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ISDA Create and ISDA Protocols

October 2021

Mark NewSenior Counsel, AmericasISDA


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Standardization and Customization of Documentation

• Customization of documents allows parties to agree contacts that are suited to their particular circumstances. But putting bilaterally negotiated documents in place is hard work!

• Standardized forms reduce the workload, but can still take a long time to negotiate

• When managing a large portfolio of agreements, keeping track of individual terms is an ongoing challenge

• The advent of digital technology offers opportunities to standardize customization - not just one standard way of documenting a relationship, but several alternative ways

• Preserve the ability to customize agreements, but at lower cost

• But sometimes parties don’t want or need customization (or have only very limited need)

• E.g. when amending agreements in response to market-wide external drivers, such as regulation or market practice changes


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ISDA Clause Taxonomies and Clause Libraries

• ISDA published Clause Libraries for the ISDA Master Agreement in 2020 and for Credit Support Documentation in 2021

• The Clause Libraries are based upon an analysis of approx. 50,000 clauses and over 100 document samples provided by ISDA members

• The Clause Libraries provide standardized drafting for business outcomes that were identified in the earlier development of Clause Taxonomies

• Based on market input, Clause Taxonomies identify:

• Clauses commonly included in ISDA Master Agreements or Credit Support Documentation

• Business outcomes commonly negotiated for each clause

• The result is a rich library of clauses that can be individually tailored and combined to produce thousands of different versions of an agreement, where each version can be captured as a digital collection of datapoints


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Institutions have historically negotiated ISDA Master Agreements adopting their “house style”. Accordingly, language has diverged

and yet in many cases the intended business outcome is the same. This clause taxonomy importantly evaluates variants by

reference to their business outcome – by substance of the wording, rather than form.

The Clause Taxonomy Anatomy


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This process should enable you to derive the component parts of the ISDA Master Agreements:

• V1 Termination Currency + V4 Automatic Early Termination + V3 Payment Netting, etc.

Clause Taxonomy


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ISDA Create

• ISDA Create is an online tool that allows parties to take a standard form document and negotiate/agree/execute a specific agreement using that form

• Pre-defined elections in the standard document are represented in the tool, as well as space to agree individual bespoke terms

• No limitation on what the parties can agree (compare to ISDA Protocols)

• Benefits of the tool

• Reconciliation process is automated

• Parties can leverage real-time dashboards and communication features

• Production of 100% clean structured data that exactly matches the legal document and can feed downstream systems

• Negotiation process data can be captured

• Built-in negotiation workflows

• Reduction in time, cost and risk associated with putting new documents in place

• The platform has been built with the ability and intention to evolve over time to meet market demands


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Use of ISDA Create

• ISDA Create was originally developed by ISDA in partnership with law firm Linklaters to facilitate implementation of regulatory initial margin requirements

• Large numbers of new initial margin documents anticipated in the run-up to September 2020 compliance date (extended by regulators to September 2021 and 2022)

• The platform also provides functionality for Custody agreements and Account Control Agreements

• The concept is being expanded to other types of agreement, e.g. ISDA Master Agreement, variation margin CSA

• Identification of commonly-agreed terms and converting them into standardized elections through ISDA’s clause library

• Other features have been added to assist in the efficiency of negotiation

• Advisor Functionality: Ability for advisors to negotiate on behalf of their client on the platform

• User Enhancements: Added user requested features, including:

• Advanced filtering and navigation

• “Approver Views” of what requires manager approval

• “Strawman Negotiation” to capture data from off-platform negotiations


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Use of ISDA Create – turning negotiation data into documents


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Use of ISDA Create – reconciling differences in negotiation data


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Use of ISDA Create – turning data into documents


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Use of ISDA Create – extracting documentation data


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Industry-wide Documentation Remediation Exercises

• Each ISDA Master Agreement, CSA or Confirmation is a unique private document between the two parties

• External circumstances may require or encourage parties to make changes to that documentation

• Changes to existing terms

• Addition of new terms

• Creation of new documents

• If multiple counterparty pairs want to make the same exact changes, then the amendments can be standardized

• An ISDA Protocol is a delivery mechanism to make those changes with multiple counterparties simultaneously

• Benefits include efficiency and speed


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What is an ISDA Protocol?

