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ISDA Publishes Statement on Benchmark Fallbacks

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On November 27,the International Swaps and Derivatives Association (“ISDA“) published a statement of the preliminary results of its consultation on new benchmark fallbacks for derivatives contracts that reference certain interbank offered rates (“IBORs“).

The consultation suggests four options for calculating the applicable adjusted risk-free rates (“RFRs“), if fallbacks are triggered, and three options for calculating spread adjustments, as well as setting out which of the options the ISDA expects to proceed with and include in its standard definitions.

The information in the statement is subject to the final decision of the ISDA Benchmark Committee and only reflects its preliminary findings at this stage.

The full statement can be found here.

OTC Derivative Brexit Issues Considered by AFME and ISDA

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A paper was jointly published by AFME and ISDA on July 30, 2018 which considered the potential contractual continuity issues which may influence OTC derivative contracts following Brexit.

As has been widely discussed, Brexit will bring an end to the single market passport. The passport currently allows regulated activities to be carried out by the UK in EU countries without additional local licenses. This however will no longer be in place following Brexit. Given that a number of contracts will have been entered into prior to Brexit and will continue thereafter, there is a risk that entities may be carrying out regulated activities in other jurisdictions without having the relevant local licensing requirements in place following Brexit.

The report, the full version of which is available here, looks at possible solutions both for UK entities, as well as regulators, in order to minimize disruption following Brexit.

ISDA, AFME, ICMA, SIFMA and SIFMA AMG Publish Global Benchmark Report

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The International Swaps and Derivatives Association (“ISDA“), the Association of Financial Markets in Europe (“AFME“), International Capital Market Association (“ICMA“) and the Securities Industry and Financial Markets Association (“SIFMA“) and its asset management group (SIFMA AMG) have published a new report that assesses the issues involved with benchmark reform, and makes recommendations on steps firms can take to prepare for the transition from interbank offered rates (“IBORs“) to alternative risk-free rates (“RFRs“). Click here to read the full report.

ISDA Publishes Updated EMIR Classification Letter

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On April 13, the International Swaps and Derivatives Association, Inc. (“ISDA”) published an updated classification letter that enables counterparties to notify each other of their status for clearing and other regulatory requirements under the European Market Infrastructure Regulation (“EMIR”).

The updated letter covers the clearing obligation for certain interest rate derivatives classes denominated in EEA currencies and certain credit default swap index classes. The ISDA EMIR classification letter allows market participants to bilaterally communicate their status to their counterparties by answering a series of questions.

The updated letter makes several substantive amendments, including:

  • aligning the definition of “Category 1 entity” to the one used in the final, published version of the G-4 interest rate products regulatory technical standards (“RTS”) (which come into force from June 2016); and
  • providing the ability for entities to make classifications in respect of the draft RTS for EEA rates and the RTS on credit default swap index classes.

Classification Letter.

ISDA Publishes EMIR Classification Letter

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On July 13, 2015, ISDA published a classification letter that will enable counterparties to notify each other of their status for clearing and other regulatory requirements under Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and repositories (EMIR) (Classification Letter).

EMIR imposes a number of regulatory obligations on counterparties in the derivatives market. The application of the EMIR requirements depends on how counterparties are classified. The Classification Letter has been prepared as a bilateral version of the classification tools that currently exist on ISDA Amend and is intended to facilitate compliance with EMIR by allowing counterparties to communicate their status by answering a series of questions. ISDA has published an explanatory memorandum to accompany the Classification Letter.

The clearing categorization in the Classification Letter covers interest rate derivatives only. It is anticipated that the Classification Letter will be expanded in the future to cover other classes of products that may become subject to the clearing obligation.

ISDA Publishes EMIR Frontloading Additional Termination Event Amendment Agreement

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On June 12, 2015, ISDA published its EMIR Frontloading Additional Termination Event Amendment Agreement and an accompanying explanatory memorandum. The amendment agreement allows parties to an ISDA Master Agreement to amend the agreement to incorporate a new additional termination event covering frontloading.

Frontloading refers to the requirement for certain derivative transactions to be cleared in accordance with the clearing obligation under EMIR where the transactions are entered into during a given period before the clearing obligation takes effect. According to ISDA, in such cases, if clearing is not possible by the time the clearing obligation takes effect, the only way the parties can avoid breach of the frontloading requirement (or stop a breach that has occurred from continuing) is to terminate the problem contract. The amendment agreement provides the required termination right, thereby reducing the risk of regulatory breach faced by market participants subject to frontloading.

Federal Reserve Board and FDIC Welcome ISDA Announcement

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On October 11, the Board of Governors of the Federal Reserve System and the FDIC applauded the International Swaps and Derivatives Association (ISDA) for the agreement of a new resolution stay protocol.  The resolution stay amendments of the protocol are intended to facilitate an orderly resolution of a major global banking firm and reduce the potential negative impact of the resolution on financial stability by giving the bankruptcy court or resolution authority the ability to prevent early termination of financial contracts of the firm’s global subsidiaries.  Release.

FCA Chief Executive Speaks at ISDA Conference on Reform of the International Derivatives Market

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The FCA has published a speech made at a conference held by ISDA in London by the Chief Executive of the FCA, Martin Wheatley, on reform of the international derivatives market.

The speech focused on the “final delivery stage” of reforms in this area.  Martin Wheatley commented that the details on which regulators are currently focusing “happen to be some of the most important facing the derivatives industry.”

The key issues under consideration were the extent to which financial regulators exert influence across international markets, the issue of the broader recognition of equivalence between international regimes, the collateralization of bilateral derivatives, EMIR implementation and benchmarking.  Speech.

FIA and ISDA Cleared Derivatives Addendum

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 On August 29, the Futures Industry Association (FIA) and ISDA announced publication of the FIA-ISDA Cleared Derivatives Addendum, a template that can be used by U.S. futures commission merchants (FCMs) and their customers to document their relationship with respect to cleared OTC swaps.  The Addendum supplements a futures and options agreement between a U.S. FCM and its customer, includes party representations as to certain clearing-related matters, close-out methodologies for cleared OTC swaps, triggers for liquidation, valuation provisions for terminated trades, and provisions governing tax issues.  ISDA Release.  FIA Release.