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ISDA Publishes March 2013 DF Protocol

On 22 March 2013, the ISDA March 2013 Dodd-Frank Protocol (the “DF Protocol 2.0”) opened.  The DF Protocol 2.0 is part of ISDA’s Dodd-Frank Documentation Initiative and attempts to assist the industry in complying with certain CFTC final rulings imposed under Title VII of the Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), specifically:

  • Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading      Relationship Documentation (“STRD”) Requirements for Swap Dealers and Major Swap      Participants[1];
  • End-User Exception to the Clearing Requirement for Swaps[2]; and
  • Clearing Requirement Determination Under Section 2(h) of the CEA[3].

In order to comply, most counterparties will be required to supplement existing documentation.  In order to facilitate this updating process, the DF Protocol 2.0 provides a standard set of amendments which counterparties may select.  In addition, for those which do not currently have documentation in place, it is also possible to deem a new 2002 ISDA Master Agreement to exist which can then be further supplemented by selection of standard amendments.  In order to facilitate compliance, the DF Protocol 2.0 addresses such issues as:

  • the issuance of confirmations;
  • the extinguishment and replacement of swaps upon clearing;
  • the status of counterparties as Category 1 Entities, Category 2 Entities or neither;
  • notification procedures for counterparties seeking to make use of end user exceptions;
  • notifications regarding whether a counterparty is a “covered party” for the purposes of the Orderly Liquidation Authority’s ‘living will’ regulations together with acknowledgements regarding restrictions on termination rights against covered parties;
  • valuation of transactions and the resolution of disputes; and
  • portfolio reconciliation.

A person wishing to participate in the DF Protocol 2.0, whether as principal or agent, must submit an Adherence Letter to ISDA.  Once accepted by ISDA, a conformed copy of the Adherence Letter will be published and will be viewable by all protocol participants.  Each party that submits an Adherence Letter must also deliver a completed Protocol Questionnaire (either bilaterally or through the ‘ISDA Amend’ system).  Amendments to documentation become effective when two protocol participants exchange Questionnaires.  It is possible for a protocol participant to deliver different Questionnaires to different counterparties provided that more than one Questionnaire is not delivered to the same counterparty.

A lot of thought has clearly gone into the drafting of the DF Protocol 2.0.  It is a valiant attempt which will assist many counterparties in complying with a number of provisions of the Dodd-Frank Act.  In particular, the Protocol Questionnaire provides short, but very helpful, explanations of the various regulatory requirements.  However, as with all ISDA protocols, it is intended to be used without negotiation (although participants can, to a degree, select which parts of the protocol will apply).  As such, it largely imposes a ‘one size fits all’ solution to a relatively complicated problem in circumstances where this might not be appropriate or acceptable.  By way of example, broadly speaking, parties will only have one business day to object following receipt of a swap valuation and non-dealers will have only two business days to review data received as part of a portfolio reconciliation process.  In addition, if there are no quotes available to recalculate the value of a swap following notification of a dispute then the “Risk Valuations Agent’s” (in most cases the dealer’s) original calculation will be used.  It may be that securing agreement on this type of provision is not operationally feasible or institutionally acceptable, particularly in larger firms where more stakeholder approval is required and existing processes are harder to re-engineer.  The result may be that a number of market participants may not feel able to sign up to the DF Protocol 2.0 either in part or in whole, leaving compliance to be dealt with by way of bilateral negotiation.

[1] 77 Fed. Reg. 55904 (Sept. 11, 2012)

[2] 77 Fed. Reg. 42559 (July 19, 2012)

[3] 77 Fed. Reg. 74284 (Dec. 13, 2012)

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