On 13 August 2012, ISDA launched its Dodd-Frank Protocol initiative, designed to help market participants meet the requirements of the following CFTC rules, finalised pursuant to the Dodd-Frank Act:
- Business Conduct Standards for Swap Dealers and Major Swap Participants;
- 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;
- Swap Dealer and Major Swap Participant Recordkeeping and Reporting, Duties, and Conflicts of Interest Policies and Procedures; Futures Commission Merchant and Introducing Broker Conflicts of Interest Policies and Procedures; Swap Dealer, Major Swap Participant, and Futures Commission Merchant Chief Compliance Officer; and
- Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps.
The ISDA Dodd-Frank Protocol is made up of four primary documents, being the:
- ISDA DF August 2012 Protocol Agreement;
- ISDA DF August 2012 Protocol Questionnaire (the “Questionnaire”);
- ISDA August 2012 DF Supplement (the “DF Supplement”); and
- DF Terms Agreement.
The protocol applies the amendments detailed within the DF Supplement to “Covered Swaps” executed, or proposed to be executed, between:
- two principals;
- parties acting on behalf of two principals; or
- a principal and an executing broker which are subsequently given up to a prime broker.
Unless otherwise agreed, Schedules 1 and 2 of the DF Supplement are automatically incorporated into the amended ISDAs of protocol participants. However, Schedules 3, 4, 5 and 6 of the DF Supplement must be specifically elected in order to apply.
Adherence to the protocol requires participants to complete the online adherence letter process. Subsequently, ISDAs executed between two participants are amended when participants become ‘matched’ via an exchange of Questionnaires, the amendments taking effect on the date on which the later of the two Questionnaires is delivered. A participant may, but is not required to, execute multiple Questionnaires in order to deliver different Questionnaires to different counterparties. ISDA can designate a cut-off date for adherence to the protocol, with the requirement that delivery of a Questionnaire be made within 30 calendar days of the specified date.
A more detailed summary of the contents of the DF Supplement and the Questionnaire are provided in the Schedule to this note.
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ISDA August 2012 DF Supplement
The DF Supplement is made up of 6 schedules:
- Schedule 1: Defined Terms;
- Schedule 2: Agreements between a Swap Dealer and any other party;
- Schedule 3: Institutional suitability safe harbour for Non-Special Entities;
- Schedule 4: Safe harbors for Non-ERISA Special Entities;
- Schedule 5: Safe harbors for ERISA Special Entities (Option 1); and
- Schedule 6: Safe harbours for ERISA Special Entities (Option 2).
Schedule 2: Agreements between a Swap Dealer and any other party
Schedule 2 is split into 7 parts, as detailed below.
Part I: Representations and Agreements
Participants make certain representations to each other and agree certain matters as detailed below:
- regarding the accuracy of information (other than financial information) provided pursuant to the DF Supplement;
- that financial information which has been provided has been prepared in accordance with applicable accounting standards;
- that an event of default, termination event, or other similar event will not occur solely on the basis of a representation associated with the protocol being incorrect or misleading in any material respect, or a breach of any covenant or agreement set forth solely in the DF Supplement;
- to promptly notify the other party of any material change or inaccuracy with respect to the information provided to the other;
- to promptly provide the other party with any information reasonably requested to enable such other party to comply with Title VII of the Dodd-Frank Act;
- consent to the disclosure of information to the extent necessary for the reporting of transactions;
- consent to the recording of conversations between trading, marketing, operations and other relevant personnel; and
- certain hedging representations with respect to Commodity Trade Options.
Part II: Agreements of a Non-Reporting Counterparty
Non-Reporting Counterparties agree to provide the following notifications to Reporting Counterparties:
- with respect to “international swaps”, the (i) identity of each non-U.S. trade repository not registered with the CFTC to which the Non-Reporting Counterparty or its agent has reported the swap, and (ii) the swap identifier used by such non-U.S. trade repository to identify the swap; and
- the occurrence of a “life cycle event” relating to a corporate event with respect to a swap.
Part III: Representations and Agreements of a Counterparty that is not a Swap Dealer
A counterparty that is not a Swap Dealer must provide representations and its agreement regarding:
- its receipt, review and understanding of the notifications in Part VII of Schedule 2 that are applicable to it;
- the manner in which notifications and disclosures may be provided to it; and
- the definition, use and disclose of Material Confidential Information.
Part IV: Agreements and Acknowledgements of a Counterparty that is not a Regulated Swap Entity
A counterparty that is not a Regulated Swap Entity agrees that:
- it will obtain any daily marks it wishes to receive for a cleared Swap from the FCM through which it clears such swap or another third party;
- daily marks with respect to any uncleared swaps will be calculated by the Swap Dealer as of the close of business on the prior Business Day; and
- with respect to any swap this is not “available for trading”, it shall not be entitled to any scenario analysis unless the Swap Dealer otherwise agrees.
