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Dodd Frank ISDA Protocol andContractual Changes
IECA Spring Education ConferenceMarch 17, 2013
Willa Cohen BrucknerAlston & Bird LLP
Documentation Changes: Background
• Dodd Frank is a watershed change for swaps
• Impacts virtually every aspect of swapstrading
• Documentation changes will take many forms New types of agreements
New contractual provisions for existing types ofagreements
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: OperativeAspects
• 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: SubstantiveProvisions
• Trade option exemption representations
If offeree: producer, processor, commercial userof, or merchant handling, commodity, andentering option for business purposes
Both parties: exercise of option is obligation tomake/take delivery
• Eligible contract participant by $1 M net worthand hedging: represent all swaps are hedges
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ISDA August 2012 DF Protocol: SubstantiveProvisions – cont’d
• Non-reporting party - notices regarding:
International swaps and non-U.S. traderepositories
Life cycle events
• Non-swap dealer consents:
Swap dealer notices through webpage
Oral disclosure of pre-trade marks and keyeconomic terms
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ISDA August 2012 DF Protocol: SubstantiveProvisions – cont’d
• Non-swap regulated entity - acknowledgmentsand 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: SubstantiveProvisions – 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 coveredby prior agreement to affiliates, service providers
Typical limits on what constitutes confidentialinformation
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ISDA August 2012 DF Protocol: SubstantiveProvisions – cont’d
• Optional schedules fulfill requirements forswap dealer safe harbors
Schedule 3: non-special entities that are notregulated swap entities
Schedule 4: non-ERISA special entities
Schedules 5 and 6: ERISA special entities
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ISDA August 2012 DF Protocol: SubstantiveProvisions – cont’d
• Schedule 3: non-special entities with 3rd partyevaluation agent
Non-special entity representations:
Written policies/procedures to ensure agent capability
With agent, independently evaluating swap dealerrecommendations
Agent representation: independently evaluatingswap dealer recommendations
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ISDA August 2012 DF Protocol: SubstantiveProvisions – cont’d
• Schedule 3: non-special entities without 3rd
party evaluation agent – representations:
Written policies and procedures to ensurecapability of person evaluating
Independently evaluating swap dealerrecommendations
• Swap Dealer disclosure that it is not assessingsuitability 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 andcommodity pools
Must complete, even if not an active fund orcommodity pool
• Addendum II
Optional
Election not to receive pre-trade marks; U.S. personstatus; status as commodity pool or non-active fund
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IECA Amendment to ISDA August 2012 DFProtocol
• 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 IECAmodifications
Participate in Protocol; also enter into bilateralagreement amending terms of Protocol
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IECA Amendment to ISDA August 2012 DFProtocol: Substantive Changes
• Can specify subset of swap document(s) to beamended
• No new representation regarding financialinformation/accounting standards
• Expands set of termination-type events nottriggered by the Protocol
• No amendment to limitation of liabilityprovisions in swap document(s)
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IECA Amendment to ISDA August 2012 DFProtocol: 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 DFProtocol: Substantive Changes- cont’d
• Other clarifications
$1 M net worth/hedging eligible contractparticipant
Email confirmation of scenario analysis request
Effective date of notice of change in informationor representations
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Bilateral Documents with Protocol Terms
• Some dealers have bilateral alternatives toProtocol
• 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 ReportingAgreement
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 forUncleared Swaps
• Counterparty to swap dealer/MSP has right toelect 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 toreturn of collateral
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Documentation for Cleared Swaps
• Futures agreements plus provisions forcleared swaps
• Futures agreements Cover types of issues in ISDAs (e.g., margin,
default and remedies, representations, disputeresolution)
More one-sided than ISDAs and less subject tonegotiation
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 IndustryAssociation 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/ISDAExecution Agreement
• Short time horizon: upon clearing, executedtrade replaced by two trades with clearing entity
• May need agreement with swap execution facility
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Futures Documentation
• Futures commission merchant gives customeraccess to clearing; FCM is not the counterparty
• FCM has both customer credit concerns andrequirements from clearing entity/regulations
• Typically no default events for FCM, no cureperiod for customer default
• Termination, liquidation, transfer provisions
• All margin must be segregated; not based oncustomer election
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Other Issues
• “Swap” includes guarantee of a swap to theextent of recourse to guarantor
Guarantors of swaps must be eligible contractparticipants
Representations regarding guarantor
Carve outs from guarantor/guarantee
• Insolvency: limits on contractual rights
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Considerations for Negotiations
• Does requested change challenge regulatoryor clearing entity requirements?
• Strength in numbers
• Pick your battles
• How important are you to the FCM or swapdealer?
• 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
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