Derivative Solutions

F3's Multi-Currency CSA Solution

Building Cheapest-to-Deliver Curves with F3

A Credit Support Annex (CSA) is an optional component of an ISDA Master Agreement which specifies how much collateral is posted or transferred between swap counterparties to mitigate counterparty credit risk. Some CSAs allow a counterparty to choose the currency in which the collateral can be posted. These multi-currency CSAs offer cost-saving opportunities by providing the option to post collateral in the currency that provides the greatest economic return.

The choice of currency introduces complexity into building the discount curve, the "Cheapest-to-Deliver" curve, that is used to price derivatives governed by a multi-currency CSA.

F3's flexible architecture simplifies this complexity. With F3 you can use one universal model to build discount factor curves for all relevant currencies, taking into account the terms of any CSA, and quotes for cross-currency swap spreads. F3 gives you the consistency needed for building this set of curves.

Increased Transparency into Complex CSA Discounting

F3 allows you to:

  • Accurately price contracts covered by multi-currency CSAs
    using "Cheapest-to-Deliver" curves
  • Easily identify the optimal currency in which to post collateral

CTD curve under a CSA agreement
The CTD curve under a CSA agreement that allows collateral to be posted in either GBP or EUR.

This CTD rate curve would be used to calculate discount factors to value a GBPbased trade covered by a dual-currency CSA. EUR currently earns a higher rate for the poster (EONIA adjusted for cross-currency swap spreads), although it is expected that GBP will earn a higher rate (SONIA) in 5 years' time for purposes of valuation and hedging.

F3 enables you to easily build and interpret the Cheapest-to-Deliver curve for more accurate valuation and the most efficient use of capital.

Gain Insight into Risk Exposures for Accurate Hedging

The benefits of using one model for multiple discount factor curves extend to determining your risk exposures. With all curves built into one universal model, F3 enables risk to be calculated at a granular level. When dealing with multi-currency CSAs, this level of detail reveals the sensitivity to all the quotes used to build the Cheapest-to-Deliver discount curve, and allows hedge factors to be determined for all relevant hedging instruments. These calculations are performed using F3's Universal Risk Technology™ (URT), and do not require "bumping" inputs and revaluation.

Exposure of a Sterling swap under a dual currency CSA
Exposure of a Sterling swap under a dual currency CSA

This vanilla GBP swap, with a CSA agreement to post collateral in either GBP or EUR, has cash flows in only one currency (GBP), but its value is still sensitive to a variety of risk factors across both currencies. While the majority of the exposure remains in the GBP market, approximately 8% of the exposure lies in EUR LIBOR and EONIA

Future Proof Curve Building

F3's flexible and object-oriented architecture allows for model reuse, eliminating the need for code and system changes and accommodating the growing complexity of curve construction. By separating the description of trades and portfolios from the construction of the financial models and the valuation method employed, F3 allows any one of those components to be changed with ease, independently of the others. This means all calculations can be expressed in a set of concepts that remain consistent over time. With F3 you can build and evolve your models with confidence, knowing that they will remain accurate in the future as industry standards evolve, while guaranteeing internal consistency.