March 2013 Dodd-Frank Protocol – Protocol 2.0


The second and latest International Swaps and Derivatives Association, Inc. (“ISDA”) Dodd-Frank Protocol (“DF Protocol 2.0”) opened for adherence on March 22, 2013. DF Protocol 2.0 is intended to address the following requirements related to certain business conduct standards under the Dodd-Frank Act:

  • End-User Exception Documentation. If applicable, a swap dealer (“SD”) or major swap participant (“MSP”) must obtain documentation sufficient to form a reasonable belief that its counterparty meets the conditions required for election of the end-user exception.[1]
  • Documentation of Swap Trading Relationships. SDs and MSPs must establish, maintain, and follow written policies and procedures reasonably designed to ensure (1) that they execute a confirmation for each swap transaction that they enter into and (2) that swap trading relationship documentation meets certain specified criteria with all counterparties. Additionally, SDs and MSPs must acknowledge and document swap transactions within certain specific time periods.[2]
  • Portfolio Reconciliation. SDs and MSPs must establish, maintain, and follow written policies and procedures regarding portfolio reconciliation and the resolution of portfolio value discrepancies.[3]

These requirements were finalized by the CFTC after the August 2012 Dodd-Frank Protocol and, therefore, were not addressed by that Protocol. DF Protocol 2.0, although completely separate from the original Protocol, has the same structure and adherence process. That is, as with the earlier Protocol, adherence involves the submission of an adherence letter (which may be submitted through the online system “ISDA Amend” via the Markit portal), a protocol agreement, a protocol supplement, and the completion of a questionnaire. The relevant CFTC rules will become applicable to SDs and MSPs on July 1, 2013, after which customers may find that dealers are unwilling to enter into swaps with them unless they have adhered.

There are four Schedules to DF Protocol 2.0. A party adhering to the Protocol Agreement would automatically agree to incorporate Schedule 1 (defined terms) and Schedule 2 (general agreements regarding the creation of transaction confirmations, mandatory clearing, and the end-user exception to clearing). Schedules 3 and 4 are applicable unless the adhering party opts out of them. Schedule 3 generally contains provisions regarding daily valuation of swaps and dispute resolution mechanics (to the extent the parties do not otherwise address these issues in a written agreement, such as an ISDA Credit Support Annex), and Schedule 4 generally contains portfolio reconciliation procedures.

[1] 17 C.F.R. § 23.505.

[2] 17 C.F.R. §§ 23.501, 23.504.

[3] 17 C.F.R. § 23.502.