Collateral and the CSA

Without collateral, RiskAtoms Bank's expected exposure to Corriemoor Bank one year out is £6.25m. Under their Credit Support Annex it is £1.28m. Ebbsworth's CSA cuts £7.44m only to £3.22m, because it lets the first £10m go unsecured. The same word, collateral, covers very different protection. The difference lies in a few lines of the CSA, and a risk manager has to be able to read them.

L1.7.11: Clearing, margin and collateral introduced margin and haircuts, and L3.3.12: Collateral, guarantees and credit risk mitigation collateral on loans. A derivative is harder: its value moves every day and can flip sign, so the collateral has to move with it. That is the job of the Credit Support AnnexCredit Support Annex: the part of the ISDA documentation that sets how two parties exchange collateral on the trades under their Master Agreement. (CSA), which sits under the ISDA Master Agreement and covers one netting set (L3.4.04: Netting). Each valuation date, the party that is out of the money posts variation marginVariation margin: collateral that moves as the value of the trades moves, so the party in the money holds collateral close to what it is owed. so that the other holds roughly what it is owed.

ISDA's standard forms differ in law and mechanics. The 1994 New York law CSA works by security interestCollateral pledged: the giver keeps ownership and the receiver holds a security interest it can enforce on default (the New York law CSA).: the poster keeps ownership and the receiver can enforce on default. The 1995 English law CSA works by title transferCollateral given outright: the receiver owns it and owes back equivalent assets later (the English law CSA).: the collateral becomes the receiver's outright. ISDA added variation margin versions in 2016 to fit the new margin rules, and separate documents for initial margin (L3.4.07: Initial margin and the uncleared margin rules). The economics in this lesson are the same under all of them.

The terms that matter

The book's CSAs

Halvergate, a manufacturer, has no CSA: like many corporates it hedges without posting collateral. The other three do. Under each, the book sets the collateral from the value one step (about ten business days) earlier, the last call the counterparty would have met before a default; L3.4.06: The margin period of risk explains why.

Corriemoor's CSA flattens a profile that would climb past £11m into a line near £1.4m: what is left is the move over the ten days a call can go unpaid. Saltney's CSA does even better, £19.92m down to £0.79m, because its £3m independent amount absorbs much of that move. Ebbsworth's profile under its CSA hovers around £3m to £4m and never comes down to Corriemoor's level: on every path the first £10m is never covered. (The spike at three years is Corriemoor's FX forward settling: the book drops the trade on its maturity date while the collateral still reflects it for one more step.)

What the threshold and the MTA cost

The threshold costs exposure one for one: Ebbsworth's £10m roughly doubles its EPE against a zero threshold. The MTA barely matters at £0.5m on a book this size; it is an operational saving. On one simulated year of daily margining with Corriemoor, an MTA of £0.5m triggers 161 transfers; £5m triggers 9, but the average uncollateralised exposure rises from £0.44m to £1.24m.

Eligible collateral and haircuts

Cash is the simplest collateral and the most used for variation margin: in ISDA's survey of leading derivatives firms, 67.6% of the variation margin they received at end-2025 was cash (ISDA Margin Survey, April 2026). Bonds come with a haircut, set to cover how far their price could fall before they are sold. The margin rules' standard schedule (BCBS-IOSCO, 2020):

A haircut has a job to do. A 10-year gilt posted by Corriemoor loses 2.0% of its value if rates rise 25bp before the next call, half the 4% haircut gone. Worse, rising rates are exactly when the bank's pay-fixed swap with Corriemoor gains value: the collateral weakens as the exposure grows. Haircuts on collateral that moves with the exposure deserve a second look; this is wrong-way risk, the subject of L3.4.11: Wrong-way risk.

Who owns the collateral: re-use and segregation

Under title transfer the receiver owns what it holds, so it can sell it, lend it or post it on. Under a New York CSA the secured party may usually rehypothecateRe-using collateral received: selling it, lending it or posting it on to someone else. the collateral unless the CSA says otherwise. Re-use makes collateral cheap, because the same bond can support several trades. The cost falls on the poster: if the receiver fails holding more collateral than it is owed, the poster is an unsecured creditor for the excess. That is why the margin rules let variation margin be re-used but require initial margin to be segregated, held apart from the collector's own assets (typically with a third-party custodian), and generally not re-used (L3.4.07: Initial margin and the uncleared margin rules).

Disputes

Two valuation agents rarely agree to the pound. Under the New York CSA, a party that disputes a call notifies the other by the next business day and pays the undisputed amount; the parties consult, and if they cannot agree, the trades are revalued using mid-market quotations from other dealers. Disputes are a risk in themselves: while one runs, exposure goes uncollateralised, and supervisors lengthen the margin period of risk for a netting set with a history of long disputes (L3.4.06: The margin period of risk). Regular portfolio reconciliation, matching trade lists and values before calls are made, prevents most of them.

