copyright © 2012 – iq3 solutions group – all rights reserved. implementing dodd-frank title vii...

Copyright © 2012 – IQ3 Solutions Group – All rights reserved.

Implementing

Dodd-Frank Title VII

The Dodd-Frank Act has broad and deep implications that will touch every corner of finance. Title VII impacts the OTC derivatives market. This presentation provides an overview of ISDA’s DF Protocol and a proposal for rapid delivery of the DF Protocol effort using Scrum.

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Dodd-Frank ActISDA August 2012 DF Protocol

Change is the only constant...

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Swaps Regulation

• As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC will write rules to regulate the swaps marketplace. The CFTC has identified 38 areas where rules are necessary.

• The Dodd-Frank Act also contains more than 90 provisions that require SEC rulemaking, and dozens of other provisions that give the SEC discretionary rulemaking authority. To date, the SEC has put in place a framework that will support a new regulatory regime designed to bring greater transparency and access to the securities-based swaps market.

• The ISDA August 2012 D-F Protocol (the “DF Protocol”) is part of ISDA’s Dodd-Frank Documentation Initiative aimed at assisting the industry in implementing and complying with the regulatory requirements imposed under Title VII of the Dodd–Frank Act.

• In order to facilitate implementation of Dodd-Frank, ISDA plans to launch future Protocols to simplify documentation changes for upcoming CFTC and SEC final rules, as well as changes under EMIR, MiFiD and MiFIR.


ISDA’s DF Protocol

• The DF Protocol is designed to allow swap market participants to amend their ISDA Master Agreements to facilitate compliance with the CFTC’s Dodd-Frank regulatory requirements.

• The DF Protocol is intended to facilitate industry compliance with seven final rulemakings by allowing market participants to:

– (i) supplement the terms of existing master agreements under which parties may execute Swaps, or

– (ii) enter into an agreement to apply selected Dodd-Frank compliance provisions to their trading relationship in respect of Swaps.

• The DF Protocol adds notices, representations and covenants responsive to Dodd-Frank requirements that must be satisfied at or prior to the time that Swap transactions are offered and executed.

• Also, the DF Protocol includes additional bilateral delivery requirements, including a Questionnaire, to facilitate compliance with “know your counterparty” information requirements under Dodd-Frank.


CFTC Covered Rules

• The DF Protocol is intended to address the requirements of the following final CFTC rules (Covered Rules) including the external business conduct rule (“EBC Rule”) [See 77 FR 9734 – 9835]:

– 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 (IB) 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


EBC Compliance

• On August 27, 2012, the CFTC published final rules for Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants. Section III.C of that rule extends the compliance date for the following EBC Rule provisions until January 1, 2013:

– 23.402(b) “Know your counterparty” requirements

– 23.410(c) “Confidential treatment of counterparty information”

– 23.430 “Verification of counterparty eligibility”

– 23.431 “Disclosures of material information” including “Scenario Analysis”[23.431(a),(b), and (c)]

– 23.432 “Clearing disclosures”

– 23.434 “Recommendations to counterparties—institutional suitability” [23.434(a)(2),(b), and (c)]

– 23.440 Requirements for SDs acting as advisors to Special Entities”

– 23.450 “Requirements for SDs and MSPs acting as counterparties to Special Entities”


Process / Architecture

• Swap dealers need to capture/integrate Questionnaire information provided by counterparties into their systems prior to trading with that counterparty.

• Counterparties should therefore adhere to the DF Protocol at their earliest convenience and work towards providing the Questionnaire to their dealer counterparties as soon as possible thereafter (either by the ISDA Amend solution or by another means as designated by their dealer counterparty).

• The basic architecture of the DF Protocol consists of four documents:

– (I) an Adherence Letter

– (II) the Questionnaire

– (III) the Protocol Agreement

– (IV) the DF Supplement

• In addition, a fifth document, the DF Terms Agreement extends to situations in which parties may wish to transact in swaps without the benefit of having a pre-executed master agreement between them.


