SCSA2 Set to Right the Wrongs of its Predecessor

In light of the difficulties which have plagued ISDA’s Standard Credit Support Annex (SCSA) (see this blog post for background), a successor, the SCSA2, is being drafted.  As before, the purpose of the SCSA2 will be to reduce (although not completely remove), the amount of optionality available when collateralising derivative transactions.  Initial Margin (IM) and Variation Margin (VM) will still be dealt with separately, Minimum Transfer Amounts will be low, Thresholds set to zero and VM collateral will be cash only.  It also remains the case that VM will be calculated by reference to 17 separate “Designated Currency Portfolios”, with other currencies being, broadly speaking, allocated either to the EUR or USD basket.   

SCSA2’s most notable change lies in the fact that the concept of the “Transfer Currency” looks set to be ditched, together with the rather complicated methodology for determining the “Implied Designated Currency Portfolio Balance”.  It remains to be seen whether this will lead to a more widespread adoption of the SCSA2 than was the case with its (almost) stillborn brother.