Presentation on theme: "INDEX Credit Support Agreement & Credit Support Annex"— Presentation transcript:
1 Credit Support Annex under ISDA framework vis-à-vis Legal and Regulatory Scenario in India
2 INDEX Credit Support Agreement & Credit Support Annex Netting and Close-Out Netting Provisions under ISDA Master AgreementWhether Close-out Netting enforceable in IndiaLegal Position in IndiaRegulatory Scenario on CSAPerspective of ISDA
4 CSD and CSAISDA Master Agreement + Schedule Credit Support Deed (CSD) under English Laws Credit Support Annex (CSA) under English Laws CSD – Security Agreement CSA – Direct Transfer (CSA does not create a Charge or Security Interest)
5 Features of CSA:Nature of CollateralsAmountHow determinedPeriodicityIts an Annex i.e exchange of Collateral is a “Transaction” under ISDA AgreementNo separate governing law and jurisdiction, as it shall be governed by the law agreed under ISDA Agreement
6 Netting and Close-Out Netting Provisions under ISDA Master Agreement Payment Netting ( = 2)combining offsetting cash flow obligations between two parties on a given day in a given currency into a single net payable or receivable; payment netting is essentially the same as set-offClosing Out Nettinga process involving termination of obligations under a contract with a defaulting party and subsequent combining of positive and negative replacement values into a single net payable or receivable. Basic elements of Close-out Netting :a. Early Termination,b. Valuation of the Terminated Transactionsc. Settlement and Set off
7 Enforcement of close-out netting in India Whether close-out netting under ISDA is enforceable in India ?a. Companiesb. Private Banksc. Foreign Banks (Indian Branch)d. PSBs / SBI
8 LEGAL POSITION IN INDIA Close-out Netting :Whether there is any specific legislation in India which permits the same ?Is there any “direct” High Court or Supreme Court Judgement in India which recognises this concept for derivatives or other transactions/ entities and overruling the application of law of liquidation ? (other than Judgements from which attempt can be been made to draw a distant corollary to enable one to form such view ?)
9 REGULATORY SCENARIO IN INDIA RBI circulars on Netting :2011 RBI Circular on Prudential Norms for Off- Balance Sheet Exposures of banks states – “law is not unambiguously clear”2012 Master RBI Circular on Prudential Guidelines on Capital Adequacy – “No Netting exposure for regulatory capital purposes is not permitted”Margining is required to be on gross and not on net exposures
10 Basel Requirement on netting : Basel III permits regulatory capital netting, if regulator is satisfied that written and reasoned legal opinion in said jurisdiction permits close-out netting.
11 Model Netting Act (PROPOSED BY ISDA TO VARIOUS COUNTRIES) Discussion-Divergent Views In view of the different laws and statutes under which various companies, banks and financial institutions are incorporated/ set up in India, do the present legislations read as a whole, have place for a consolidated all pervading “Netting-Act” ?
12 BASEL perspective on CCP CCP has to be qualified one i.e. compliant with Committee on Payment and Settlement Systems (CPSS)- International Organisation of Securities Commission (IOSCO)’s Principles for Financial Market Infrastructures (FMI Principles)(FMI Principles have to be adopted by a Country for implementation. )If CCP is not Qualified, 20% %, risk weight for trade exposure may apply