Document #1: Adherence Letter

• The Adherence Letter must be signed and submitted by each party agreeing to the terms of the Protocol Agreement in order to participate in the Protocol.*

– Adhering parties must include name, address, and other non-sensitive data.

– Each adhering party must specify the address (electronic or otherwise) and means by which party will receive Questionnaires as a Protocol Participant from other Protocol Participants.

• Letter is uploaded and available for public view, like prior ISDA adherence letters.

– Submit Adherence Letterhttp://www2.isda.org/functional-areas/protocol-management/submit-adherence-letter/

– Adhering Partieshttp://www2.isda.org/functional-areas/protocol-management/protocol-adherence/8

– Check Letter Statushttp://www2.isda.org/functional-areas/protocol-management/protocol-step3/

*Market participants who have previously adhered to an ISDA protocol are familiar with doing so using a process that involves submitting signed and conformed copies of an adherence letter to a designated email address.

A new process was established in August 2012, when ISDA, in an effort to provide a more streamlined and efficient process, developed a technical solution to further automate the adherence process. The adhering party still needs to provide an adherence letter signed by an authorized signatory in order to validate the adherence, but the new process is online and allows the adhering party to monitor the status from the submission to the approval.

http://www2.isda.org/functional-areas/protocol-management/submit-adherence-letter/

http://www2.isda.org/functional-areas/protocol-management/protocol-adherence/8

http://www2.isda.org/functional-areas/protocol-management/protocol-step3/


Document #2: Protocol Agreement

• Establishes an agreed process for amending agreements that govern the terms and conditions of one or more transactions in swaps and/or entering into a “DF Terms Agreement”. Each such agreement is defined as a “Protocol Covered Agreement.”

• Defines “PCA Principal” as a party who is or may become a principal to one or more swaps under a Protocol Covered Agreement, and “PCA Agent” as a party who has executed a Protocol Covered Agreement as an agent on behalf of PCA Agent(s).

• Specifies that a person may participate in the DF Protocol as a PCA Principal or PCA Agent (or both), but that only a party that executed an existing Protocol Covered Agreement may use the Protocol to supplement that Protocol Covered Agreement.

• Each PCA Principal and PCA Agent directly participating in the Protocol through execution of an Adherence Letter is provided the ability to supplement Protocol Covered Agreements by completing one or more Questionnaires.

• Provides that Protocol Participants that exchange Questionnaires in the manner proscribed supplement the Protocol Covered Agreements for swaps between PCA Principals named in such Questionnaires by incorporating Schedules 1 and 2 from the DF Supplement. Additional schedules of the DF Supplement are incorporated only if both of the relevant PCA Principals have elected to do so.

• The Protocol Agreement also includes provisions designed to work with the DF Supplement by establishing that information delivered by a Questionnaire is considered “DF Supplement Information” for purposes of the DF Supplement.


Document #3: Questionnaire

• The basic document used by Protocol Participants to supplement Protocol Covered Agreements. Protocol Participants may complete and exchange Questionnaires to supplement their mutual Protocol Covered Agreements.

• Provides for the delivery of required information about a Protocol Participant (or in the case of a Questionnaire delivered by a PCA Agent, its PCA Principals) to counterparties.

– Questionnaire includes representations as to the legal status of the relevant PCA Principal(s) (e.g., eligible contract participant, swap dealer, major swap participant, special entity, etc.).

– A PCA Agent who has an existing “umbrella” agreement with a swap dealer for multiple underlying clients may complete and deliver Questionnaire(s) on behalf of such clients.

• The Questionnaire allows a PCA Principal to make various elections under the DF Supplement, including DF Schedules supplementing its Protocol Covered Agreements.

• A Protocol Participant is permitted to complete more than one Questionnaire so that it may deliver different Questionnaires to different counterparties under the Protocol.

