This Spring is filled with deadlines regarding swaps, particularly cleared swaps. Some are fast approaching. We would like to take a moment to remind you of these upcoming deadlines and provide this checklist.
- Meet April 10, 2013 Deadline to Obtain a CICI
- Finish Account Documents before First Clearing Mandate for Non-Active Fund - Hedge Funds
- Adhere to ISDA August 2012 Dodd-Frank Protocol, Questionnaire and Addenda
- Re-Test Compliance with CFTC Rules 4.5(c)(2) and 4.13(a)(3) as Margin Rates Rise
- Adhere to ISDA 2013 EMIR NFC Representation Protocol (or Not?)
- Arrange for Funds to Take Corporate/Partnership Action to Authorize Protocol Adherence
- Funds Must Adopt Designated Evaluation Agent Policies to Fall into Institutional Safe Harbor
NUMBER ONE: Meet April 10, 2013 Deadline to Obtain a CICI
On March 15, 2013, the Division of Market Oversight and Office of Data and Technology of the Commodity Futures Trading Commission (“CFTC”) issued an Advisory reminding all swap counterparties that April 10, 2013 is the deadline for each non-swap dealer and non-major swap participant swap counterparty to obtain a CFTC Interim Compliant Identifier (“CICI”).1 CICIs may be obtained at http://www.ciciutility.org. A swap counterparty will need to provide a CICI for all new and existing swaps as of April 10, 2013. CICIs also will need to be supplied upon adherence to the ISDA Dodd-Frank Protocol. Either self-registration (i.e., the counterparty obtains its own CICI) or third-party registration (an advisor or other third party obtains the CICI on behalf of the counterparty) is allowed. CICI Utility released guidance intended for managers of funds who need to obtain CICIs.2 This guidance addresses issues such as umbrella funds/sub-funds and master-feeder CICI set up.
NUMBER TWO: Finish Account Documents before First Clearing Mandate for Non-Active Fund - Hedge Funds
As of March 11, 2013, hedge funds active in the swaps market are required to begin clearing certain index credit default swaps and interest rate swaps that they entered into on or after such date.3 Hedge funds must also clear an existing swap agreement if there is a change in the ownership of such existing swap agreement on or after March 11, 2013, even if the original parties entered into the agreement prior to March 11, 2013. Partial novations or terminations of old non-cleared trades are no longer require clearing thanks to CFTC relief issued today.4 The CFTC has published a table which provides specifications on the five swap classes that are required to be cleared. The table may be found at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/generic/cftcfiveswapclasses031113.pdf.
Hedge funds that are not active funds will begin clearing these five swap classes on June 10, 2013. Accordingly, the bulk of hedge funds that trade these products are now pushing, or being pushed, to complete the necessary account documentation to be ready for mandatory clearing.
NUMBER THREE: Adhere to ISDA August 2012 Dodd-Frank Protocol, Questionnaire and Addenda
After publication of the initial Dodd-Frank Protocol Questionnaire, the International Swaps and Derivatives Association (“ISDA”) published addenda which provide a non-exclusive method for parties to provide certain additional information and representations, and in some cases additional elections at law, to their counterparties. Completing either addendum, however, is not a requirement for being matched with a counterparty. However, ISDA recommends completing the addenda because they provide methods to exchange information necessary to avoid disruptions in trading.
Addendum I, published on November 9, 2012 and most recently updated on December 9, 2012,5 addresses CFTC rules regarding eligible contract participant status for certain transactions for commodity pools and “active fund” status for purposes of the implementation schedule for mandatory clearing of interest rate swaps and credit default swaps. Addendum II, published on February 22, 2013,6 is meant to address: (i) providing a mechanic to make elections and provide information to address elections to forego delivery of pre-trade marks to market in permitted situations, consistent with applicable CFTC No-Action Letters 12-42 and 12-58, (ii) identifying U.S. person status, which is used for purposes of interim CFTC guidance (e.g., to assist in compliance obligations for Non-U.S. Swap Dealers), and (iii) status for purposes of the second phase of mandatory clearing for interest rate swaps and credit default swaps.
Many fund managers suspended the process to adhere at year-end after the CFTC relaxed the deadline for compliance. Fund managers must re-engage in these efforts and make it all the way through to matching with trading counterparties.
NUMBER FOUR: Re-Test Compliance with CFTC Rules 4.5(c)(2) and 4.13(a)(3) as Margin Rates Rise
Managers who rely on exemption from registration as a commodity pool operator with respect to certain funds on account of one of the de minimis exemptions provided in CFTC Rules 4.5(c)(2) and 4.13(a)(3) must be mindful that margins required to be posted for swap transactions are likely to increase in the near future. Managers who comply with 4.5(c)(2) or 4.13(a)(3) on account of the applicable fund’s complying with the “five percent or less” initial margin requirement should be sure to re-calculate compliance with these measures as these margin amounts increase. This will help ensure that they remain in compliance with 4.5(c)(2) or 4.13(a)(3), as applicable, in light of increased margin requirements.
NUMBER FIVE: Adhere to ISDA 2013 EMIR NFC Representation Protocol (or Not?)
ISDA recently published the ISDA 2013 EMIR NFC Representation Protocol (the “EMIR Protocol”). The EMIR Protocol is intended to assist market participants with increased know your customer requirements that have arisen as a result of the obligations imposed by the E.U. Market Infrastructure Regulation on OTC derivatives, central counterparties, and trade repositories (“EMIR”). We recently published a Sidley update regarding the EMIR Protocol, and encourage managers who have not yet reviewed it to do so.7
NUMBER SIX: Arrange for Funds to Take Corporate/Partnership Action to Authorize Protocol Adherence
We advise hedge fund managers who must comply with any of the agreements, mandates or protocols referenced above to have their managed funds take appropriate corporate or partnership action to authorize the manager to sign all necessary documents, including adherence to the protocols. For example, the manager should review its investment management agreements to check for authority to amend fund trading documents, including by adherence to protocols or seek specific authority to do so.
NUMBER SEVEN: Funds Must Adopt Designated Evaluation Agent Policies to Fall into Institutional Safe Harbor
Managers who wish to incorporate Schedule 3 of the Dodd-Frank Supplement, “Institutional Suitability Safe Harbors for Non-Special Entities,” into an agreement with a counterparty must adopt compliance policies and procedures on behalf of a fund. The fund must represent that it has policies and procedures in place reasonably designed to ensure that the designated evaluation agent (or if there is no designated evaluation agent, the person responsible for evaluating swap recommendations and making trading decisions) is capable of evaluating recommendations with respect to swaps by a swap dealer and making trading decisions on behalf of fund. These compliance policies reside with the manager’s funds, and not with the manager itself. Swap dealers may insist on these representations in order to use the institutional safe harbor.