Separating Novation Payments from CSA Valuation Effects
Summary
The document considers a novation in which one party replaces another on a cross-currency basis swap. It stresses that the relevant collateral valuation for the continuing trade is the CSA agreed between the incoming party and the remaining counterparty. The CSA between the departing party and either other party does not determine the value of a trade it will no longer hold. The example assumes the incoming party and remaining party use a third, unspecified CSA currency.
The answer illustrates the economic reconciliation with three hypothetical valuations under different collateral agreements. In its example, the departing party receives compensation for the asset it gives up, while the incoming party pays the remaining counterparty the difference between the old and new trade values. The example clarifies the intended allocation of value, but does not provide a general calculation method for CSA valuation adjustments. The actual CSA between the incoming and remaining parties is essential, and the document’s initial question does not specify it.
Key ideas
- Value the continuing trade using the collateral agreement between the incoming and remaining counterparties.
- The departing party’s collateral agreements do not price a trade it no longer holds.
- The example allocates compensation to the departing party and a value difference payment to the remaining counterparty.
- The illustration is conditional on hypothetical valuations and does not give a full CSA adjustment calculation.
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# Understanding CSA and novation # Understanding CSA and novation I had an example at work which I didn't have full intuition of. The example is as follows: You have novated a forward starting cross-currency basis swap (let's say 10y10y EUR ccbs). The PV is agreed with counter party 'A' stepping in. However, there is a CSA implication... the remaining counter-party 'B' is on USD CSA whereas counter-party 'A' is in GBP CSA. Counter-parties A & B will now face each other on the trade. Simply put, what are the steps to take in order to calculate the CSA impact, and who should pay/receive the CSA fee? I started to get lost once the third currency was factored in (GBP). Appreciate any help on this, and thanks in advance! ## Answer by Attack68 (score 2) https://quant.stackexchange.com/a/54015 This is an unclear question so let me first state my assumption of what you are asking. - You work for organisation C and are asking from organisation C's persepctive: - C has, initially, a 10y10y cross-currency EUR/USD basis swap with counterparty B. - C is coordinating a novation to 'step out' of the trade and counterparty A will replace them. - B is a remaining party to trade so that they previously faced C and will now face A. - C has a USD CSA agreement with B and C has a GBP CSA agreement with A. The information of the CSA agreement between C and A is irrelevant, C is not facing A on the trade. The information of the CSA agreement between B and A is relevant and is not provided. Suppose you were able to calculate the following: - Trade between C and B is valued at \$100 under a USD CSA. (C has asset) - Trade between A and B is valued at \$110 under a XXX CSA. (A has asset) - Trade between A and C is valued at \$105 under a GBP CSA. (A has asset) What should happen, theoretically is that: - C should receive \$100 to replace its asset, payable by A. - A should pay \$10 to B: A now has an asset worth \$110 and it has paid $110 in total for it. B now has a liability valued at \$110 that was originally only \$100 and has received $10 compensation.
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