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2021- Breaking Points

As a form of due diligence, I have to plough through such an amount of Fear-Uncertainty-Doubt “marketing” articles to have developed a deep dislike for the breed. That said, we thought it instructive to briefly remind readers of the 2021 Regulatory calendar, at least while some time remains to mitigate.

Benchmark Reform

The ISDA Fallbacks Protocol is now open for adherence, and has got off to a promising start, with 271 adherents as of writing. While the Protocol and Supplement are efficient mechanisms to amend derivative contract fallbacks, reversion to fallback is not the “officially” approved method of amendment. Applying to a wide range of Master and Credit Support Agreements, the Protocol’s coverage is extensive, if not universally supported by accompanying legal opinion. Though it seems likely that this somewhat convoluted method will suffice for adherents’ vanilla legacy derivative portfolios, the Protocol will be of no assistance for a range of more “complex” product types such as swaptions, or packages where the hedge must entirely accord with the underlying. Equally, there is no Protocol for loans or bonds; amendment for each broad product class will require careful bilateral handling, being fraught with the potential for litigation. While some vague hope of respite, in the form of a continued publication of a “synthetic” LIBOR, has been offered by the FCA in respect “difficult” legacy transactions, Regulators have been univocal in their insistence that end’ 2021 will mark the end of the IBORs. The publication of the Protocol and Supplement mark the beginning of the largest repapering exercise yet undertaken by the market.

IM Phases 5 and 6

The veterans of Phases 1-4 need no reminding of the challenges represented by IM compliance and, with the exception of the Phase 1 custodian-onboarding bottleneck, the introductory phases of IM compliance have been relatively smooth going. Despite Regulatory acknowledgement and assistance via bifurcation and delay, the remaining two phases constitute a hugely significant, if not historic challenge. IM 5 and 6 differ from their antecedents primarily by the vast volume increase- 314 in-scope entities for Phase 5 and a further 775 for Phase 6. This amounts respectively to 3,616 and 5,443 counterparty relationships that require de novo documentation. The volume of Phase 5 alone represents a multiple of all other phases to date- combined. ISDA Create and online portals into the major custodians will introduce some marginal efficiencies, but compliance remains a complex task of negotiating and harmonising multiple documents. The typical new entrant IM “start to finish” time is 18 months, volume multiplication will not compress this timeline. Given the lack of experienced IM resource- 2021 should be the year of IM, regardless of what phase you expect to be. Cancellation of Phase 6, or further delay of either phase, is overwhelmingly unlikely.


Delayed first by a lack of regulatory coordination,  then by a one year Coronavirus delay, market participants now have at least a chance to comply. The likely 1 February 2022 deadline is outside this note’s 2021 documentation doom remit, but will impact resources earlier. Although largely operational, requiring systems upgrade and testing to avoid settlement failure and subsequent penalties and buy-ins; the settlement discipline regime of the CSDR (“SDR”) is also a significant documentation challenge. This is particularly the case for custodians- the regulation requiring bilateral amendment across the board of their clients.  While a typical financial firm will only face a limited number of custodians, the SDR imposes an operational burden and another amendment straw on the 2021 camel’s back. While the latest delay has enabled the UK to kick compulsory compliance into the post-Brexit wilderness, the regulation’s extensive extra-territorial effect will compel compliance, largely regardless of location.


The second Bank Recovery Resolution Directive (“BRRD 2”) and the accompanying second Single Resolution Mechanism Regulation, are due to be transposed into national law by 28 December 2020- temptingly close to the final Brexit date. BRRD 2 introduces an exemption where it would be legally/otherwise impracticable to include a contractual recognition of bail-in, early intervention powers for regulators and a requirement for contractual recognition of resolution stay powers- each and all will require bilateral amendment. While the BoE has indicated that UK-specific compliance will not be expected, forthcoming deadlines will apply in respect of EU counterparties with attendant repapering obligations.


While we are hesitant to make any predictions about Brexit, it is clear that whatever last-minute FTA is or is not cobbled together, the parties have run out of time for a comprehensive agreement in respect of financial services. With the exception of “too big not to exempt” LCH, ESMA’s grants of equivalence are now likely to take place post-Brexit, and potentially be (even more) subject to political machination. While both UK and EU firms have prepared by setting up complementary entities and novating contracts across as applicable, a disorderly financial Brexit poses a number of problems for 2021. A typical example is the confusion in respect of cross-border trade lifecycle events, UK entities will potentially require authorisation by national regulators, such authorisation varying by product and activity. While, not a purely documentation issue, the Brexit aftermath will add a number of stressors to an already manic 2021 legal calendar.


LIBOR’s demise and IM Phase 5 would each make for a landmark year in the documentation world, in combination they represent a unique challenge. The nearest comparable is the market-wide VM repapering exercise of 2017, during which the market largely failed to comply by the deadline. The added elements of CSDR, BRRD 2 repapering, Brexit unknowns and the additional operational burdens of legislation such as the Shareholder Rights Directive 2, promise to stretch resources to the utmost. To paraphrase Donald Rumsfeld’s now-immortal miscommunication, these are the “known knowns” of 2021. If 2020 has taught us anything, it should be the wisdom of having capacity enough to deal with a least a degree of the “unknown unknowns”.  

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