• A Protocol Participant completing the Questionnaire online through ISDA Amend will have the ability to deliver the Questionnaire through ISDA Amend exclusively to other Protocol Participants that it has specifically approved.


Document #4: DF SupplementDocument #5: Terms Agreement

• The DF Supplement sets forth certain standardized representations, acknowledgments, notifications and agreements relating to Covered Rules.

– Representations and covenants are set forth in various “DF Schedules.”

– DF Schedules 1 and 2 are automatically incorporated into Protocol Covered Agreements through the exchange of Questionnaires. However, certain sections of Schedule 2 are only applicable to certain types of counterparty pairs based on representations they have made to each other in their Questionnaires.

– DF Schedules 3-6 are optional and applicable only if both PCA Principals with respect to a pair of exchanged Questionnaires have elected to apply them.

• The DF Terms Agreement serves the limited purpose of allowing parties to apply selected provisions of the DF Supplement to their trading relationship in respect of swaps, irrespective of whether or not such relationship is governed by an existing written agreement. The DF Terms Agreement is a “bare-bones” agreement that:

– (i) sets forth its intended scope;

– (ii) provides that the parties thereto automatically agree to incorporate DF Schedules 1 and 2 into such agreement;

– (iii) allows the parties thereto to elect to incorporate DF Schedules 3 through 6; and

– (iv) includes basic representations, governing law, address for notices and other basic contract provisions.


Dodd-Frank ActSupplemental Information

Vision builds motivation...

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Dodd-Frank Titles

• The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. It contains 848 pages and sixteen titles:

– Title I: Financial Stability

– Title II: Orderly Liquidation Authority

– Title III: Transfer of Powers to the Comptroller of the Currency, the FDIC, and the FRB

– Title IV: Regulation of Advisers to Hedge Funds and Others

– Title V: Insurance

– Title VI: Improvements to Regulation of Bank Holding Company and Depository Institutions

– Title VII: Wall Street Transparency and Accountability

– Title VIII: Payment, Clearing, and Settlement Supervision

– Title IX: Investor Protections and Improvements to the Regulation of Securities

– Title X: Bureau of Consumer Financial Protection

– Title XI: Federal Reserve System Provisions

– Title: XII: Improving Access to Mainstream Financial Institutions

– Title XIII: Pay It Back Act

– Title XIV: Mortgage Reform and Anti-Predatory Lending Act

– Title XV: Miscellaneous Provisions

– Title XVI: Section 1256 Contracts


Key CFTC Final Rules

• CFTC, Final Rule, Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 Fed. Reg. 9734 (Feb. 17, 2012);

• CFTC, Final Rule, Large Trader Reporting for Physical Commodity Swaps, 76 Fed. Reg. 43851 (July 22, 2011);

• CFTC, Final Rule, Position Limits for Futures and Swaps, 76 Fed. Reg. 71626 (Nov. 18, 2011);

• CFTC, Final Rule, Real-Time Public Reporting of Swap Transaction Data, 77 Fed. Reg. 1182 (Jan. 9, 2012);

• CFTC, Final Rule, Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136 (Jan. 13, 2012);

• CFTC, Final Rule, Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 Fed. Reg. 20128 (Apr. 3, 2012); and

• CFTC, Final Rule, Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps, 77 Fed. Reg. 35200 (June 12, 2012).


• IQ3 SOLUTIONS GROUP DOES NOT GIVE LEGAL OPINIONS

• The decision flow charts herein are based on CFTC and SEC Final Rulings of Title VII of the Dodd-Frank Act. It is of a general nature and cannot substitute for the advice of a licensed professional, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case. Please contact a local bar association, law society or similar association of jurists in your legal jurisdiction to obtain a referral to a competent legal professional if you do not have other means of contacting an attorney-at-law, lawyer, civil law notary, barrister or solicitor.