Part V: Representation of a Hedging Entity ECP
If a counterparty is a “Hedging Entity ECP”, it represents that for so long as it remains so, each swap entered into by it will be in connection with the conduct of its business or to manage the risk associated with an asset or liability owned or incurred or reasonably likely to be owned or incurred by it in the conduct of CP’s business.
Part VI: Representation of Hedging Individual ECP
If a counterparty is a “Hedging Individual ECP”, it represents that for so long as it remains so, each swap entered into by it, will be entered into in order to manage the risk associated with an asset owned or liability incurred, or reasonably likely to be owned or incurred, by it.
Part VII: Notification by a Swap Dealer
Under Party VII, Swap Dealers agree to notify their counterparties:
- of their ability to request, and consult on the design of, scenario analysis and to receive daily marks;
- that daily marks with respect to uncleared swaps may not (i) necessarily reflect the price at which the swap could be replaced or terminated, (ii) be the sole factor in calculating margin; and (iii) represent the value at which the swap is marked on the Swap Dealer’s books;
- of their right (i) to select the DCO at which a swap is to be cleared; and (ii) to elect that a swap which is not subject to mandatory clearing requirements be cleared, and to select the DCO at which the swap will be cleared; and
- of the right for certain employee benefit plans to elect to be treated as a special entity.
Schedule 3: Institutional Suitability Safe Harbors for Non-Special Entities
In order to take advantage of “Safe Harbors”, Non-Special Entities are required to represent that:
- they have complied with written policies designed to ensure that its “Designated Evaluation Agents” (“DEAs”) or the persons with responsibility for making trading decisions on its behalf (as appropriate) are capable; and
- it will exercise independent judgment (in consultation with a DEA where appropriate), in evaluating all swap recommendations.
Swap Dealers are required to disclose to counterparties that they are acting in the capacity of a counterparty and not undertaking to assess the suitability of any swap or trading strategy.
Schedule 4: Safe Harbors for Non-ERISA Special Entities
Non-ERISA Special Entities are also required to make representations regarding non-reliance and the exercise of independent judgment. Again, Swap Dealers must disclose that they do not undertake to act in the best interests of a counterparty or to assess the suitability of any swap or trading strategy. Each Designated QIRis also required to make representations regarding its independence and handling of conflicts of interest, and agree to promptly notify the Swap Dealer if any of its representations become incorrect or misleading in any material respect.
Schedule 5 and 6: Safe Harbors for ERISA Special Entities (Option 1 and Option 2)
Both Options cover largely the same ground, regarding fiduciaries, evaluation of transactions and the exercise of independent judgment. Again, Swap Dealers disclose that they do not undertake to act in the best interests of a counterparty or to assess the suitability of any swap or trading strategy.
ISDA August 2012 DF Protocol Questionnaire
A questionnaire can be completed by a counterparty as principal (a “PCA Principal”) or by an agent on its behalf. The information requested in Sections 2 to 5 of Part II of the questionnaire is not required if it has already been provided. However, note that, unless such information appears in the publicly available portion of an Entity Identifier database or in the questionnaire itself, the entity completing the questionnaire will have been deemed to represent to its counterparty that the information has already been provided, and that it is true, correct and complete as of the date of delivery of the questionnaire.
Completion of the questionnaire involves the provision of information regarding:
- the PCA Principal’s Entity Identifier, address and contact details, and occupation or business;
- whether performance by the PCA Principal is being guaranteed, and if so, by whom;
- whether any person other than an employee of the PCA Principal is exercising any control with respect to swap positions, and if so, whom;
- for PCA Principals that are not Regulated Swap Entities or Special Entities and that wish to incorporate DF Schedule 3 (Institutional Suitability Safe Harbor for Non-Special Entities), whether the PCA Principal has a “Designated Evaluation Agent”, and if so, whom;
- for PCA Principals that are Special Entities other than ERISA Special Entities, and that wish to incorporate DF Schedule 4 (Safe Harbors for Non-ERISA Special Entities), the contact details for any Designated QIR;
- for PCA Principals that are ERISA Special Entities, and that wish to incorporate DF Schedule 5 (Safe Harbors for ERISA Special Entities (Option 1)) and/or DF Schedule 6 (Safe Harbors for ERISA Special Entities (Option 2)), the contact details of any Designated Fiduciary;
- if the PCA Principal is an SD or MSP, the contact details for the submission of any complaints (this is not a compulsory field);
- contact details for delivery of notifications to any PCA Principal that is not an SD;
- whether the PCA Principal agrees to receive oral disclosure regarding pre-trade MTM and basic economic terms;
- the classification of the PCA Principal; and
- whether the PCA Principal agrees to enter into a DF Terms Agreement with each counterparty to whom this Questionnaire has been delivered, and if so, its notice information.
 A “Designated QIR” is a representative of the Special Entity which, inter alia has sufficient knowledge to evaluate a swap, undertakes to act in the best interests of the Special Entity, and evaluates the appropriateness of the swap