A credit support annex (CSA) is a document that defines the terms for the provision of collateral by the parties in derivatives transactions. It is one of four parts of a standard contract or master agreement developed by the International Swaps and Derivatives Association (ISDA).
ISDA master agreements are required between any two parties trading derivative securities in a privately-negotiated or over-the-counter (OTC) agreement rather than through an established exchange. The majority of derivatives trading is done through private agreements.
The main purpose of a CSA is to define and record the collateral offered by both parties in a derivatives transaction in order to ensure that they can cover any losses. Derivatives trading carries high risks. A derivatives contract is an agreement to buy or sell a specific number of shares of a stock, a bond, an index, or any other asset at a specific date. The amount paid upfront is a fraction of the value of the underlying asset.
Why Collateral Is Required?
Because there is a high risk of losses on both sides, derivatives traders generally provide collateral as credit support for their trades. Each party sets aside collateral as a guarantee that it can meet any losses. Collateral, by definition, can be cash or any property of value that can be easily converted to cash. In derivatives, the most common forms of collateral are cash or securities. In derivatives trading, the collateral is monitored daily as a precaution. The CSA document defines the amount of the collateral and where it will be held.
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