Against the backdrop of impending comprehensive regulation of the derivatives marketplace, on November 10, 2009, the International Swaps and Derivatives Association, Inc. (“ISDA”) recommended common principles (the “Principles”) for “give-up” arrangements to facilitate the negotiation of relevant agreements across different clearing platforms with central counterparties (“CCPs”). The Principles were derived from a series of meetings among representatives of prospective customers, dealers and clearing houses. In preparing the Principles, the drafting group acknowledged that its recommendations may be affected by the evolution of pending derivatives legislation.

The Principles cover four points. The first of these is to recommend fallbacks in the event of a rejection of a trade for clearing by a clearing member (“CM”) and the inability of a customer to find an alternate CM to accept the trade before the specified cut-off time. These proposed fallbacks are as follows, the first two being elective on the part of the executing broker (“EB”): (i) the EB may elect to accept the trade as a bilateral cleared trade (with the EB acting as the CM for the trade); (ii) the EB may elect to accept the trade as a bilateral one between it and the customer (assuming, of course, that proper documentation governing the trade exists or is agreed to at that time between the EB and the customer); (iii) breakage is calculated on the trade as between the EB and customer based on which party (if any) was at fault for the rejection (e.g., if the EB failed to submit the trade, breakage would be calculated on the customer’s side of the market; if the customer violated a trading limit with the CM, breakage would be calculated on the EB’s side of the market; and if the CCP rejected a trade for any other reason, breakage would be calculated at mid-market).

The second recommendation in the Principles is that a CM have the ability to reject trades, so long as it specifies in a notice to the EB the circumstances under which it is rejecting the trade. The third recommendation in the Principles is that a CM be able to reduce a Customer’s trading limits by notice to the Customer, with such reduction effective upon receipt of the notice, so long as the reduced limits do not apply to trades executed before the effectiveness of the reduction notice, even if such trades have not yet cleared. Finally, the fourth recommendation in the Principles is that all CCPs act (i) in accordance with the determinations of a “relevant industry sanctioned decisional body” (such as the ISDA Determinations Committee in connection with credit default swaps) or (ii) in the absence of a determination by a relevant decisional body, in cooperation with one another to achieve a coordinated result.