Industry Protocols, Surveys and Whitepapers

ISDA Publishes White Paper on Future of Derivatives Processing and Market Infrastructure


In September 2016, the International Swaps and Derivatives Association, Inc. (“ISDA”) published a wide-ranging white paper entitled “The Future of Derivatives Processing and Market Infrastructure.”[1]  The white paper proposes a “path forward” from the new regulatory ecosystem created in response to the financial crisis and the resulting compliance burden on market participants.

As described in the white paper, tight time frames for complying with regulatory requirements prevented market participants in various jurisdictions from making necessary changes to compliance, operational risk management, and other processes in an optimal manner. The resulting complex workflows have created challenges.  The white paper’s proposals are intended to foster a “standardized, efficient, robust and compliant ecosystem that supports the needs of an array of market participants.”[2]  In particular, the white paper identifies three key areas for improvement: (i) standardization; (ii) collaboration; and (iii) technology. READ MORE

Major Banks Agree to Protocol “Staying” Exercise of Termination Rights

On October 18, the International Swaps and Derivatives Association, Inc. (“ISDA”) announced that eighteen major global banks had agreed to sign a protocol (the “Protocol”) that imposes a stay on cross-default and termination rights under standard derivatives contracts governed by an ISDA master agreement. The terms of the Protocol, which was developed in close coordination with regulators to facilitate cross-border resolution efforts and to address risks associated with the disorderly unwind of derivatives portfolios, would apply where one of the Protocol signatories becomes subject to resolution action in its jurisdiction.

The push for a temporary suspension of termination rights was prompted, at least in part, by the rush of counterparties to unwind some 900,000 derivatives contracts against Lehman Brothers trading entities and seize collateral upon Lehman’s bankruptcy filing. This stampede to exercise termination rights further destabilized the markets and led to disorder that deepened the financial crisis. In response, certain countries developed statutory resolution regimes. For example, in the United States, Title II of the Dodd-Frank legislation provides a stay of termination rights against “covered financial companies” for which the Federal Deposit Insurance Corporation (“FDIC”) has been appointed receiver until 5:00 p.m., U.S. Eastern time, on the business day following the date on which the FDIC is appointed receiver.[1] However, absent the Protocol, statutory regimes such as that of Title II might only apply to trades between domestic parties under domestic law governed agreements, and not to cross-border trades.

For some time, regulators, industry groups and banks have expressed a strong interest in amending derivatives documentation to recognize the suspension of early termination rights on bilateral uncleared swaps upon the commencement of insolvency or resolution proceedings against a systemically important financial institution. Indeed, in November 2013, four global regulators sent a letter to ISDA expressing their desire for the group to effect changes to its widely-used master agreement documenting derivatives. In this letter, the regulators noted that “[a] change in the underlying contracts for derivative instruments that is consistently adopted is a critical step to provide increased certainty to resolution authorities, counterparties, and other market participants, particularly in the cross-border resolution context.”[2]

Under the Protocol, adhering parties incorporate suspension terms into their derivatives contracts by “opting-into” certain qualifying overseas resolution regimes. In effect, by signing the Protocol, an adhering party recognizes stays under various statutory resolution regimes. The purpose of the suspension is to provide regulatory authorities with a brief period during which they could exercise certain powers, such as the transfer of derivatives contracts to a solvent third party or, possibly, conversion of financial institution obligations into equity. In short, the Protocol will facilitate regulators’ ability to deal with the swap positions of financial institutions that present systemic risk because they are perceived to be “too big to fail,” hence shielding taxpayers from bail-out costs.

The Protocol reportedly will cover more than 90% of the outstanding derivatives notionals of the adhering parties, a percentage that is expected to increase as additional firms agree to its terms, especially if global prudential regulators require its adoption by regulated entities. However, certain end-users have expressed reluctance in having their potential termination rights curtailed, especially during a time of distress and extreme market volatility. Asset managers, in particular, have argued that voluntarily limiting early termination rights could violate fiduciary duties owed to their clients.

The eighteen banks are expected to adhere to the terms of the Protocol by early November—before the next G-20 meeting in Australia—and the Protocol generally will become effective beginning January 1, 2015. Nevertheless, additional work remains to remove obstacles to cross-border resolution. On September 29, the Financial Stability Board launched a public consultation on a set of proposals to achieve the cross-border recognition of resolution actions and remove impediments to cross-border resolution.[3]

[1] Generally, “qualified financial contracts” (“QFCs”) (which are defined to include, inter alia, “swap agreements”), may not be terminated, liquidated and accelerated solely by reason of, or incidental to, the appointment of the FDIC as receiver for a “covered financial company” (i.e., a financial company for which, among other things, the Secretary of the Treasury has made a systemic risk determination) until the earlier of: (i) 5:00 pm on the business day following the date of the appointment of the FDIC as receiver; or (ii) receipt of notice of transfer of the QFC. Wall Street Financial Reform and Consumer Protection Act § 210(c)(10)(B)(i).

