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Published on 30th March 2017, the Credit Support Deed for Cash Collateral (VM) governs the exchange of collateral for hedging transactions under the TMA and follows the rollout of variation margin requirements for non-cleared transactions in multiple jurisdictions from March 1, 2017. The regulatory push for initial and variation margin exchange is part of G20 commitment to make global financial markets safer and more resilient.
1. TMA CSD: Is a standalone security document, providing for the creation of security in respect of cash collateral posted by the collateral provider to secure sums owed by it to the secured party under the TMA.
It is a two-way document, meaning that either party may be the party granting security and either party may be the secured party.
2. Variation Margin Calculation: Calculation is made by reference to a marking to market of each party’s exposure.
Each party’s exposure is reduced by the amount of any collateral then held by it so as to determine the collateral amount (the Delivery Amount) which it can call for from the other party.
3. Enforcement: The security under the TMA becomes enforceable upon the occurrence of an Event of Default under the TMA (with a two Local Business Day grace period for remedying such failure
A failure of a party to pay a called for collateral amount or a failure to perform any other obligation under the TMA CSD (with a thirty Local Business Day grace period for remedying such failure).
4. Returns on Posted Cash Collateral: No accrual or payment of profit amounts on Posted Cash Collateral provided in the CSD.
The parties may enter into a separate agreement to provide “Investment Returns” on any Posted Cash Collateral. The terms of any such separate agreement should be documented between the parties in consultation with their own Shari’ah advisors.
5. Legal Ineligibility: The collateral provided for is limited to cash, a provision is included allowing a Secured Party to call for cash in an alternative currency if the first currency ceases to be eligible under applicable regulatory requirements.
6. Governing Law and Jurisdiction: It is an English law deed.
To create a security in respect of cash collateral posted by the collateral provider to secure sums owed by it to the secured party.
Designed to facilitate the risk management function of Islamic financial institutions including providing a legal framework
Use: Reasonably used in Islamic inter-bank market as per the IIFM recent survey,as well as the gathered information during personal meetings by the IIFM secretariat with banks and financial institutions globally.
Further features & clarification: The Delivery Amount is calculated by reference to the Secured Party’s net Exposure: a point to bear in mind when determining haircuts, particularly if netting is not robust in the relevant jurisdiction. It governs the exchange of collateral for hedging transactions under the TMA and follows the rollout of variation margin requirements for non-cleared transactions in multiple jurisdictions from March 1, 2017. The regulatory push for initial and variation margin exchange is part of G20 commitment to make global financial markets safer and more resilient. IIFM’s Shari’ah Board has approved it. The approval does not extend to any specific transactions between the parties or to any amendments or additions made to the TMA CSD.
Note: Available through login. For further details please contact IIFM at info@iifm.net