Dodd Frank ISDA Protocol and Contractual Changes IECA Spring - PowerPoint PPT Presentation

Dodd Frank ISDA Protocol and Contractual Changes IECA Spring Education Conference March 17, 2013 Willa Cohen Bruckner Alston & Bird LLP

Documentation Changes: Background • Dodd Frank is a watershed change for swaps • Impacts virtually every aspect of swaps trading • Documentation changes will take many forms  New types of agreements  New contractual provisions for existing types of agreements  Amendments to existing documents  More layers of complexity in document structure 1

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 2

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 3

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 4

ISDA August 2012 DF Protocol: Operative Aspects • 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 5

ISDA August 2012 DF Protocol: Substantive Provisions • Trade option exemption representations  If offeree: producer, processor, commercial user of, or merchant handling, commodity, and entering option for business purposes  Both parties: exercise of option is obligation to make/take delivery • Eligible contract participant by $1 M net worth and hedging: represent all swaps are hedges 6

ISDA August 2012 DF Protocol: Substantive Provisions – cont’d • Non-reporting party - notices regarding:  International swaps and non-U.S. trade repositories  Life cycle events • Non-swap dealer consents:  Swap dealer notices through webpage  Oral disclosure of pre-trade marks and key economic terms 7

ISDA August 2012 DF Protocol: Substantive Provisions – cont’d • Non-swap regulated entity - acknowledgments and 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 8

ISDA August 2012 DF Protocol: Substantive Provisions – 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 covered by prior agreement to affiliates, service providers  Typical limits on what constitutes confidential information 9

ISDA August 2012 DF Protocol: Substantive Provisions – cont’d • Optional schedules fulfill requirements for swap dealer safe harbors  Schedule 3: non-special entities that are not regulated swap entities  Schedule 4: non-ERISA special entities  Schedules 5 and 6: ERISA special entities 10

ISDA August 2012 DF Protocol: Substantive Provisions – cont’d • Schedule 3: non-special entities with 3 rd party evaluation agent  Non-special entity representations:  Written policies/procedures to ensure agent capability  With agent, independently evaluating swap dealer recommendations  Agent representation: independently evaluating swap dealer recommendations 11

ISDA August 2012 DF Protocol: Substantive Provisions – cont’d • Schedule 3: non-special entities without 3 rd party evaluation agent – representations:  Written policies and procedures to ensure capability of person evaluating  Independently evaluating swap dealer recommendations • Swap Dealer disclosure that it is not assessing suitability for non-special entity 12

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 13

ISDA August 2012 DF Protocol: Addenda • Amended and Restated Addendum I  Addresses issues regarding active funds and commodity pools  Must complete, even if not an active fund or commodity pool • Addendum II  Optional  Election not to receive pre-trade marks; U.S. person status; status as commodity pool or non-active fund 14

IECA Amendment to ISDA August 2012 DF Protocol • 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 IECA modifications  Participate in Protocol; also enter into bilateral agreement amending terms of Protocol 15

IECA Amendment to ISDA August 2012 DF Protocol: Substantive Changes • Can specify subset of swap document(s) to be amended • No new representation regarding financial information/accounting standards • Expands set of termination-type events not triggered by the Protocol • No amendment to limitation of liability provisions in swap document(s) 16

IECA Amendment to ISDA August 2012 DF Protocol: 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 17

IECA Amendment to ISDA August 2012 DF Protocol: Substantive Changes- cont’d • Other clarifications  $1 M net worth/hedging eligible contract participant  Email confirmation of scenario analysis request  Effective date of notice of change in information or representations 18

Bilateral Documents with Protocol Terms • Some dealers have bilateral alternatives to Protocol • Substantive terms are similar to Protocol • Useful if only one dealer; saves adherence fee • Can request IECA and other changes 19

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 20

Other IECA Documentation Initiatives • Dodd-Frank Act Representation and Reporting Agreement  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 21

Documenting Collateral Segregation for Uncleared Swaps • Counterparty to swap dealer/MSP has right to elect 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 to return of collateral 22

Documentation for Cleared Swaps • Futures agreements plus provisions for cleared swaps • Futures agreements  Cover types of issues in ISDAs ( e.g. , margin, default and remedies, representations, dispute resolution)  More one-sided than ISDAs and less subject to negotiation  No standard futures account agreement 23

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 Industry Association and ISDA  Some buy-side input 24

Execution Documentation • Addresses:  Submitting executed swap for clearing: who submits and timing  Consequences if swap is not accepted for clearing • Example: Futures Industry Association/ISDA Execution Agreement • Short time horizon: upon clearing, executed trade replaced by two trades with clearing entity • May need agreement with swap execution facility 25