The International Swaps and Derivatives Association, Inc. (ISDA) has announced the launch of the August 2012 Dodd-Frank Protocol (DF Protocol). The DF Protocol is designed to allow swap market participants to amend their ISDA Master Agreements (widely used standardized contracts under which derivatives and other products can be traded and netted) to facilitate compliance with the CFTC’s Dodd-Frank regulatory requirements.
The DF Protocol is intended to address the requirements of the following final CFTC rules (Covered Rules):
- External Business Conduct Standards for Swap Dealers (SDs) and Major Swap Participants (MSPs)
- Large Trader Reporting for Physical Commodity Swaps
- Position Limits for Futures and Swaps
- Real-Time Public Reporting of Swap Transaction Data
- Swap Data Recordkeeping and Reporting Requirements
- SD and MSP Recordkeeping, Reporting and Duties Rules; Futures Commission Merchant (FCM) and Introducing Broker Conflicts of Interest Rules, and Chief Compliance Officer Rules for SDs, MSPs, and FCMs
- Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps
Structure of the Protocol
The primary modification of ISDA Master Agreements is accomplished through (i) the “DF Supplement,” which contains 6 schedules setting forth certain standardized representations, acknowledgments, notifications, and agreements relating to the Covered Rules and (ii) a “DF Protocol Questionnaire,” by which a participant provides certain required information to its counterparty, including representations as to its legal status under various Dodd-Frank categorizations (e.g., eligible contract participant, swap dealer, special entity status), and makes various elections with respect to the DF Supplement.
Unlike previous ISDA protocols, where amendments or supplements were effected solely through the delivery of an adherence letter to the relevant protocol, the DF Protocol has additional bilateral delivery requirements in order to effectuate the addition of supplemental terms. Each party that submits an Adherence Letter to ISDA (along with a one-time $500 fee) must also deliver a completed Questionnaire to its adhering counterparty for the addition of supplemental terms to be effective with respect to that counterparty. To facilitate these additional bilateral delivery requirements, ISDA and Markit have developed a technology-based solution (“ISDA Amend”) to automate the information gathering process and provide sharing of submitted data and documents to counterparties based on selected permissions.
Making DF Protocol Arrangements For Your ISDA Master Agreements
Many of the Covered Rules listed above go into effect on or shortly after October 12, 2012. SDs, many with hundreds or thousands of ISDA Master Agreements to bring into compliance within such timeframe, may be challenged to put the DF Protocol into place with each of their counterparties and thus may find it necessary to concentrate on doing so with their largest counterparties first. Smaller counterparties should consider contacting their SD counterparties and putting DF Protocol arrangements in place with them soon so that they don’t find themselves with a usually available trading partner unwilling to enter into a desired swap on short notice because of unaddressed compliance issues. Starting April 10, 2013, even end users trading swaps with other end users will at least have to address which parties will be responsible for reporting the swaps.
ISDA states that while the DF Protocol is designed to provide an efficient manner for a large number of counterparties to amend their bilateral contracts, “it cannot address all situations, products or types of counterparties” and thus recommends that counterparties obtain legal advice as to whether the provisions of the Protocol address their particular situation.