CSA Collateral Terms Guide Swap Discounting Curves

Summary

The document explains that the discount curve used to value a swap is connected to the collateral terms agreed by the counterparties. Those terms are set out in the Credit Support Annex, which forms part of the contractual arrangement governing collateral exchange.

The CSA specifies which collateral the party owing value may post. A bank’s choice between a standard overnight-indexed curve and a counterparty-specific curve should therefore reflect the collateral terms for that swap. The answer gives this contractual link as the governing principle, but does not describe curve construction, spread calibration, or cases where collateral choices are optional or change over time. It is a concise conceptual answer rather than a detailed valuation procedure.

Key ideas

• Swap collateral terms are documented in a Credit Support Annex.
• The CSA specifies the collateral that may be posted by the party with a liability.
• Discounting curve selection should reflect the collateral arrangements that apply to the swap.
• The document does not explain how to construct or calibrate a counterparty-specific curve.

Tags

# Answer by Attack68 (score 3)


# When a bank enters a swap with a counterparty, when does it decide to use a OIS curve as its CSA Term, versus a counterparty specific "CSA Curve"?












What determines whether a swap should be discounted against a standard OIS curve VS a 'custom' CSA curve specific to the swap's counterparty? (such custom curves are marked as spreads to some base curve by the bank's trading desk)?

## Answer by Attack68 (score 3)

https://quant.stackexchange.com/a/45716

To trade a swap counterparties must have an ISDA Master Agreement drawn up and signed between themselves.

If collateral is to be exchanged that agreement will also contain a section called a CSA: a Credit Support Annex.

That documentation defines the types of collateral available to post as the liability holder: and the banks choice of discount curve will reflect these choices.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.