Dodd Frank ISDA Protocol and Contractual Changes IECA Spring - - PowerPoint PPT Presentation

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Dodd Frank ISDA Protocol and Contractual Changes IECA Spring - - PowerPoint PPT Presentation

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Dodd Frank ISDA Protocol and Contractual Changes IECA Spring Education Conference March 17, 2013 Willa Cohen Bruckner Alston & Bird LLP Documentation Changes: Background Dodd Frank is a watershed change for swaps Impacts virtually

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Dodd Frank ISDA Protocol and Contractual Changes

IECA Spring Education Conference March 17, 2013 Willa Cohen Bruckner Alston & Bird LLP

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Documentation Changes: Background

  • Dodd Frank is a watershed change for swaps
  • Impacts virtually every aspect of swaps

trading

  • Documentation changes will take many forms
  • New types of agreements
  • New contractual provisions for existing types of

agreements

  • Amendments to existing documents
  • More layers of complexity in document structure

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Background – cont’d

  • Documentation changes will be ongoing
  • Drivers of change in documentation
  • Presumption of clearing
  • Swap dealer compliance obligations
  • End-user exception criteria
  • Who can access the swaps market
  • How is the market accessed
  • Protection of funds
  • Futurization of swaps

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Background – cont’d

  • Brief overview of relevant Dodd Frank issues
  • Swap dealers/ major swap participants
  • Cleared vs. uncleared swaps
  • End-user exception
  • Execution of swaps
  • Eligible contract participant
  • Swap dealer, MSP external business conduct rules
  • Reporting and recordkeeping
  • Collateral segregation

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ISDA August 2012 DF Protocol: Structure

  • Protocol refers to the execution method
  • Electronic platform for efficient execution
  • August 2012 DF Protocol is a two step process
  • Documentation Pieces
  • Adherence Letter
  • Protocol Agreement - mechanics, basic representations
  • Supplement - DF specific representations and covenants
  • Questionnaire – party-specific information
  • DF Terms Agreement - swaps with no written agreement
  • Addendum I - commodity pool issues
  • Addendum II (optional) - pre-trade mid-market marks

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ISDA August 2012 DF Protocol: Operative Aspects

  • Protocol amends swap documentation
  • Incorporates terms of the Supplement
  • Questionnaire dictates which terms included
  • Addresses:
  • Swap dealer external business conduct rules
  • Reporting requirements
  • Eligible contract participant status
  • Amendments to Protocol terms must be bilateral
  • Timing for participation: before May 1, 2013

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ISDA August 2012 DF Protocol: Substantive Provisions

  • Trade option exemption representations
  • If offeree: producer, processor, commercial user
  • f, or merchant handling, commodity, and

entering option for business purposes

  • Both parties: exercise of option is obligation to

make/take delivery

  • Eligible contract participant by $1 M net worth

and hedging: represent all swaps are hedges

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ISDA August 2012 DF Protocol: Substantive Provisions – cont’d

  • Non-reporting party - notices regarding:
  • International swaps and non-U.S. trade

repositories

  • Life cycle events
  • Non-swap dealer consents:
  • Swap dealer notices through webpage
  • Oral disclosure of pre-trade marks and key

economic terms

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ISDA August 2012 DF Protocol: Substantive Provisions – cont’d

  • Non-swap regulated entity - acknowledgments

and agreements regarding:

  • Daily marks
  • Scenario analysis
  • Swap dealers:
  • Notify counterparty of rights to scenario analysis and

daily marks

  • Disclaimers regarding daily marks
  • Notify counterparty of choices regarding clearing

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ISDA August 2012 DF Protocol: Substantive Provisions – cont’d

  • Confidentiality
  • Agree to other party’s disclosure of DF reporting

information

  • In general, prior confidentiality agreement governs
  • Swap dealer can disclose to regulators or SRO,

subject to prior confidentiality agreements

  • Swap dealer can disclosure information not covered

by prior agreement to affiliates, service providers

  • Typical limits on what constitutes confidential

information

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ISDA August 2012 DF Protocol: Substantive Provisions – cont’d

  • Optional schedules fulfill requirements for

swap dealer safe harbors

  • Schedule 3: non-special entities that are not

regulated swap entities

  • Schedule 4: non-ERISA special entities
  • Schedules 5 and 6: ERISA special entities

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ISDA August 2012 DF Protocol: Substantive Provisions – cont’d

  • Schedule 3: non-special entities with 3rd party

evaluation agent

  • Non-special entity representations:
  • Written policies/procedures to ensure agent capability
  • With agent, independently evaluating swap dealer

recommendations

  • Agent representation: independently evaluating

swap dealer recommendations

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ISDA August 2012 DF Protocol: Substantive Provisions – cont’d

  • Schedule 3: non-special entities without 3rd

party evaluation agent – representations:

  • Written policies and procedures to ensure

capability of person evaluating

  • Independently evaluating swap dealer

recommendations

  • Swap Dealer disclosure that it is not assessing

suitability for non-special entity

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ISDA August 2012 DF Protocol: Questionnaire

  • Legal identifier number (CICI)
  • Basic information about party
  • Third party evaluation agent
  • Status as:
  • Eligible contract participant
  • Swap dealer
  • Major swap participant
  • Financial entity
  • Election of Schedule(s)
  • Election of DF Terms Agreement