[2] Letter to ISDA from the Bank of England, Bundesanstalt für Finanzdiensteistungsaufsicht, Federal Deposit Insurance Corporation and Swiss Financial Market Supervisory Authority, available at

[3] See “Cross-border recognition of resolution action” (29 September 2014), available at

ISDA Publishes Section 2(a)(iii) Form of Amendment

In June 2014, the International Swaps and Derivatives Association, Inc. (“ISDA”) published a form of amendment relating to Section 2(a)(iii) of the preprinted form of ISDA Master Agreement.  Section 2(a)(iii) generally permits a contracting party to withhold performance indefinitely if an event of default or potential event of default has occurred and is continuing (or an early termination date has been designated) with respect to its counterparty.  ISDA initially announced an initiative to evaluate and address issues arising under Section 2(a)(iii) in 2011.

As previously discussed in Derivatives in Review, Section 2(a)(iii) has been treated inconsistently by courts across various jurisdictions in recent years, leading to market uncertainty regarding the ability of a non-defaulting party to indefinitely withhold performance.  The form of amendment effectively allows a defaulting party to impose a limit on the non-defaulting party’s right to suspend performance by designating a “condition end date” to that suspension of performance (the form of amendment suggests 90 days after notice by the defaulting party for this period), after which a non-defaulting party either must perform (together with payment of interest[1] on withheld amounts or other compensation in respect of withheld delivery), or terminate.

[1] Such interest would be payable at the “Non-default Rate,” which is defined: (i) under the 1992 ISDA Master Agreement, as a rate equal to the cost (without proof or evidence of any actual cost) to the non-defaulting party if it were to fund the relevant amount, as certified by it; and (ii) under the 2002 ISDA Master Agreement, as a rate offered to the non-defaulting party, as certified by it, by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such banks selected in good faith by the non-defaulting party for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market.

Further Delay of and Request for Comments on November 14, 2013 Staff Advisory Regarding Application of CFTC Regulations to U.S. Activities of Non-U.S. Swap Dealers

On January 3, 2014, the Commodity Futures Trading Commission (“CFTC”) issued a no-action letter further delaying until September 15, 2014 the effectiveness of a November 14, 2013 advisory regarding the applicability of certain Dodd-Frank requirements to activities that occur in the United States (the “Advisory”).[1]  A previous no-action letter, issued on November 26, 2013, had delayed the effectiveness of the Advisory until January 14, 2014.[2]

The Advisory generally provides that a non-U.S. swap dealer registered with the CFTC must comply with “transaction-level” requirements[3] of Dodd-Frank when entering into a swap with a non-U.S. person if the swap is “arranged, negotiated, or executed by personnel or agents” of the non-U.S. swap dealer located in the United States.[4]

In conjunction with the issuance of this latest no-action letter, the CFTC also issued a notice of request for public comment on all aspects of the Advisory.[5]

[1] CFTC Letter No. 14-01, Re: Extension of No-Action Relief: Transaction-Level Requirements for Non-U.S. Swap Dealers (January 3, 2014); CFTC Staff Advisory No. 13-69, Applicability of Transaction-Level Requirements to Activity in the United States (November 14, 2013).

[2] CFTC Letter No. 13-71, Re: No-Action Relief: Certain Transaction-Level Requirements for Non-U.S. Swap Dealers (November 26, 2013).

[3] The “transaction-level” requirements include: (i) required clearing and swap processing; (ii) margining (and segregation) for uncleared swaps; (iii) mandatory trade execution; (iv) swap trading relationship documentation; (v) portfolio reconciliation and compression; (vi) real-time public reporting; (vii) trade confirmation; (viii) daily trading records; and (ix) external business conduct standards.   These requirements are separated into “Category A” and “Category B” requirements, the latter of which includes solely external business conduct standards.

[4] See CFTC Staff Advisory No. 13-69, Applicability of Transaction-Level Requirements to Activity in the United States (November 14, 2013).

[5] Request for Comment on Application of Commission Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in the United States (available at:

Central Clearing and Securitization SPEs

A fundamental component of the Dodd-Frank Act is to require central clearing of standard swaps in order to decrease systemic risk. Pursuant to Section 2(h) of the Commodity Exchange Act, the Commodity Futures Trading Commission (“CFTC”) may determine that a group, category, type, or class of swap must be centrally cleared by a derivatives clearing organization (“DCO”). The CFTC may then exercise its discretion in applying a compliance schedule in connection with a particular clearing requirement determination. To date, the CFTC has issued such a determination only with respect to certain classes of interest rate swaps and credit default swaps.[1] Pursuant to the relevant compliance schedule for this determination, subject swaps that are entered into between “financial entities” and swap dealers generally are required to be cleared beginning June 10, 2013.