• An ISDA Protocol is a multilateral contractual amendment mechanism that allows for standardized amendments to be made to agreements between any two adhering parties

• Parties indicate their willingness to make the amendments contemplated by the Protocol by sending an adherence letter to ISDA

• ISDA publishes all adherence letters so parties can determine which of their counterparties have adhered

• N.B. some Protocols also require or allow adhering parties to provide "Questionnaires" or other standardized information to other adhering counterparties ("counterparty-level information")

• Allows amendments to be tailored at the counterparty relationship level


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ISDA Amend

• ISDA and Markit collaborated to launch ISDA Amend, which allows parties to provide counterparty-level information online.

• ISDA Amend is an internet-based solution

• Automates the information-gathering process

• Provides sharing of submitted data and documents to permissioned counterparties

• Can also be used for standardized information sharing outside a Protocol (e.g. Regulatory Margin Self-Disclosure Letter)

• Additional information regarding ISDA Amend is available on the ISDA website


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A selective history of Protocols

1998 EMU Protocol

2012 ISDA August

2012 DF Protocol

ISDA March

2013 DF Protocol

ISDA 2013 EMIR Portfolio

Reconciliation, Dispute

Resolution and Disclosure Protocol

2016 ISDA Jurisdictional

Modular Protocol

ISDA 2018 U.S.

Resolution Stay

Protocol

2020 IBOR

Fallbacks Protocol

ISDA 2021 SBS Top-

Up Protocol

ISDA 2021 SBS

Protocol


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ISDA Dodd Frank Protocols (for CFTC-regulated swaps market)

• The ISDA August 2012 Dodd Frank Protocol (“August Protocol”) and the ISDA March 2013 Dodd Frank Protocol (“March Protocol”) are intended to be industry standard solutions to address the documentation requirements of certain CFTC regulations.

• A large part of the CFTC regime is based on registration requirements for swap dealers (and major swap participants)

• Once an entity registers, it must comply with a wide range of regulatory requirements, which indirectly impact counterparties

• The Protocols facilitate compliance:

• Market-standard provisions for consistency

• Efficient means of incorporating those provisions into documentation


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Regulations covered by ISDA Dodd Frank Protocols

• Compliance with various elements of CFTC regulations can either be achieved by or facilitated by providing information, representing information or agreeing to certain terms.

• These regulations are therefore amenable to a documentation solution

• Such solutions include:

• Providing KYC and factual information

• Representing regulatory status

• Consenting to information disclosure

• Consenting (if selected) to investor safe harbor treatment

• Agreeing business practices (e.g. portfolio reconciliation)


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Main Components of the ISDA Dodd Frank Protocols

The August Protocol and the March Protocol each include the following three main components:

• Protocol Agreement: Sets out the terms of the agreement to the mechanism for supplementing written agreements governing swaps (“Protocol Covered Agreements” or “PCAs”). The actual effect of the Protocol Agreement depends on the elections made in Questionnaires.

• Questionnaire: Allows a party to:

• provide information about itself,

• choose the scope of the supplements it is willing to apply to PCAs

• identify (through delivery of the Questionnaire) the counterparties with whom it is willing to utilize the ISDA Dodd Frank Protocols to supplement PCAs.

• DF Supplement: Contains the substantive provisions - standardized representations, covenants, disclosures, acknowledgements and notifications. The DF Supplement may also be incorporated directly into an agreement (outside the Protocol).


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How to participate in the ISDA Dodd Frank Protocols

To participate in the August Protocol and/or the March Protocol a party must:

• Deliver a completed and executed Adherence Letter to ISDA.

• Deliver a completed and executed Questionnaire to one or more of its Protocol Covered Agreement counterparties.

➢ The relevant ISDA Dodd Frank Protocol will ONLY impact Protocol Covered Agreements if both counterparties have delivered a Questionnaire

➢ Questionnaires must be delivered in the manner specified in the receiving party’s Adherence Letter

➢ The Questionnaire may be completed and delivered in paper format or online via ISDA Amend

➢ A Swap Dealer is deemed to have delivered a Questionnaire to every counterparty who delivers a Questionnaire to it via ISDA Amend

• Each of the foregoing steps must be completed for the August Protocol and the March Protocol separately.


