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ISDA Publishes Dodd-Frank – EMIR Protocol Bridge

Introduction

A further addition to the already long list of bilateral amendments to derivative documentation became available on 10 September 2013 when ISDA published its Dodd-Frank March 2013 Protocol (DFP2) to EMIR Top Up Agreement (the “Extension Agreement”) together with an Explanatory Memorandum.

The Extension Agreement is a bilateral amendment which allows parties which have already adhered to the ISDA March 2013 DF Protocol (the “DF Protocol”) to make changes to the DF Protocol in order to comply with the portfolio reconciliation and dispute resolution requirements of EMIR, without those parties actually having also to adhere to the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (the “EMIR Port Rec Protocol”).  However, it does not, and was never intended to, achieve “super-compliance”.  In other words, it has not been designed specifically to meet all relevant CFTC requirements under the Dodd-Frank Act and all relevant EMIR requirements in relation to portfolio reconciliation and dispute resolution.

The Extension Agreement covers the following areas:

Portfolio Rec and Dispute Resolution Under the EMIR Port Rec Protocol

Schedule 4 to the DF Protocol is amended so as to tailor it more closely to the portfolio reconciliation requirements of EMIR.  In contrast, the dispute resolution provisions of the EMIR Port Rec Protocol are transposed to the Extension Agreement almost in their entirety.   Broadly, this:

    • allows either party to identify a dispute by way of sending a “Dispute Notice” to the other party;
    • requires the parties to consult in good faith in an attempt to resolve any dispute in a timely manner;
    • requires the parties to escalate any dispute which has not been resolved within five Joint Business Days to “appropriately senior members of staff”; and
  • requires each party to have internal procedures and processes in place to record and monitor any dispute for as long as it remains outstanding.

The Extension Agreement also includes a confidentiality waiver provision pursuant to which each party consents to the disclosure of information to the extent required by the Dodd-Frank Act or EMIR with respect to transaction reporting and/or retention of transaction and similar information.

Optional termination

Section 2 of the Extension Agreement provides an optional termination provision with a number of suggested alternatives.  This was drafted in light of the continuing uncertainty over recognition of equivalent regimes.  If included, it would allow termination of the Extension Agreement in the event that, in the future, the parties were able to (and preferred to) comply only with the CFTC’s rules promulgated under the Dodd-Frank Act (and so wished to return to the position where they are using the DF Protocol in its unamended form).

With only 4 days to go before the portfolio reconciliation and dispute resolution provisions of EMIR come into force, only 1,900-odd market participants having adhered to the EMIR Port Rec Protocol.  This is in contrast to the 9,000-odd which have adhered to the DF Protocol and may explain the timing of this latest document initiative from ISDA.  However, in truth, the market’s appetite to execute bilateral amendments to documentation has, to date, been very limited – matched only by the regulator’s apparent lack of appetite to enforce the regulations.  As such, it remains to be seen just how compliant the industry is by 15 September.

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