In times when banks are facing balance sheet pressure and rating downgrades, it seems sensible for their clients to review the Credit Support Annex (“CSA”) terms under which they have entered into (or are looking to enter into) interest rate swaps with such bank counterparties. This is the main protection for a swap counterparty against counterparty credit risk so it is important that the terms actually address the current state of play.

In the past, when the banks were seen as almost indestructible, it was not unusual for the CSA to be completely absent or one-sided, relieving the banks of the need to post collateral, eliminating their funding risk or shifting it entirely onto the other swap party in the case of a one-sided CSA.

Having witnessed the difficulties that highly rated banks can run into – in some cases without any warning – and the impact it can have on their swap positions, clients should again consider the credit risks that they face in terms of what they can, and should, do to protect themselves when negotiating the swap terms.
Continue Reading CSAs: when and why to negotiate?