Presentation on the ISDA and CSA to The

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

Single Agreement Master Agreement Schedule Confirmations CSA Paragraph 11 Single Agreement

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

Netting is a particularisation of the principle of mutual dealings and set off Ø Payment netting - Netting during the course of transactions Ø Close out netting - Netting post closing out (terminating) the transactions

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

Payment Netting As per the ISDA Master Agreement Gross: Rs. 100/- PARTY A Net: Rs. 75/- PARTY B Gross: Rs. 25/Note: payment netting applies to payments: v v v 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 Rs. 8/Swap 1 Rs. 5/- PARTY A Swap 2 PARTY B Rs. 10/Swap 3 Note: Amounts refer to MTM values on close-out, not to payments due

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

If Close-out netting is not enforceable Rs. 13/PARTY A PARTY B 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/ -

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

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

Understanding why “the CSA” EXPOSURE

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

CSA - Cash Ø If INR § 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 Ø If FX – FEMA Permissions

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

Its been a pleasure! Thank you