On August 13th, the International Swaps and Derivatives Association, Inc. (“ISDA”) and Markit announced the launch of the Dodd-Frank Protocol (the “DF Protocol”).  The DF Protocol focuses primarily on the many “business conduct standard” requirements of the Dodd-Frank legislation and is being used as a mechanism for market participants to more efficiently amend existing swap documents to address changes required by (or relating to) the legislation.  Among other things, the DF Protocol is intended to: (i) assist dealers in gathering information needed to satisfy certain compliance obligations (especially “know your customer” rules); (ii) provide for certain representations and agreements between the parties necessary to get the benefit of certain safe harbors (for example, dealers are required to confirm that governmental or other “special entity” counterparties have qualified independent representatives and will rely on the advice of those representatives); and (iii) serve as a method for dealers to deliver certain new disclosures.

The amendment of trading documentation by counterparties is accomplished in two steps: first, by “adhering” to the DF Protocol via execution and online delivery of an executed adherence letter at the “Protocol Management” section of ISDA’s website, along with the payment of a related fee (note that the adhering parties will be listed on the website); and second, by the bilateral  exchange of a “DF Questionnaire” between counterparties.  At the time of adherence, a party may specify the method through which it wishes to receive DF Questionnaires from its counterparties (e.g., by a Markit portal, e-mail, or fax).  The DF Questionnaire includes information on the identity of a party, whether an agent acts on its behalf and its status under the Act (e.g., swap dealer, or special entity).  It also operates as the mechanism through which the counterparties elect which of the following portions of the “DF Supplement” they wish to incorporate into their trading documentation (although Schedules 1 and 2 automatically apply to all adherents):

  • Schedule 1:  Definitions
  • Schedule 2:  Representations and agreements relating to reporting of trade information, treatment of confidential information, rights of the parties to receive daily marks, delivery of required dealer notifications, etc.
  • Schedule 3:  Institutional Safe Harbors for Non-Special Entities
  • Schedule 4:  Safe Harbors for Non-ERISA Special Entities
  • Schedule 5:  Safe Harbors for ERISA Special Entities (Option 1)
  • Schedule 6:  Safe Harbors for ERISA Special Entities (Option 2)

Note that Schedules 4 through 6 are relevant only for market participants that are “special entities,” which are defined to include federal agencies; States, State agencies, cities, counties, municipalities or other political subdivisions of a State; employee benefit plans and governmental plans under ERISA; and endowments (including organizations described in section 501(c)(3) of the Internal Revenue Code of 1986, as amended).