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Explanation:
Historically, there has been no requirement in an over-the-counter (OTC) derivatives contract for posting collateral. The Credit Support Annex (CSA) serves to regulate credit support (collateral) under the ISDA Master Agreement. Its primary purpose is to create an obligation for the trading parties to mutually agree on posting collateral to mitigate counterparty credit risk. It defines the terms and conditions under which collateral is posted, transferred, and managed between the parties.
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Q.5163 What is the purpose of a Credit Support Annex (CSA) in a derivatives trade?
A
To protect the trading party from any potential losses due to market volatility.
B
To provide a mechanism for netting and settlement of trades.
C
To create an obligation for trading parties to mutually agree on posting collateral.
D
To ensure that all derivative contracts are honored by both parties involved.