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FIA-ISDA Cleared Derivatives Execution Agreement Living on Borrowed Time?

Risk Magazine is reporting that, in its current form, the FIA-ISDA Cleared Derivatives Execution Agreement does not comply with CFTC guidance, with the consequence that thousands of existing agreements will either have to be “torn up or amended”.

The FIA-ISDA agreement enables a party to claim breakage costs from its counterparty if a trade is submitted for clearing but is not accepted, for instance due a breach of credit limits.  In practice, dealers have been requiring clients to sign up to the agreement as a condition of clearing – an understandable attempt to address the risk associated with a failed transaction.  In addition, some swap execution facilities (SEFs) also make this kind of provision a pre-requisite to trading.  However, critics of the clause have claimed that this restricts the number of dealers with which they are able to trade.

The issue came to a head on 14 November 2013, when the CFTC issued guidance which stated, inter alia, that any requirement that market participants may only execute a swap on a SEF if the market participants have a pre-execution agreement are inconsistent with the requirements of the Commodities Exchange Act and Commission regulation 37.202, which require a SEF to allow its market participants full access to its trading systems or platforms.

According to the Risk Magazine article, an industry working group is already looking at revisions to the FIA-ISDA agreement, and that an ISDA protocol seems to be the favoured option to implement amendment en masse.

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