ISDA launches SBS Protocol

ISDA has today launched the 2021 Security-based Swaps (SBS) Top-Up Protocol. The Protocol allows firms that have adhered to either the August 2012 or March 2013 Dodd-Frank protocols to incorporate new SEC rules for SBS. The first registration date, in respect of certain of the new rules is 6 October 2021, SBS dealers must resister by 1 November 2021, major SBS participants must register by 1 December 2021. Applicable categories will be determined over the two months prior to first registration, from the “counting date” – 6 August 2021. The SEC rules largely mirror those of the CFTC, with respect to: reporting, SBS dealer business conduct, margin, capital, segregation,  and cross-border application.  ISDA intends to make a separate protocol available later this year, for those entities that have not adhered to either of the earlier Dodd-Frank protocols. The SBS Top-Up protocol is accompanied by a US Self-Disclosure letter, facilitating attestation to the presence or otherwise of a US nexus. As per previous Dodd-Frank protocols, the SBS Protocol will be supported by ISDA Amend. Adherence is by the normal authorised letter submission, which may be signed electronically. ISDA is offering a new pricing structure, discounting for multiple entity adherence. 25-100 entities- flat fee of $12,500. 100+ entities- flat fee of $25,000.

The Protocol follows the 18 December 2019 SEC adoption of final cross-border SBS amendments, triggering the compliance timeline above.

As a reminder, a SBS is a swap based on loans or securities, including:

• A single security or loan or any characteristic thereof such as pricing or any interest
• Narrow-based security indices, mostly composed of less than nine component security indices
• The occurrence or other wise of certain financial events relating to issuers of securities

The final definition of a SBS therefore captures: most commonly traded single-name CDS, most CDS based on narrow indices, as well as most equity swaps. As an example- a Total Return Swap (TRS) based on 10 different corporate issuers would most likely be a broad-based index swap and would fall under the jurisdiction of the CFTC. The “same” trade as a package of 10 individual TRS on the same issuers would be based on single securities and would most like fall under SEC jurisdiction.

The SEC portion of the global derivatives market covers approx. 5% by volume; however, the final implementation of the SEC rules may be regarded as the last major piece in the Dodd-Frank Title VII jigsaw. An important moment for participants involved, something of a footnote for the wider market.

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