• No warranty whatsoever is made that the decision flow charts herein are accurate. Law varies from place to place and it evolves over time—sometimes quite quickly. Even if a process flow relating to a regulator definition is accurate, it may only be accurate in a specific jurisdiction. In addition, the law may have changed, been modified or overturned by subsequent development since date of presentation.

• Nothing herein should be construed as an attempt to offer or render a legal opinion or otherwise engage in the practice of law.

Disclaimer


Swap Dealer - §1.3(ggg)(1)

Commission shall determine/grant limited designation of categories

§1.3(ggg)(1) Definition of Swap Dealer - Decision Flow Chart

1 Apply Statutory Definition 2 Statutory Definitions’ Tests

Part II.A.4.b Holding Out Indicia

Holding itself out as… Commonly known in trade as… [See note 187.]

Part II.A.4.c Market Making

Routinely standing ready to enter into swaps at request/demand...

Part II.A.4.d Regular Business

(i) purpose of satisfying counterparty; (ii) separate profit center; (iii) staffing

Part II.A.4.a Dealer-Trader

Dealer-trader distinction forms basis for framework…[See: 75 FR 80177]*

xHolds itself out as...

§1.3(ggg)(1)(i)

xMakes a market in...

§1.3(ggg)(1)(ii)

xRegularly enters into...

§1.3(ggg)(1)(iii)

xCommonly known in...

§1.3(ggg)(1)(iv)

3 Excluded Swap Activity

xInter-affiliate activities

§1.3(ggg)(6)(i)

xCooperative activities

§1.3(ggg)(6)(ii)

xHedging physicals

§1.3(ggg)(6)(iii)

xRegistered floor traders

§1.3(ggg)(6)(iv)

Interpretive Guidance Part II.A.4

xPerson’s own account... §1.3(ggg)(2) Exception...not regular business

Part II.A.4.e Hedging Physicals

(i) mitigate price risk; (ii) physical channel; (iii) reduce commercial risk; (iv) sound practices; (v) not evasive

Part II.A.4.f Floor Traders

(i) registered CFTC Reg §3.11; (ii) enters into with proprietary funds via DCM/SEF, clears via DCO; (iii) is not

affiliated with SD; (iv) does not participate in RFQ process; (v) does

not provide clearing services; (vi) does not qualify under §(ggg)(6)(iii)

or §(kkk); (vii) does not participate in DCM or SEF market making

program; (viii) recordkeeping as if SD

Part II.A.4.g Interpretive Issues

Definition not susceptible to bright-line test; multi-factor interpretation

Apply Statutory Tests?

Swap Dealer?

Applicable?

ApplyStatutory Tests

Fail

Pass

Excluded Activity Determination

Fail

Meet Definition of Exclusion?

Apply Activity Exclusion(s)

Yes

Pass

4 Depository Originating Loans 6 Scope of Designation

Disjunctive (ie, “engages in any one of these activities”)

NoMeet Definition of Orig. Loan?

Apply Orig. Loan Exclusion(s)

Yes

Scope Limited?

Not deemed a “Swap Dealer”

5 De minimis Exception

Meet de min. Exemption?

Apply de minimis Exemptions

Yes

xDe Minimis Exception

§1.3(ggg)(4)x

Insured depository inst. §1.3(ggg)(5)(i)

xConsidered loan orig.

§1.3(ggg)(5)(ii)

xLoan shall not include:

§1.3(ggg)(5)(iii)

No

Copyright © 2012 IQ3 Solutions Group

Limited Designation

No

Swap DealerAll Categories

Swap Dealer

For own account; regular business

Non-Dealer

Counterparty

Non-Dealer

For own account; not regular business

Swap Dealer

Counterparty

Non-Dealer

Counterparty

Functional Approach: Identify swap dealers as those persons whose function is to serve as the points of connection in the swap markets.

