Define: Credit Support Annexe

A Credit Support Annex (CSA) is a legal agreement that governs the collateralization of derivative transactions between two parties. It outlines the terms and conditions for posting and receiving collateral to mitigate credit risk.

The purpose of a CSA is to ensure that both parties involved in a derivative transaction have sufficient collateral to cover potential losses in the event of default. It helps to reduce counterparty credit risk and maintain the stability of the financial system.

Common types of collateral that can be used in a CSA include cash, government securities, corporate bonds, equities, and other eligible financial instruments. The specific types of collateral accepted may vary depending on the terms of the CSA agreement.

Collateral valuation in a CSA is typically determined based on market prices or agreed-upon valuation methodologies. Parties may use independent pricing sources or rely on mutually agreed-upon valuation models to determine the value of the collateral.

Yes, CSAs can be customised to suit the specific needs and requirements of the parties involved. The terms and conditions, including the types of collateral, thresholds, haircuts, and other provisions, can be negotiated and agreed upon between the parties.

If a party fails to meet its collateral obligations under a CSA, it may be considered a default event. The non-defaulting party may have the right to terminate the agreement, liquidate the collateral, or take other appropriate actions as specified in the CSA.

A CSA can be terminated or amended by mutual agreement between the parties. However, any termination or amendment should be done in accordance with the provisions specified in the original CSA agreement.

Regulatory requirements for CSAs may vary depending on the jurisdiction and the type of financial institution involved. Parties may need to comply with specific regulations related to collateral management, reporting, and risk management.

While CSAs are primarily used for derivative transactions, they can also be used for other types of financial transactions where collateralization is required. The terms and conditions of the CSA would need to be adapted to suit the specific transaction.