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Another day- another change to the CSA

In yet another development driven by the remorseless exigencies of Regulatory Capital requirements, banks are looking to move currently clearing-exempted clients to cash-only CSAs. In order to bridge the pricing-gap between cash and non-cash collateralised swaps, banks are offering insurers and pension funds the option to post securities with an automatic switch to cash at the expiration of their respective exemption periods.

Banks will benefit by only being exposed to expected yield decreases two to three years out as opposed to the duration of posted securities, with a consequent decrease in leverage ratio capital charges. Clients benefit from better pricing and by avoiding recourse to the increasingly illiquid repo market.

The adjusted agreements are being marketed as “sunset CSAs”, presumably sunset refers to exemption expiry rather than the CSA itself, which is rapidly becoming the Trigger’s Broom of derivative documentation. Repapering to a sunset CSA may prove particularly attractive in combination with the re-couponing of existing swaps, realising likely buy-side profit, reducing sell-side collateral payments and limiting longer term leverage ratios.

Unsurprisingly, re-couponed sunset CSAs are not all sunshine, banks will have to accept bond collateral for a short period and the buy-side will lose their in the money hedge against rate rises, leading to near-term larger collateral payments. However, as a possible means to close the swaps rate gap and render restrike prices more palatable, the sunset CSA is a worthwhile and relatively easily-implemented initiative.

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