amount
A. n/a
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Pledgor (Party B)
B.
B.
B.
B.
B.
n/a
250
100
50
n/a
Pledgor (Party B)
B. 500 + 250 - 0 - 100 = 650
B. 650 - 250 (iff (50)) = 400
Delivery Amount Worksheet
Example 2
“Assigned” Defined Terms
1.
2.
3.
4.
5.
Secured Party
(Party A)
A. 500
A. 700
A. n/a
A. n/a
A. 300
Exposure
Independent Amount
Threshold
Min. Transfer Amount
Value of Posted Credit
Support
“Calculated” Defined Terms Secured Party
(Party A)
6. Credit Support Amount
A. n/a
7. Delivery Amount
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A. n/a
Pledgor (Party B)
B.
B.
B.
B.
B.
n/a
300
200
50
n/a
Pledgor (Party B)
B. 500+300 - 700 - 200
= (100)
=0
B. 0
Return Amount Worksheet
“Assigned” Defined Terms
1.
2.
3.
4.
5.
Secured Party
(Party A)
A. [
]
A. [
]
A. n/a
A. [
]
A. [
]
Exposure
Independent Amount
Threshold
Min. Transfer Amount
Value of Posted Credit
Support
“Calculated” Defined Terms Secured Party
(Party A)
6. Credit Support Amount
A. n/a
7. Return Amount
A. 5A - 6B iff
7A (4A)
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Pledgor (Party B)
B. n/a
B. [
]
B. [
]
B. n/a
B. n/a
Pledgor (Party B)
B. 1A + 2B - 2A - 3B
B. n/a
Return Amount Worksheet
Example 1
“Assigned” Defined Terms
1.
2.
3.
4.
5.
Secured Party
(Party A)
A. 500
A. 0
A. n/a
A. 50
A. 300
Exposure
Independent Amount
Threshold
Min. Transfer Amount
Value of Posted Credit
Support
“Calculated” Defined Terms Secured Party
(Party A)
6. Credit Support Amount
A. n/a
7. Return Amount
A. 300 - 200
(iff (50))=100
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Pledgor (Party B)
B.
B.
B.
B.
B.
n/a
300
600
n/a
n/a
Pledgor (Party B)
B. 500 + 300 - 0 - 600 = 200
B. n/a
Return Amount Worksheet
Example 2
“Assigned” Defined Terms
1.
2.
3.
4.
5.
Secured Party
(Party A)
A. 500
A. 700
A. n/a
A. 50
A. 300
Exposure
Independent Amount
Threshold
Min. Transfer Amount
Value of Posted Credit
Support
“Calculated” Defined Terms Secured Party
(Party A)
6. Credit Support Amount
A. n/a
Pledgor (Party B)
B.
B.
B.
B.
B.
n/a
300
200
n/a
n/a
Pledgor (Party B)
B. 500+300 - 700 - 200
= (100)
=0
7. Return Amount
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A. 300 - 0 (iff
(50)) = 300
B. n/a
Paragraph 4
Conditions Precedent, Transfers,
Calculations and Substitutions
(a)
(b)
(c)
(d)
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Conditions Precedent - no Event of Default,
Potential Event of Default or Specified
Condition/no Early Termination Date
Transfers - next Local Business Day after
demand
Calculations - by Valuation Agent as of the
Valuation Time for each Valuation Date
Substitutions - permitted unless otherwise
Paragraph 5
Dispute Resolution
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
Notify other party and Valuation Agent

Undisputed amount is transferred

Parties consult

If dispute relates to Exposure, obtain Market
Quotations

If dispute relates to Value of Credit Support,
resolve in manner stipulated in Paragraph 13
Paragraph 6
Holding and Using Posted Collateral
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(a)
Care of Posted Collateral
(b)
Eligibility to Hold Posted Collateral; Custodians
(c)
Use of Posted Collateral - Broadly Permitted
(d)
Distributions and Interest Amount
Paragraph 7
Events of Default

Failure to post/return collateral or to pay
distributions or interest when due for 2 Local
Business Days after notice

Failure to comply with provisions regarding use
of collateral for 5 Local Business Days after
notice

Failure to perform any other agreement or
obligation under Annex for 30 days after notice
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Paragraph 8(a)
Secured Party’s Rights and Remedies

Triggered by:
(1) Occurrence of Event of Default or Specified Condition
with respect to Pledgor; or
(2) Occurrence/Designation of Early Termination Date

Exercise of Rights and Remedies
(i) rights available under applicable law (NY UCC)
(ii) rights under terms of Other Posted Support
(iii) right to set off
(iv) right to liquidate Posted Collateral
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Paragraph 8(b)
Pledgor’s Rights and Remedies

Triggered by Occurrence/Designation of Early
Termination Date as a result of an Event of Default or
Specified Condition with respect to Secured Party

Exercise of Rights and Remedies
(i) rights available under applicable law
(ii) rights under terms of Other Posted Support
(iii) Secured Party obligated to Transfer all Posted
Collateral and the Interest Amount
(iv) right to set off or withhold payment of remaining
amounts
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Paragraphs 8(c)/(d)
Rights and Remedies
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
Deficiencies and Excess Proceeds

Final Returns
Paragraph 9
Representations

Power to grant a security interest

Sole owner of or right to transfer Eligible Collateral

Creation of a valid and perfected first priority security
interest

No other security interest on any Posted Collateral

Special Representation for U.S. bank or thrift Appendix F to User’s Guide
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Paragraph 10
Expenses

Each party pays its own when performing its
contractual obligations

Because the Pledgor remains the “owner” of collateral,
continues to be liable to pay taxes and other charges
that may be levied on collateral

Costs incurred by Secured Party in liquidating and
applying collateral are payable by the Defaulting Party
or (if no Defaulting Party) equally by both parties
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Paragraph 11
Other Provisions
(a) Default Interest - applicable when Secured Party fails
to make a timely transfer
(b) Further Assurances
(c)
Further Protections - Pledgor must safeguard all
Posted Credit Support
(d) Good Faith and Commercially Reasonable Manner
(e) Demands and Notices
(f)
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Specification of Certain Matters in Confirmations
Paragraph 13
Elections and Variables
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
Eligible Collateral/Valuation Percentages

Thresholds

Valuation and Timing

“Specified Conditions”

Dispute Resolution provisions where Value of Posted Credit
Support not agreed

Eligibility to hold Posted Collateral; Custodians
Paragraph 13
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
Distributions and Interest Amount

Additional Representations

Other Eligible Support and Other Posted
Support

Demands and Notices

Other Provisions
2001 ISDA Margin Provisions
The New Structure


Common operational provisions – Part 1
New York Law: pledge/security interest approach –
Part 2

English Law: title transfer approach – Part 3

Other jurisdictions – Part 4

Definitions – Part 5

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Supplement and other Appendices (Forms of
Notices)
Issues to Consider
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
Nature and location of collateral

Nature and location of counterparty

Perfection issues

Tax issues

Recharacterization issues

Collateral Opinion Projects
ISDA Collateral Opinion
Projects

ISDA is in the process of obtaining legal opinions relating to
creation and perfection of security interests under the New York
and English law collateral documents.

Opinions received from:
Australia
England
Italy
Austria
Finland
Belgium
France
Bermuda
Germany
Switzerland
Canada
Hong Kong
Cayman Islands Indonesia
Denmark
Ireland

Awaiting final opinions from:
Norway

South Africa
Opinions commissioned for:
British Virgin Islands
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Scotland
Singapore
Japan
South Korea
Luxembourg
Sweden
Malaysia
The Netherlands
Taiwan
New Zealand
Thailand
Portugal
U.S.A.