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

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • What is credit support and how is it used in the ISDA credit support documentation?
  • What is credit support?
  • Cash collateral
  • Securities collateral
  • What are the benefits of using credit support?
  • What are the problems with using credit support?
  • What do the key defined terms found in the credit support documents mean?
  • Base currency
  • Credit support amount
  • Credit support balance or posted credit support
  • More...

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

What is credit support?

Credit support is a means of a party reducing its credit risk on its counterparty. Credit support arrangements are also known as 'financial collateral arrangements', 'margin arrangements', 'collateralisation' and 'credit enhancement'.

One party (or both parties) will deliver, or otherwise make available, assets (known as collateral or margin) to the other party (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 are usually:

  1. cash, or

  2. securities

Cash collateral

The vast majority of collateral is provided as cash. This can be in the form of both cash (ie notes and coins) or rights to deposits.

Following the decision in Re Charge Card Services, it used to be questionable whether a chargor could create a security interest in a cash deposit where the cash is held with the collateral taker and so cash collateral would often be

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