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Dodd Frank ISDA Protocol andContractual Changes

IECA Spring Education ConferenceMarch 17, 2013

Willa Cohen BrucknerAlston & Bird LLP

Documentation Changes: Background

• Dodd Frank is a watershed change for swaps

• Impacts virtually every aspect of swapstrading

• Documentation changes will take many forms New types of agreements

New contractual provisions for existing types ofagreements

Amendments to existing documents

More layers of complexity in document structure

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Background – cont’d

• Documentation changes will be ongoing

• Drivers of change in documentation Presumption of clearing

Swap dealer compliance obligations

End-user exception criteria

Who can access the swaps market

How is the market accessed

Protection of funds

Futurization of swaps

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Background – cont’d

• Brief overview of relevant Dodd Frank issues Swap dealers/ major swap participants

Cleared vs. uncleared swaps

End-user exception

Execution of swaps

Eligible contract participant

Swap dealer, MSP external business conduct rules

Reporting and recordkeeping

Collateral segregation

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ISDA August 2012 DF Protocol: Structure

• Protocol refers to the execution method Electronic platform for efficient execution August 2012 DF Protocol is a two step process

• Documentation Pieces Adherence Letter Protocol Agreement - mechanics, basic representations Supplement - DF specific representations and covenants Questionnaire – party-specific information DF Terms Agreement - swaps with no written agreement Addendum I - commodity pool issues Addendum II (optional) - pre-trade mid-market marks

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ISDA August 2012 DF Protocol: OperativeAspects

• Protocol amends swap documentation• Incorporates terms of the Supplement• Questionnaire dictates which terms included• Addresses: Swap dealer external business conduct rules Reporting requirements Eligible contract participant status

• Amendments to Protocol terms must be bilateral• Timing for participation: before May 1, 2013

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ISDA August 2012 DF Protocol: SubstantiveProvisions

• Trade option exemption representations

If offeree: producer, processor, commercial userof, or merchant handling, commodity, andentering option for business purposes

Both parties: exercise of option is obligation tomake/take delivery

• Eligible contract participant by $1 M net worthand hedging: represent all swaps are hedges

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ISDA August 2012 DF Protocol: SubstantiveProvisions – cont’d

• Non-reporting party - notices regarding:

International swaps and non-U.S. traderepositories

Life cycle events

• Non-swap dealer consents:

Swap dealer notices through webpage

Oral disclosure of pre-trade marks and keyeconomic terms

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• Non-swap regulated entity - acknowledgmentsand agreements regarding: Daily marks

Scenario analysis

• Swap dealers: Notify counterparty of rights to scenario analysis and

daily marks

Disclaimers regarding daily marks

Notify counterparty of choices regarding clearing

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• Confidentiality Agree to other party’s disclosure of DF reporting

information

In general, prior confidentiality agreement governs

Swap dealer can disclose to regulators or SRO,subject to prior confidentiality agreements

Swap dealer can disclosure information not coveredby prior agreement to affiliates, service providers

Typical limits on what constitutes confidentialinformation

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• Optional schedules fulfill requirements forswap dealer safe harbors

Schedule 3: non-special entities that are notregulated swap entities

Schedule 4: non-ERISA special entities

Schedules 5 and 6: ERISA special entities

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• Schedule 3: non-special entities with 3rd partyevaluation agent

Non-special entity representations:

Written policies/procedures to ensure agent capability

With agent, independently evaluating swap dealerrecommendations

Agent representation: independently evaluatingswap dealer recommendations

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• Schedule 3: non-special entities without 3rd

party evaluation agent – representations:

Written policies and procedures to ensurecapability of person evaluating

Independently evaluating swap dealerrecommendations

• Swap Dealer disclosure that it is not assessingsuitability for non-special entity

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ISDA August 2012 DF Protocol: Questionnaire

• Legal identifier number (CICI)• Basic information about party• Third party evaluation agent• Status as: Eligible contract participant Swap dealer Major swap participant Financial entity

• Election of Schedule(s)• Election of DF Terms Agreement

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ISDA August 2012 DF Protocol:Addenda

• Amended and Restated Addendum I

Addresses issues regarding active funds andcommodity pools

Must complete, even if not an active fund orcommodity pool

• Addendum II

Optional

Election not to receive pre-trade marks; U.S. personstatus; status as commodity pool or non-active fund

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IECA Amendment to ISDA August 2012 DFProtocol