Special purpose entity (“SPE”) issuers in securitizations often enter into interest rate swaps in connection with the securitizations. Most of these SPEs qualify as “financial entities,” which is generally defined to include, among others, commodity pools, “private funds,” as defined in section 202(a) of the Investment Advisers Act of 1940, and persons predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature, as defined in section 4(k) of the Bank Holding Company Act of 1956. Industry group members and market participants have repeatedly requested an exemption or, at least, explicit interpretive guidance from the CFTC in connection with the applicability of the existing clearing mandate to securitization SPEs. So far, no such exemption or guidance has been provided.

As a practical matter, the two clearinghouses able to accept interest rate swaps for clearing in the United States are currently not able to accept swaps having “limited recourse” language and “non-petition” covenants, which are typical characteristics of securitization swaps required by rating agencies to make the SPEs bankruptcy-remote. However, if in the future this is no longer the case, the securitization market may need to renew its efforts for clarity on mandatory clearing, and may need to seek a stay of the clearing requirement pursuant to CFTC Regulation 39.5.

[1] Clearing Requirement Determination Under Section 2(h) of the CEA, 77 Fed. Reg. 74,284 (Dec. 13, 2012).

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.

The New CFTC Regulatory Regime for Private Fund Managers; First Quarter 2013 Update

The enactment of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementation by the Commodity Futures Trading Commission (“CFTC”) has ushered in a new era of regulation of managers of “private funds.” This White Paper provides a survey of some of the most significant aspects of the new swaps regulatory regime mandated by the Dodd-Frank Act that directly impact private fund managers. Specifically, this White Paper focuses on the regulatory actions of the CFTC, many of which have been taken in close coordination with the SEC.  Click here to read more

Dodd-Frank Protocol Opens for Adherence

On August 13th, the International Swaps and Derivatives Association, Inc. (“ISDA”) and Markit announced the launch of the Dodd-Frank Protocol (the “DF Protocol”).  The DF Protocol focuses primarily on the many “business conduct standard” requirements of the Dodd-Frank legislation and is being used as a mechanism for market participants to more efficiently amend existing swap documents to address changes required by (or relating to) the legislation.  Among other things, the DF Protocol is intended to: (i) assist dealers in gathering information needed to satisfy certain compliance obligations (especially “know your customer” rules); (ii) provide for certain representations and agreements between the parties necessary to get the benefit of certain safe harbors (for example, dealers are required to confirm that governmental or other “special entity” counterparties have qualified independent representatives and will rely on the advice of those representatives); and (iii) serve as a method for dealers to deliver certain new disclosures.

The amendment of trading documentation by counterparties is accomplished in two steps: first, by “adhering” to the DF Protocol via execution and online delivery of an executed adherence letter at the “Protocol Management” section of ISDA’s website, along with the payment of a related fee (note that the adhering parties will be listed on the website); and second, by the bilateral  exchange of a “DF Questionnaire” between counterparties.  At the time of adherence, a party may specify the method through which it wishes to receive DF Questionnaires from its counterparties (e.g., by a Markit portal, e-mail, or fax).  The DF Questionnaire includes information on the identity of a party, whether an agent acts on its behalf and its status under the Act (e.g., swap dealer, or special entity).  It also operates as the mechanism through which the counterparties elect which of the following portions of the “DF Supplement” they wish to incorporate into their trading documentation (although Schedules 1 and 2 automatically apply to all adherents):

  • Schedule 1:  Definitions
  • Schedule 2:  Representations and agreements relating to reporting of trade information, treatment of confidential information, rights of the parties to receive daily marks, delivery of required dealer notifications, etc.
  • Schedule 3:  Institutional Safe Harbors for Non-Special Entities
  • Schedule 4:  Safe Harbors for Non-ERISA Special Entities
  • Schedule 5:  Safe Harbors for ERISA Special Entities (Option 1)
  • Schedule 6:  Safe Harbors for ERISA Special Entities (Option 2)

Note that Schedules 4 through 6 are relevant only for market participants that are “special entities,” which are defined to include federal agencies; States, State agencies, cities, counties, municipalities or other political subdivisions of a State; employee benefit plans and governmental plans under ERISA; and endowments (including organizations described in section 501(c)(3) of the Internal Revenue Code of 1986, as amended).

ISDA Protocol Address Eurozone Capital Control Risk

For some time now, market participants have been concerned about the exit of a member-state from the Eurozone. These concerns are most acute in—but not limited to—the case of Greece, as it struggles to implement structural reforms demanded by its troika of lenders: the European Central Bank, the International Monetary Fund and the European Commission. As part of its Eurozone contingency planning, the International Swaps and Derivatives Association, Inc. (“ISDA”) has attempted to address some of the risks relating to derivatives transactions in the event such an exit occurs through the publication on July 11th of the Illegality/Force Majeure Protocol (the “Protocol”).[1] The purpose of the Protocol is to facilitate the amendment of 1992 ISDA Master Agreements with the more sophisticated “Illegality” and “Force Majeure” provisions of the 2002 ISDA Master Agreement.