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ISDA August 2012 DF Protocol: Addenda

  • Amended and Restated Addendum I
  • Addresses issues regarding active funds and

commodity pools

  • Must complete, even if not an active fund or

commodity pool

  • Addendum II
  • Optional
  • Election not to receive pre-trade marks; U.S. person

status; status as commodity pool or non-active fund

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IECA Amendment to ISDA August 2012 DF Protocol

  • Modifies substantive provisions of Protocol
  • Has been accepted by many parties
  • User’s Guide available
  • Elect structural approach
  • Don’t participate in Protocol; instead incorporate

terms into bilateral agreement, with IECA modifications

  • Participate in Protocol; also enter into bilateral

agreement amending terms of Protocol

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IECA Amendment to ISDA August 2012 DF Protocol: Substantive Changes

  • Can specify subset of swap document(s) to be

amended

  • No new representation regarding financial

information/accounting standards

  • Expands set of termination-type events not

triggered by the Protocol

  • No amendment to limitation of liability

provisions in swap document(s)

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IECA Amendment to ISDA August 2012 DF Protocol: Substantive Changes- cont’d

  • No waiver of rights against swap dealer
  • Life-cycle events based on non-reporting party

interpretation, until CFTC clarification

  • Confidentiality
  • Prior or future confidentiality agreement takes

precedence

  • Adds caveats to swap dealer right to disclose to

regulators/SROs

  • Adds caveats to swap dealer right to disclose to

affiliates/service providers

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IECA Amendment to ISDA August 2012 DF Protocol: Substantive Changes- cont’d

  • Other clarifications
  • $1 M net worth/hedging eligible contract

participant

  • Email confirmation of scenario analysis request
  • Effective date of notice of change in information
  • r representations

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Bilateral Documents with Protocol Terms

  • Some dealers have bilateral alternatives to

Protocol

  • Substantive terms are similar to Protocol
  • Useful if only one dealer; saves adherence fee
  • Can request IECA and other changes

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ISDA DF Protocol 2

  • In draft form (as of mid-February, 2013)
  • Addresses:
  • Confirmation methodology
  • End-user exception criteria/requirements
  • Acknowledgments regarding clearing
  • Risk valuation
  • Portfolio reconciliation

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Other IECA Documentation Initiatives

  • Dodd-Frank Act Representation and Reporting

Agreement

  • End-user to end-user agreement
  • Addresses:
  • Characterization of parties under Dodd Frank
  • Which party will report swaps (if parties must elect)
  • Obligations of reporting party and non-reporting party
  • Trade Option Exemption requirements
  • Election of end-user exception; hedging representation

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Documenting Collateral Segregation for Uncleared Swaps

  • Counterparty to swap dealer/MSP has right to

elect segregated collateral/margin

  • Applies to excess over mark-to market value
  • Segregate at third party custodian
  • CFTC rule not yet final
  • Key issues:
  • Who pays
  • Secured party perfection vs. pledgor’s right to

return of collateral

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Documentation for Cleared Swaps

  • Futures agreements plus provisions for

cleared swaps

  • Futures agreements
  • Cover types of issues in ISDAs (e.g., margin,

default and remedies, representations, dispute resolution)

  • More one-sided than ISDAs and less subject to

negotiation

  • No standard futures account agreement

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Documentation for Cleared Swaps – cont’d

  • Added terms for cleared swaps should include:
  • Portability
  • Liquidation upon default or other termination event
  • Consequences if a swap is not accepted for clearing
  • Limits futures commission merchant’s liability
  • Cleared Swaps Addendum
  • Developed jointly by the Futures Industry

Association and ISDA

  • Some buy-side input

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Execution Documentation

  • Addresses:
  • Submitting executed swap for clearing: who submits

and timing

  • Consequences if swap is not accepted for clearing
  • Example: Futures Industry Association/ISDA

Execution Agreement

  • Short time horizon: upon clearing, executed

trade replaced by two trades with clearing entity

  • May need agreement with swap execution facility

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Futures Documentation

  • Futures commission merchant gives customer

access to clearing; FCM is not the counterparty

  • FCM has both customer credit concerns and

requirements from clearing entity/regulations

  • Typically no default events for FCM, no cure

period for customer default

  • Termination, liquidation, transfer provisions
  • All margin must be segregated; not based on

customer election

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Other Issues

  • “Swap” includes guarantee of a swap to the

extent of recourse to guarantor

  • Guarantors of swaps must be eligible contract

participants

  • Representations regarding guarantor
  • Carve outs from guarantor/guarantee
  • Insolvency: limits on contractual rights

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Considerations for Negotiations

  • Does requested change challenge regulatory
  • r clearing entity requirements?
  • Strength in numbers
  • Pick your battles
  • How important are you to the FCM or swap

dealer?

  • Timing

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Looking Ahead

  • More rules and interpretations
  • Margin requirements
  • Extraterritoriality
  • Changing market conventions
  • Movement to cleared swaps
  • Futurization of swaps
  • Swap execution facilities
  • Enhanced CFTC enforcement authority

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Contact Information

Willa Cohen Bruckner Alston & Bird LLP 90 Park Avenue New York, NY 10016 212-210-9596 willa.bruckner@alston.com

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