Functional Approach (See 77 FR at 30598 and 75 FR at 80177)

Commissions interpret reference “for its own account” to refer to a person who enters into a swap as a principal, and not as an agent. A person who enters into swaps as an agent for customers (ie, customers’ accounts) would be required to register as FCM, IB, CPO or CTA.

“Hedging is not dealing activity” Swaps entered into for the purpose of hedging or mitigating commercial risk

Staff “element of def. should be applied in a reasonable manner”

See §1.3(ggg)(4) Flow Chart

See §(ggg)(6)(ii) Flow Chart

See §(ggg)(6)(iii) Flow Chart


See §(ggg)(6)(i) Flow Chart

See §(ggg)(6)(iv) Flow Chart

swaps entered into for the purpose of accommodating counterparty’s needs or demands… irrespective

of having a hedging consequencex

Application to limit... §1.3(ggg)(3)

Each swap entered into...

Apply via registration

See discussion 77 FR at 30610, Part II.A.4.d.

Note: regulations read exclusion for swap activities that are not part of ‘‘a regular business”; not exclusion from definition. Thus requirement to maintain records showing activities are excluded.



aDe minimis exception

§1.3(ggg)(4)(i)b

Voluntary registration §1.3(ggg)(4)(vi)

Registered? Yes

Activity<12 mths since

10/12/2012?

Yes

Not“Swap Dealer”

No

Activity preceding 12 mths?

§1.3(ggg)(4)(ii)(C)

Phase-in termination date set 9 mths after Report

c§1a(47) Dodd-FrankFinal Rules, Effective

Date 60 days post pub.

Issued 8/13/2012+ 60 days: 10/12/2012

No

No

Aggregate Gross Notional

Phase in level: $25 mil.

Is counterparty special entity?

ePhase-in Period

§1.3(ggg)(4)(ii)(A)

hStaff report

§1.3(ggg)(4)(ii)(B)


Phase in level: $3 billion


Phase in level: $8 billion

d“Special entity” counter-

party §4s(h)(2)(C)

Definition of “Swap”, etc.

NoPhase-in

termination date

Yes

Before

After

(i) Federal Agency; (ii) State, State agency, city, county, municipality; (iii) employee benefit plan; (iv) any governmental plan; or (v) any endowment

Not “Swap Dealer” if <$3 billion

Not “Swap Dealer” if <$8 billion

gSwap Data Reporting

77 FR 2136

Earlier of (4)(ii)(C) or

(D)?

fAct §1a(49) or §1a(33)

See SDR Effective Date Decision Tree [A]

§1.3(ggg)(4)(ii)(D)

Phase-in termination date not established: 5 years Later of...

§1.3(ggg)(4) Swap Dealer De Minimis Exception - Decision Flow Chart

§1.3(ggg)(4)(ii)(B)

<30 months following date SDR receives swap data

§1.3(ggg)(4)(ii)(D)

5 years following date SDR receives swap data

2

1

“Swap Dealer”(No de minimis)

$1a(47) Final Rule pub?

Yes

“Swap Dealer”clock “not ticking”

No

[A] SDR Decision Tree

Swap Data Reporting Compliance Effective Date

YAct §1a(47) Final Rules Issued, Effective Date

60 days post pub.

Issued 8/13/2012+ 60 days: 10/12/2012

Definition of “Swap”, etc.

N77 FR 2136

Swap Data ReportingCompliance: 7/16/2012

NAct §1a(49) or §1a(33) Final Rules, Effective

Date 60 days post pub.

Swap Data Recordkeeping

Issued 7/23/2012 + 60 days: 9/21/2012

>Phase in level?

