Credit Support Annex (CSA): What It Is and How It Works

Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.

​Somer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas.

Michael Rosenston is a fact-checker and researcher with expertise in business, finance, and insurance.

What Is a Credit Support Annex (CSA)?

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.

Key Takeaways

• A CSA is part of a contract agreement required for any privately-negotiated derivatives trade.
• This document defines the terms of the collateral put up by both parties to the transaction.
• Collateral is normally required because of the high risk of losses associated with derivatives trading.

How a CSA Works

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. Meanwhile, the value of the contract fluctuates with the price of the underlying asset.

In fact, OTC derivatives are riskier than derivatives traded through exchanges. The market is less regulated and less standardized than exchange markets.

OTC derivatives are often traded as a speculation. They also are traded as a hedge against risk. As such, many major corporations engage in derivatives trades in order to protect their businesses against losses caused by currency price fluctuations or sudden changes in raw materials costs.

Because of the high risk of losses on both sides, derivatives traders generally provide collateral as credit support for their trades.

Why Collateral Is Required

Because of the high risk of losses on both sides, derivatives traders generally provide collateral as credit support for their trades. That is, 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.

ISDA Master Agreement

A master agreement is required to trade derivatives, although the CSA is not a mandatory part of the overall document. Currently the 1992 and the 2002 versions of the master agreement are the most commonly used versions to define the terms of a derivatives trade and make them binding and enforceable. Older and alternate versions exist as well. Its publisher, the ISDA, is an international trade association for participants in the futures, options, and derivatives markets.

1. ContractsCounsel. "ISDA Agreement."
2. ISDA. "Legal Guidelines for Smart Derivatives Contracts: The ISDA Master Agreement." Page 4.

A qualified professional asset manager (QPAM) is a registered investment adviser who assists various financial counterparties in investment decisions.

The American Institute of Certified Public Accountants (AICPA) is a U.S. non-profit professional organization of certified public accountants (CPAs).

An associated person is any owner, partner, officer, director, branch manager, or non-clerical or administrative employee of a broker or dealer.

The SEC's Rule 10b5-1 allows stock trades to be set up in advance by public companies' officers or directors to avoid accusations of insider trading.

Insider trading is using material nonpublic information to trade stocks and is illegal unless that information is public or not material.

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