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Security-based swap Protocols (for SEC-regulated SBS market)

The SEC has a similar regime to the CFTC, but for security-based swaps (SBS). Requirements for security-based swap dealers will come into effect on November 1, 2021

There are two Protocols that can be used for SEC compliance:

• ISDA 2021 SBS Top-Up Protocol

• This allows parties that have adhered to the Dodd Frank Protocols to “top up” those previously adherences to apply them to security-based swaps

• Takes the information/representations/agreements provided in the Dodd Frank Protocols for swaps, and makes the necessary amendments to meet the SEC’s requirements for security-based swaps

• No Questionnaires required

• ISDA 2021 SBS Protocol

• Very similar to the Dodd Frank Protocols

• One Protocol, two Questionnaires

• No requirement to have adhered to the either of the Dodd Frank Protocols


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ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol

• The ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol enables parties to amend the terms of their Protocol Covered Agreements to:

• Reflect the portfolio reconciliation and dispute resolution requirements imposed by EMIR

• Include a disclosure waiver to help ensure parties can meet the various reporting and record keeping requirements under EMIR without breaching confidentiality restrictions

• The Protocol provides for two alternate methods of portfolio reconciliation

• Each entity that adheres to the Protocol elects, in its Adherence Letter, whether it is a “Portfolio Data Sending Entity” or a “Portfolio Data Receiving Entity”

• The combination of the two parties’ elections determines which method applies

• This allows for some level of customization without requiring a Questionnaire


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ISDA Jurisdictional Modular Protocol

ISDA JMP developed to facilitate compliance with special resolution regime stay regulations in various jurisdictions

• SRRs: Special resolution regimes enacted in legislation or regulation to resolve failing financial institutions or systemically important entities (alternatives to bankruptcy/liquidation)

• Stays: SRRs typically provide for stays or overrides on certain rights of counterparties to an entity in resolution, e.g. temporary stay on right to terminate transactions under an ISDA Master Agreement following an Event of Default

• Cross-border recognition of stays: It may not always be clear whether a court or governing law outside of the jurisdiction of the SRR would recognize the stays

• SRR Stay Regulations: Regulations that require financial institutions to obtain the consent of their counterparties to be subject to stays on, or overrides of, certain termination rights under home-country special resolution regimes

• If financial institution goes into resolution, SRR stays will apply to the financial institution's foreign law-governed contracts


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ISDA Jurisdictional Modular Protocol

• The ISDA JMP is composed of boilerplate provisions and several “Jurisdictional Modules”

• Provisions of a Jurisdictional Module will closely track the requirements of applicable SRR Stay Regulations in a particular jurisdiction

• Regulated Entities

• In-scope counterparties

• In-scope contracts – not limited to ISDA-published documents

• Required amendments/acknowledgements

• An Adhering Party may choose which Jurisdictional Modules to adhere to

• An Adhering Party can also choose in a Module between three options for identifying the Regulated Entities that it will amend its contracts with (unless otherwise required by the relevant Stay Regulation). These options are:

• All present and future Regulated Entities; or

• All Regulated Entities that are members of a G-SIB and/or

• One or more specific Regulated Entities (i.e. dealer-by-dealer)


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ISDA 2018 U.S. Resolution Stay Protocol

• In contrast with other SRR stay regulations, the US SRR stay regulations were implemented in a standalone Protocol

• The ISDA 2018 U.S. Resolution Stay Protocol is based on the ISDA 2015 Universal Stay Protocol

• The US regulations specifically recognize adherence to a Protocol in the form of the ISDA 2015 Universal Stay Protocol (with some amendments required or permitted) as a safe-harbored means of compliance – called a “U.S. protocol” in the regulations

• ISDA developed the ISDA U.S. Stay Protocol based on the requirements for a safe harbored “U.S. protocol” under the U.S. Stay Regulations.

• The US regulations have been in full application since January 1, 2020 following a one-year phase-in period from January 2019


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ISDA 2020 IBOR Fallbacks Protocol

• ISDA published the IBOR Fallbacks Protocol and finalized the IBOR Fallbacks Supplement (Supplement 70 to the 2006 ISDA Definitions) on October 23, 2020, with an effective date of January 25, 2021

• The Supplement contains new triggers and fallbacks for the replacement of certain IBOR reference rates

• New derivative transactions after January 25, 2021 that incorporate the 2006 ISDA Definitions or the new 2021 ISDA Definitions include the new triggers and fallbacks

• The Protocol allows parties to amend transactions entered into before January 25, 2021 to include the terms of the Supplement in their existing Protocol Covered Documents


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Future Protocols?

• Future regulatory or market practice developments might result in additional Protocols being published.

• Development of any specific Protocol would depend on ISDA member demand and viability of a Protocol solution


October 2021

Mark NewSenior Counsel, AmericasISDA