Yes

xRegistration period

§1.3(ggg)(4)(iii)

Definition of SD and MSP

Earlier of...

xApplicability

§1.3(ggg)(4)(iv)

Act §4s(b) [77 FR 2613]

Submits complete application for registration

§1.3(ggg)(4)(iii)

Two mths after month-end exception not applicable

“Swap Dealer”Registration

§1.3(ggg)(4)(iv)

SD may apply to withdraw provided registered 12 mths

“Swap Dealer”Withdrawal

[A] Effective Date: Initiation of Swap Data Reporting

$3 billion is equivalent to 18,750 gold futures contracts @ px = $1600

$8 billion is equivalent to 50,000 gold futures

contracts @ px = $1600

§1.3(ggg)(4)(i) states: person (a) not currently registered as SD (b) shall be deemed not to be a SD as result of swap dealing activity involving counterparties (c) so long as the swap positions connected with those dealing activities (d) [entered] over the course of the immediately preceding [period], (e) have an aggregate gross notional amount of no more than… [eg, equivalent to 50,000 GC @ $1600 over 12 months]

Not deemed SDif <$25 million*

Meets de minimis (Not Swap Dealer)

No

Effective: 10/12/2012


Swap dealing activity?

Part II.A.4 Statutory TestsDefinition of “Swap”, etc.

§1.3(ggg)(4)(iv)SD Withdraw?

No

Yes

Deemed SD if >$25 mil.




§1.3(ggg)(5) Definition of Swap Dealer - Decision Flow Chart

1Insured depository inst. (“IDI”) §1.3(ggg)(5)(i)

2Considered loan orig.

§1.3(ggg)(5)(ii)

xLoan shall not include:

§1.3(ggg)(5)(iii)

Swap =<90 days before

transfer?

Swap =<180 days after transfer?

Not connected to originating loan

Swap entered into…...transfer of principal

No

Yes


No

Swap =<90 days before

agmt?

Swap =<180 days after

amgt?

Swap entered into…...execution of agmt

Yes



No

No

Meets requirement of

§1.3(ggg)(5)(i)(A)

Yes

Swap terms directly related to loan terms?


Swap required as condition to

hedge risk

Yes

No


No


§1.3(ggg)(5)(i)(B)

Yes

Duration does not extend

beyond loan?


§1.3(ggg)(5)(i)(C)


No

Yes

IDI sole source of funds under

loan?


No

§1.3(ggg)(5)(i)(A)

§1.3(ggg)(5)(i)(A)

§1.3(ggg)(5)(i)(B)(1)

§1.3(ggg)(5)(i)(B)(2)

§1.3(ggg)(5)(i)(C)

§1.3(ggg)(5)(i)(D)(1)

IDI committed =>10% of max principal amt?


No

§1.3(ggg)(5)(i)(D)(2)

Yes

Source of principal amt =>aggregate notional amt?


No

§1.3(ggg)(5)(i)(D)(3)

Yes


§1.3(ggg)(5)(i)(D)

Yes

Source of principal amt =>aggregate notional amt?


No

§1.3(ggg)(5)(i)(E)

Yes

Yes


§1.3(ggg)(5)(i)(E)

IDI directly transfers loan?

IDI part of syndicate of

lenders of loan source?

Purchases or receives

participation in loan?

Otherwise is source of funds

transferred?

or

or

or


No

No

No

No

Yes

§1.3(ggg)(5)(ii)(A)

§1.3(ggg)(5)(ii)(B)

§1.3(ggg)(5)(ii)(C)

§1.3(ggg)(5)(ii)(D)

Any trans. that is a “sham”

Any synthetic loan (CDS, etc)

Reporting guidance...

§1.3(ggg)(5)(i)(F)[ref: 7 U.S.C. 6r]


No

Term “sham”:i) regulatively defined? ii) fraud consequence?See 77 FR at 30620, 30622, 30623, 30708


No

Swap connected to orig. loan

Is Swap accepted by

DCO?

§1.3(ggg)(5)(iii)(A)

§1.3(ggg)(5)(iii)(B)

No

See 17 CFR Part 43;

17 CFR Part 45;17 CFR Part 46

Yes



End-User Exception - §2(h)(7)(A)

(1) Form and manner...