The amount due. In the ISDA CSA, the collateral the counterparty (the transferor) must have posted is the credit support amount: the bank's exposure $E$, plus any independent amount the counterparty posts, less any the bank posts, less the counterparty's threshold $H$, floored at zero:

The call. Compare it with the value $C$ of the collateral already held, counted after haircuts (market value times the valuation percentage):

The CSA is two-way: when the trades are worth $V < 0$ to the bank, the same rules run with the roles swapped. For variation margin alone, with the same threshold $H$ both ways, the collateral the bank should hold (positive) or have posted (negative) is

Exposure after collateral. If the counterparty defaulted now, the bank would lose $\max(V - C - \text{IA}, 0)$. The catch is the timing: $C$ was set on an earlier value, and $V$ keeps moving until the trades are closed out. That gap is the margin period of risk.

Run a CSA through one simulated year. Start with Corriemoor on its own terms: the collateral line tracks the value line a day behind, and the dashed line shows what is left uncovered. Raise the MTA, then the threshold, and watch the uncovered exposure grow. Switch to Ebbsworth, where most of the exposure sits below the £10m threshold.

Six months after the trade date the GBP rate, 4.00% at the start, has risen to 4.54% by yesterday's close and 4.60% today; the pound and the index have not moved. Both pay-fixed books have gained. Yesterday's calls were met in full, and transfers round to £10,000.

The BCBS-IOSCO margin requirements for non-centrally cleared derivatives (2013, last revised in April 2020) require covered firms (financial firms and systemically important non-financial firms) to exchange the full variation margin, that is with a zero threshold, regularly (for example daily), with any transfer subject to a minimum transfer amount of at most €500,000, combined with initial margin. They set out eligible collateral and the haircut schedule above. So Ebbsworth's £10m threshold is the kind of term the rules removed between covered firms; we keep it in the book to show what a threshold does. The book's £0.5m MTA for Corriemoor is a round illustrative figure, a little above the €500,000 cap. Firms outside the rules, such as most corporates like Halvergate, can still agree thresholds or no CSA at all. Capital rules recognise collateral in counterparty exposure through SA-CCR and the internal models method, covered in M4.4: Counterparty, operational and large exposures.

• A CSA turns a netting set's value into collateral calls; the party out of the money posts variation margin.
• Collateral due = max(E + IA_cpty − IA_bank − threshold, 0); a call moves only if it reaches the MTA, deliveries round up and returns round down.
• The threshold is unsecured credit: Ebbsworth's £10m leaves a one-year EPE of £3.65m against £1.77m with no threshold.
• With a zero threshold Corriemoor's EPE falls from £4.45m to £1.34m; what is left is the move while a call goes unpaid.
• Haircuts cover the fall in the collateral's value before it can be sold; collateral that falls as exposure rises is wrong-way.
• Title transfer allows re-use; initial margin must be segregated. Disputes leave exposure uncovered and lengthen the margin period of risk.

Credit Support Annex (CSA)

Credit Support Annex: the part of the ISDA documentation that sets how two parties exchange collateral on the trades under their Master Agreement.

Variation margin (VM)

Variation margin: collateral that moves as the value of the trades moves, so the party in the money holds collateral close to what it is owed.

Threshold

The exposure a party may run before the other side has to post anything. Only the exposure above it is collateralised.

Minimum transfer amount (MTA)

Minimum transfer amount: no collateral moves unless the amount due is at least this large. It saves small, frequent transfers.

Independent amount (IA)

Independent amount: extra collateral one party posts regardless of the trades' value, set when the trades are agreed. Initial margin under the margin rules is its modern, risk-based form.

Rounding

Transfers are rounded to a whole multiple of an agreed amount: deliveries up, returns down.

Valuation percentage

The share of an asset's market value that counts as collateral: 100% minus the haircut. A gilt at a 96% valuation percentage counts £96 per £100.

Valuation agent

The party that values the trades and the collateral and works out the call on each valuation date.

Title transfer

Collateral given outright: the receiver owns it and owes back equivalent assets later (the English law CSA).

Security interest

Collateral pledged: the giver keeps ownership and the receiver holds a security interest it can enforce on default (the New York law CSA).

Rehypothecation

Re-using collateral received: selling it, lending it or posting it on to someone else.

Collateral dispute

A disagreement over a call, usually about the value of the trades. The undisputed part is paid while it is resolved.