On June 10, 2013, ISDA published a new Standard Credit Support Annex (SCSA) for collateralizing over-the-counter (OTC) derivatives contracts. The SCSA aligns the collateral mechanics and economics of bilateral OTC derivatives with collateralization of cleared derivatives transactions.

ISDA® likely views this alignment as a necessary step to ensure its credit support documentation remains relevant in the context of a global push toward clearing of OTC derivatives.

The main features of the SCSA serve to:

The rationale for, and the principle features of, the SCSA are as originally announced by ISDA in November 2011 (for details, see Legal update, Standard Credit Support Annex (SCSA) for OTC Derivatives Proposed by ISDA).

The SCSA is intended to operate alongside the existing CSA, with market participants having the choice of which version they prefer to use. ISDA's current CSA is available as an English law CSA (title transfer) and as a New York law CSA (security grant). Similarly, the SCSA is also available in these two formats. As under the CSA, the English law SCSA operates to transfer full legal title in the collateral to the collateral holder, a pledgor under a New York law SCSA grants a security interest in the collateral to the secured party. For more information on the distinction between English law and New York law CSAs, see Practice Note, ISDA Documents: Overview (US): The ISDA Credit Support Annex.

While the new SCSA is a welcome addition to ISDA's suite of credit support documents, it is not clear that the market will see the need for the SCSA, as counterparties may prefer to retain greater flexibility and optionality in their bilateral derivatives collateral matters than would be provided under the SCSA. Bilateral OTC derivatives counterparties may elect to continue to use the CSA rather than limit their options with the SCSA, despite the ultimate long-term benefits that could be realized from market standardization of OTC derivatives collateral mechanics.

On the other hand, parties may welcome the simplicity of the SCSA. ISDA advocates a gradual implementation of the SCSA, allowing firms to "move at the pace they deem appropriate." ISDA does not envision compulsory use of the SCSA at any time.

For detailed information on derivatives collateral matters, see Practice Note, Practical Guide to Counterparty Collateral Negotiation.

To learn about requirements to clear OTC derivatives in the US under the Dodd-Frank Act, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Clearing and Exchange Trading under Title VII.