Credit Risk Management Practice Exam

How does a one-way CSA differ from a two-way CSA?

1. It requires both counterparties to post collateral

2. It only involves one counterparty posting collateral

3. It has fewer regulatory requirements

4. It allows for more flexible collateral types

The correct answer is: It only involves one counterparty posting collateral

A one-way Credit Support Annex (CSA) differs from a two-way CSA primarily by the requirement for collateral posting. In a one-way CSA, only one counterparty is obligated to post collateral to the other. This structure creates an asymmetrical arrangement where only one side seeks to mitigate its credit risk exposure by demanding collateral from the other party. The one-way CSA is often utilized in scenarios where one counterparty is considered significantly less risky, or where there is a specific agreement that only one party needs to provide security to support its obligations. This arrangement allows for simpler management of collateral requirements, as it reduces the administrative burden associated with assessing the collateral needs for both parties. In contrast, a two-way CSA would require both parties to post collateral to each other, thus creating a more balanced and reciprocal credit risk management framework. Options involving fewer regulatory requirements, or flexible collateral types do not specifically relate to the fundamental differences between one-way and two-way CSAs, which hinge primarily on the obligations and terms surrounding collateral posting.