“Electing counterparty”

§39.6(a)(1)

Elect EU exception from

§2(h)(1)(A)?

CEA §2(h)(1)(A) requires swaps to be:1) cleared through DCO unless exception [§2(h)(7)]2) reported to SDR3) executed on DCM or SEF, unless not available...

No

Not a “financial entity”

CEA §2(h)(7)(A)(i)CEA §2(h)(7)(C)

Yes

Hedge/commercial risk

CEA §2(h)(7)(A)(ii)§39.6(b)(1)(iii)(B)

“Financial entity” means:(I) swap dealer; (II) security-based swap dealer (III) major swap participant; (IV) major security-based swap participant; (V) commodity pool; (VI) private fund [Title 15 §80b-2]; (VII) employee benefit plan [Title 29, §1002(3),(32)]; (VIII) banking/financial [Title 12, §1843(k)]

>1 electing, provide info

specified in §39.6(b)CEA §2(h)(7)(A)(iii)

§39.6(a)(1)(i)

§39.6(a)(1)(ii) §39.6(a)(1)(iii)

§39.6(a)(2)

Provide info specified in §39.6(b) to SDR or to

Commission

Swap required to clear via DCO

End-UserException to

Clearing

CEA §2(h)(7)(A)

Reporting Counterparty?

See §45.8

Responsibility of Reporting CP

No

SDR available?

Yes

Report to SDR

See §45.8

Yes

Report to Commission

See §45.8

No

i Notice of election

ii Identity of electing

iii Info previously provided (2)

§39.6(b)(2) Annual Filing…Reporting under this paragraph shall be effective for 365 days following date of first §(b)(1)(iii)

report; amend as necessary

(A)Electing counterparty is not a financial entity §2(h)(7)(C)(i)?

(B)Electing counterparty is using

swaps to hedge or mitigate commercial risk per §39.6(c)?

(C) How meets obligations...

(D)Issuer of securities under 1934 Act §12, or files reports §15(3)

1Electing §2(h)(7)(C)(iii) or §2(h)(7)(D), if yes?

2Exempt from definition as

per §39.6(d), if yes?

Reporting under End-User Exception

1Written credit support

agreement (CSA)

2Pledge or segregated

assets (CSA)

3Written third-party

guarantee

4Available financial

resources

5Means other than §§

(b)(1)(iii)(C)(1),(2),(3),(4)

1 SEC Central Index Key

2Board review/approved

exempt trans? 2(h)(1),(8)

Reporting counterparty reasonable basis to believe electing counterparty meets

requirements for an exception to clearing req. §39.6(b)(3)

See §39.6(c) Flow Chart

§39.6(c) Flow Chart

Hedge or mitigate risk?

A§39.6(c)(1)(i)(A)

Potential change in value of assets...

§39.6(c)(1)(i) Appropriate to

reduction of risks arising from:

B§39.6(c)(1)(i)(B)

Potential change in value of liabilities...

B§39.6(c)(1)(i)(C)

Potential change in value of services...

D§39.6(c)(1)(i)(D)

Potential change in value of commodities...

E§39.6(c)(1)(i)(E)

Potential change in value of interest, FX...

F§39.6(c)(1)(i)(F)

Change in value of FX of assets/ liabilities...

§39.6(c)(1)(ii) Qualifies as bona

fide hedging under CEA

§39.6(c)(1)(iii) Qualifies for hedging treatment under...

AFASB Accounting

Standards Code 815 (aka FASB No. 133)

BGASB Statement 53, Accounting/Reporting

for Derivatives

§39.6(c)(2)(i) Not used for

speculation, investing, trading...

§39.6(c)(2)(ii) Not used to

hedge risk of another swap, unless other position is hedge...

