Credit Support Annex under

ISDA framework vis-à-vis

Legal and Regulatory Scenario in

India

Credit Support Agreement & Credit Support Annex

Netting and Close-Out Netting Provisions under ISDA Master Agreement

Whether Close-out Netting enforceable in India Legal Position in India Regulatory Scenario on CSA Perspective of ISDA

ISDA Master + Schedule

Derivative Transactions

Need for Margin / Credit Support (Cash / Securities) - Collateral

ISDA Master Agreement + Schedule

Credit Support Deed (CSD) under English LawsCredit Support Annex (CSA) under English Laws

CSD – Security AgreementCSA – Direct Transfer (CSA does not create a Charge or Security Interest)

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

Payment Netting (7 5 = 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-off

Closing 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 Transactions c. Settlement and Set off

Whether close-out netting under ISDA is enforceable in India ?

a. Companies b. Private Banks c. Foreign Banks (Indian Branch) d. PSBs / SBI

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 ?)

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

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.

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” ?

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% - 150 %, risk weight for trade exposure may apply

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