Presentation on the ISDA and CSA to The Forex Association of India 6th April 2013

Single Agreement Master Agreement Schedule Single Agreement Confirmations CSA Paragraph 11

CSA and other collateral Collateral is by the Party itself Benefits No separate invocation required No separate calculation required (pledge of shares)

Payment netting - Netting during the course of transactions Netting is a particularisation of the principle of mutual dealings and set off Payment netting - Netting during the course of transactions Close out netting - Netting post closing out (terminating) the transactions Where... mutual dealings: … account shall be taken… sum due from one … shall be set-off …. against … sum due from the other …. and the balance …. shall be claimed or paid

(Bilateral) Netting for Derivatives ISDA MASTER AGREEMENT Payment Netting (2(c)) Same Currency Same Transaction Multiple transactions by election During Life of transaction Close out netting (6(e)) On termination Netting of all o/s amounts payable under ISDA Master Agreement Set-Off (6(f)) On termination Netting net amounts under ISDA with all other amounts Same capacity

Payment Netting PARTY A PARTY B As per the ISDA Master Agreement Gross: Rs.100/- PARTY A PARTY B Net: Rs.75/- Gross: Rs.25/- Note: payment netting applies to payments: on the same day in the same currency In respect of the same Transaction UNLESS parties elect “Multiple Transaction Payment Netting” to apply (part 4(i) of the Schedule)

Close-out netting PARTY A PARTY B Rs.8/- Swap 1 Rs.5/- Swap 2 Rs.10/- Note: Amounts refer to MTM values on close-out, not to payments due

If Close-out netting is enforceable PARTY A PARTY B Rs.3/- (net) Party A has to pay Rs. 3/- to Party B’s insolvency trustee

If Close-out netting is not enforceable PARTY A PARTY B Rs.13/- Rs.10/- Party A has to pay Rs.13/- to Party B’s insolvency trustee. Party A has to file a proof of debt in Party B’s insolvency to claim Rs.10/-

What’s so different about collateral for derivatives? Why the CSA? What’s so different about collateral for derivatives? In any event: Why not use good old pledge / security creation documentation? Why complicate life with the CSA?

CSA - Title Transfer - How it works? Outright transfer of cash and securities Conditional obligation to repay cash and re-deliver fungible securities Re-delivery obligation becomes debt obligations on default Exposure netted against the collateral value

Understanding why “the CSA” EXPOSURE

Kinds of Collateral Indian Government Securities Indian Corporate Bonds Cash FX INR Foreign Government Securities Foreign Debt Securities

CSA - Cash If INR - If FX – FEMA Permissions Deposit Regulations Where the Bank is the recipient of collateral Where the corporate counterparty is the recipient of collateral Risk of Re-characterization No intention of creating security interest Transferee free to deal with collateral If FX – FEMA Permissions

CSA Issues Credit Risk on Collateral Taker Operational feasibility Perception-Netting will not be enforceable  Negotiation may be a tedious process (but changing)  Re-characterisation risk in certain jurisdictions

Its been a pleasure! Thank you