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 applied to SOFR when the Treasury market is over-collateralized to prevent 'negative carry'.
2. A dynamic premium that rises and falls based on the credit default swap (CDS) spreads of the top 10 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 paid to the clearinghouse to manage the basis risk between USD and EUR risk-free rates.

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