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Also known simply as CSA, a credit support annex is a document that helps to establish the protocols surrounding the use of collateral for transactions involving derivatives. The purpose of this type of document is to make sure that all parties concerned understand what is involved when it comes to posting collateral or credit as security for an over-the-counter derivative contract. Depending on regulatory requirements that are in effect in the jurisdictions where the investors reside, the type of collateral used and what happens with the collateral in the event that any of the parties fail to comply with the terms of the derivatives contract is also usually included.
From this perspective, a credit support annex can be viewed as a necessary document that protects the interest of all parties involved with the derivative swap. Everyone involved can rest assured that as long as they honor their commitments, there is no reason for the trade to not take place as planned. Since there is collateral or credit backing the trade, the degree of risk is kept within reasonable limits, a fact that is often important to each party in the transaction, since the idea is to arrange the terms so that ultimately everyone benefits.
A credit support annex may be drafted as a stand-alone document that is utilized alongside the derivative contract, or it may be a section or portion of a larger agreement that governs the transaction. The International Swaps and Derivatives Association or ISDA has drafted an agreement that is often used as a master agreement for many of these over-the-counter derivative transactions. It is not unusual for parties that trade in derivatives to make use of this ISDA agreement, and either include a credit support annex within the text of the document, or prepare the annex as a supplement to the main agreement. In either case, the parties involved must agree to the terms specified within both documents before any actual trading takes place.
Compliance with local and national trade regulations is extremely important when drafting the text for a credit support annex. While much of the text will follow the same basic guidelines in just about every situation, care should be taken to consult experts who can identify if there is something within the text that is not in compliance, or if something essential is missing and should be inserted. Typically, financial advisors at brokerages and investment banks are familiar with laws and regulations that apply to trading derivatives in various nations, and can provide excellent counsel on how to amend the verbiage to meet those regulations.