§240.3a67-4 of Title VII

§39.6(d)(i) Financial entity §2(h)(7)(C)(i)(VIII) shall be

exempt if certain type of bank

§39.6(d)(ii) Financial entity §2(h)(7)(C)(i)(VIII) shall be

exempt if <$10 billion assets

CEA §2(h)(7)(A) End-User Exception - Decision Flow Chart


Responsibility of Reporting CP


Client Case StudyOverview of Project

A problem well defined is halfway to a solution...

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Project Assumptions

• Description: Top 10 bank holding company has retained consultant to take accountability for oversight of ISDA August 2012 DF Protocol initiative.

• Success Criteria: Accurately collect and process DF Protocol-related data and documentation from known set of swap counterparties by 12/31/2012. At end of engagement transfer knowledge of effort’s planning, executing and monitoring for future ISDA Protocol change management initiatives.

• Participants: Bank legal response team, program/project manager, existing vendor, new vendor, multiple internal stakeholders (front to back office)

• Project Manager Role: Scope/plan project and then manage entire effort; provide oversight and coordination; knowledge transfer upon project close.

– Deliverables: Defined in Statement of Work.

• Vendor Role: Provide call center infrastructure, non-attorney support, facilitate client outreach, collect and enter as necessary counterparty data from DF Protocol documents, quality reviews, and metrics reporting.

• Start/End Dates: Engagement is expected to start 10/31/2012 and continue until 1/4/2013. Completion of DF Protocol is required by 12/31/2012.

• Locations: Work will be conducted at combination of locations, including at client facilities on the West Coast and vendor facilities on the East Coast.


Project Deliverables

• Deliverables defined in Statement of Work include:

– Project plan including scope definition, key milestones and deliverables

• Schedule planning: work breakdown structure, activity duration, activity/resources

– Resource planning in collaboration with bank legal response team and vendors

• Roles and responsibilities for all impacted stakeholders including counterparties

• Application of scrum methodology in order to deliver objectives in the shortest time

– Communication plan for all impacted stakeholders including counterparties

• Development of key performance indicators/metrics and program status reporting

– Risk / quality plan involving quality assurance and scope/schedule/cost control

• Given midstream engagement, focus s/b risk mitigation, plus communications/reporting

– Post mortem documentation of approach, drivers, metrics and work completed

• Close of project encompasses knowledge transfer and project documentation handoff


Project Risk / Focus

Given midstream engagement, focus s/b quality and risk management + communications and reporting.


IQ3 GroupIntelligent Solutions

Joining the abstract with the concrete...

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Who is IQ3 Group?

• It is one thing to see a problem clearly, it is another matter to act on it successfully. Key is the ability to join the abstract with the concrete.

• We define successful consulting as the ability to embrace the client's vision and to actualize change in the organization...

– Project Management: The science of delivering organizational change...

– Business Analysis: A problem well defined is halfway to a solution...

– Process Transformation: Re-engineering operational workflows...

– Systems Implementation: Automating redesign of business processes…

• Success depends on the ability to quickly access the information needed to anticipate, evaluate, and adapt. This requires expertise.

• An expert is someone who succeeds in clarifying options and facilitating decisions through knowing what to pay attention to and what to ignore.

IQ3 Group is an alliance of consulting professionals focused on delivering solutions to firms operating in the commodity and financial industries.


When we are clear about what we believe in and what our values are, we can envision the future we want to create. When we can envision the future we want to create, we can determine what is most important in creating that future, and take steps to make decisions, take action, and measure progress. Vision builds motivation in those who see a common future, and visionary people make decisions in the present based on the world they want to create.

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For more information, contact:

Mack Frankfurter, [email protected]: 310-849-5818

www.iq3group.com http://iq3group.blogspot.com

mailto:[email protected]

http://www.iq3group.com/

http://iq3group.blogspot.com/

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Documents

doddfrank requirements

df protocol effort

df protocol change

counterparty requirements

protocol agreement

doddfrank title

doddfrank act isda

overview of isdas df