• Modifies substantive provisions of Protocol

• Has been accepted by many parties

• User’s Guide available

• Elect structural approach Don’t participate in Protocol; instead incorporate

terms into bilateral agreement, with IECAmodifications

Participate in Protocol; also enter into bilateralagreement amending terms of Protocol

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IECA Amendment to ISDA August 2012 DFProtocol: Substantive Changes

• Can specify subset of swap document(s) to beamended

• No new representation regarding financialinformation/accounting standards

• Expands set of termination-type events nottriggered by the Protocol

• No amendment to limitation of liabilityprovisions in swap document(s)

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IECA Amendment to ISDA August 2012 DFProtocol: Substantive Changes- cont’d

• No waiver of rights against swap dealer• Life-cycle events based on non-reporting party

interpretation, until CFTC clarification• Confidentiality Prior or future confidentiality agreement takes

precedence Adds caveats to swap dealer right to disclose to

regulators/SROs Adds caveats to swap dealer right to disclose to

affiliates/service providers

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IECA Amendment to ISDA August 2012 DFProtocol: Substantive Changes- cont’d

• Other clarifications

$1 M net worth/hedging eligible contractparticipant

Email confirmation of scenario analysis request

Effective date of notice of change in informationor representations

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Bilateral Documents with Protocol Terms

• Some dealers have bilateral alternatives toProtocol

• Substantive terms are similar to Protocol

• Useful if only one dealer; saves adherence fee

• Can request IECA and other changes

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ISDA DF Protocol 2

• In draft form (as of mid-February, 2013)

• Addresses:

Confirmation methodology

End-user exception criteria/requirements

Acknowledgments regarding clearing

Risk valuation

Portfolio reconciliation

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Other IECA Documentation Initiatives

• Dodd-Frank Act Representation and ReportingAgreement

End-user to end-user agreement

Addresses:

Characterization of parties under Dodd Frank

Which party will report swaps (if parties must elect)

Obligations of reporting party and non-reporting party

Trade Option Exemption requirements

Election of end-user exception; hedging representation

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Documenting Collateral Segregation forUncleared Swaps

• Counterparty to swap dealer/MSP has right toelect segregated collateral/margin Applies to excess over mark-to market value

Segregate at third party custodian

CFTC rule not yet final

• Key issues: Who pays

Secured party perfection vs. pledgor’s right toreturn of collateral

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Documentation for Cleared Swaps

• Futures agreements plus provisions forcleared swaps

• Futures agreements Cover types of issues in ISDAs (e.g., margin,

default and remedies, representations, disputeresolution)

More one-sided than ISDAs and less subject tonegotiation

No standard futures account agreement

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Documentation for Cleared Swaps – cont’d

• Added terms for cleared swaps should include:

Portability

Liquidation upon default or other termination event

Consequences if a swap is not accepted for clearing

Limits futures commission merchant’s liability

• Cleared Swaps Addendum

Developed jointly by the Futures IndustryAssociation and ISDA

Some buy-side input

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Execution Documentation

• Addresses: Submitting executed swap for clearing: who submits

and timing

Consequences if swap is not accepted for clearing

• Example: Futures Industry Association/ISDAExecution Agreement

• Short time horizon: upon clearing, executedtrade replaced by two trades with clearing entity

• May need agreement with swap execution facility

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Futures Documentation

• Futures commission merchant gives customeraccess to clearing; FCM is not the counterparty

• FCM has both customer credit concerns andrequirements from clearing entity/regulations

• Typically no default events for FCM, no cureperiod for customer default

• Termination, liquidation, transfer provisions

• All margin must be segregated; not based oncustomer election

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Other Issues

• “Swap” includes guarantee of a swap to theextent of recourse to guarantor

Guarantors of swaps must be eligible contractparticipants

Representations regarding guarantor

Carve outs from guarantor/guarantee

• Insolvency: limits on contractual rights

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Considerations for Negotiations

• Does requested change challenge regulatoryor clearing entity requirements?

• Strength in numbers

• Pick your battles

• How important are you to the FCM or swapdealer?

• Timing

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Looking Ahead

• More rules and interpretations

• Margin requirements

• Extraterritoriality

• Changing market conventions

• Movement to cleared swaps

• Futurization of swaps

• Swap execution facilities

• Enhanced CFTC enforcement authority

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Contact Information

Willa Cohen Bruckner

Alston & Bird LLP

90 Park Avenue

New York, NY 10016

212-210-9596

[email protected]

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