The Protocol recognizes that numerous scenarios for a Eurozone exit may occur, including those where a member state: (i) announces its immediate exit from the Eurozone; (ii) creates a new replacement currency; (iii) promulgates a currency law that re-denominates (or purports to re-denominate) certain Euro obligations into that new currency; (iv) imposes capital and exchange controls (and possibly border controls); or (v) declares additional bank holidays to give time to effect the exit and the redenomination. Specifically, the Protocol addresses the risks inherent in the imposition of capital controls that may render the payment or delivery obligations of a party illegal or impossible.

The 2002 ISDA Master Agreement included numerous changes and enhancements to the 1992 ISDA Master Agreement relating to the illegality or impossibility of performance. One of these is to give effect to any disruption fallback or remedy specified in a Confirmation or elsewhere in the 2002 ISDA Master Agreement before an Illegality or Force Majeure Event is triggered. Another change is to not require the “Affected Party” to use all reasonable efforts to transfer “Affected Transactions” to another office or affiliate to avoid the occurrence of a Termination Event. Finally, the 2002 ISDA Master Agreement provides the parties with, generally, a “Waiting Period” of three Local Business Day in the case of an Illegality and eight Local Business Days in the case of a Force Majeure during which they can evaluate the circumstances before being allowed to terminate. During the Waiting Period, payments and deliveries under Affected Transactions are to be deferred and do not become due until: (i) the first Local Business Day following the end of any applicable Waiting Period; or (ii) if earlier, the date on which the Illegality or Force Majeure Event ceases to exist.

There is no cut-off date for adherence to the Protocol, although ISDA may designate a closing date upon 30 days notice.

ISDA Publishes Industry Provisions for Collateral Segregation of Uncleared Swaps

On December 6, 2011, the International Swaps and Derivatives Association, Inc. (“ISDA”) published sample tri-party provisions intended to assist market participants in the negotiation of provisions relating to the segregation of excess collateral, or “independent amounts.” The Dodd-Frank Act (the “Act”) imposes certain requirements for dealers to collect initial and variation margin from their counterparties. The sample provisions effectively provide market participants with suggested mechanics to implement Sections 724(c) (regarding “swaps”) and Section 763(d) (regarding “security-based swaps”) of Title VII of the Act, which generally require that dealers provide their end-user counterparties with the option of having independent amount collateral they deliver be segregated and held by a third-party custodian.

The genesis of the sample provisions was an examination by ISDA, the Securities Industry and Financial Markets Association and the Managed Funds Association of the risks associated with independent amounts, which came into greater market focus when counterparties were unable to access excess collateral held directly by Lehman Brothers after its collapse. A March 2010 white paper released by the three organizations discussed alternatives for holding independent amount collateral. The white paper discussed three alternative holding arrangements, each with its own risks and costs: (i) direct holding, where the pledgor delivers collateral directly to a secured party or its affiliate; (ii) third party custody, where an unaffiliated third party provides custodial services to one of the two parties; and (iii) tri-party custody, where a third party provides custody services under a three-way contract. In addition, the white paper recommended that standard collateral provisions be developed that could be incorporated by negotiating counterparties into the relevant holding arrangement documentation.[1]

The sample provisions recognize that, of the various collateralization alternatives, tri-party custody arrangements are generally the most time-consuming and expensive to negotiate. As a result, the sample provisions suggest provisions that negotiating parties may use to amend the relevant ISDA Credit Support Annex (the dominant security agreement in the marketplace for derivatives transactions) to require the segregation of independent amount collateral (i.e., to prohibit the reuse or rehypothecation of collateral) and to create a separate pool of independent amount collateral (instead of commingling it with variation margin). The sample provisions also include numerous attachments addressing matters such as the allocation of custodian risk and the mechanics of dispute rights, which the parties may consider negotiating into their bilateral arrangements. Finally, the sample provisions include alternative formulations for accessing independent amounts which the contracting parties may include in tri-party control agreements with the custodian.

As the regulatory environment develops, certain high-profile losses of counterparty collateral held as swap (or futures) security has resulted in a trend towards establishing more robust protections for collateral. For uncleared trades, the sample provisions will assist counterparties in considering various alternative collateral arrangements and simplifying their negotiations to effect those arrangements. Nevertheless, a party’s specific circumstances and approach towards risk tolerance, as well as the identity and strength of its counterparty, will dictate the approach and provisions that are most beneficial for that party in its collateral documentation.

[1]For additional information about this white paper, please click here.