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ISDA`s flash public consultation on VM Protocol

On 19 July 2016, ISDA published the draft 2016 Variation Margin Protocol for public consultation. Comments must be submitted by Friday 29 July 2016.

It is not in the habit of ISDA to hold a public consultation on its drafts – Protocols in particular are generally presented as a fait accompli. The initiative is to be welcomed as feedback should result in the VM Protocol being better tailored to market’s needs.

The Protocol allows adhering parties to comply with certain margin rules[1] by either:

  • Amending an existing New York, English or Japanese CSA
  • Replicating and amending an existing CSA
  • Creating a new CSA
  • Creating a new boilerplate ISDA 2002 Master Agreement along with a new CSA

The Protocol consists of the following eight documents:

  1. ISDA 2016 Variation Margin Protocol
  2. Questionnaire
  3. Exhibit NY-AMEND
  4. Exhibit NY-NEW
  5. Exhibit English-AMEND
  6. Exhibit English-NEW
  7. Exhibit Japanese-AMEND
  8. Exhibit Japanese-NEW

As is usually the case with Protocols including a questionnaire, adhering parties need to both adhere to the Protocol with ISDA and exchange the questionnaires with their counterparties bilaterally or via ISDA Amend.

Certain core elections must match, e.g. if Party A opts to amend the existing CSA, but Party B opts to replicate and amend, nothing happens. Other elections are allowed to diverge and are resolved in favour of the lowest common denominator.

Parties must exchange revised questionnaires until there is a successful match, at which point the agreement crystallises and no further changes can be made. Consequently, the VM Protocol will demand active coordination between adhering parties in order to produce the expected outcome. Importantly, while the vast majority of Protocols are limited to minor fixes, this new VM Protocol is designed to introduce major amendments to existing documents and even create brand new ones.

The VM Protocol is another tool in the toolbox to enable parties to comply with margin requirements. It constitutes a heavily-standardised agreement leading to shortcut compliance, and a possible alternative to protracted negotiation on the basis of the legacy CSAs or the new VM CSA templates. The broad range of approaches available paints a strong picture of the total absence of consensus on how to tackle compliance with the new margin rules; one more tool is unlikely to solve it all at once.

[1] Prudential Regulators (PR) Rules, CFTC Rules, Japan Rules, Canada (OSFI) Rules, EMIR Rules and Swiss (FMIA) Rules. Uncertainty remains around the latter two, as finalised rules are expected only in late 2016. The draft ISDA documents include brackets for the relevant Supplemental Provisions. The impact on the release date of the Protocol is not yet certain.

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