medium · Debt Capital Markets bond-instruments-structures

Which of the following best defines the 'Credit Spread Adjustment' (CSA) in the context of the LIBOR fallback language developed by the ARRC?

1. A discount subtracted from SOFR whenever the Treasury repo market is over-collateralized to prevent negative carry.
2. A dynamic premium that rises and falls in step with the credit default swap spreads observed across the top ten global banks.
3. A fixed spread added to SOFR to minimize the value transfer between parties when a LIBOR-linked contract switches to SOFR.
4. An annual fee remitted to the central clearinghouse to manage the cross-currency basis risk between USD and EUR risk-free rates.

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