On April 18, 2013, ISDA® published standard provisions that may be incorporated by reference into new or existing transaction documentation to address Dodd-Frank rules that require guarantors of swap obligations to be eligible contract participants (ECPs), as defined under the Commodity Exchange Act (CEA). The documentation, which is part of ISDA's Dodd-Frank Documentation Initiative, includes the following provisions that are designed to address this requirement, which has particular implications for swaps that are guaranteed under loan documentation:

As of March 31, 2013, parties to all swaps not executed on a registered exchange must be ECPs under the CEA (see Legal Update, No-action Guidance on SD, MSP and CPO Rules under Dodd-Frank Issued by CFTC). An ECP is generally an entity with more than $10 million in total assets. If not properly addressed in documentation, the rule could jeopardize the enforceability of certain loan guarantees. This development has implications for:

Section 721(a) of the Dodd-Frank Act defines the term "swap" by adding Section 1a(47) to the CEA (7 U.S.C. § 1a(47)). This definition was finalized and enacted by regulators in August 2012 (see Legal Update, Regulators Define Key Dodd-Frank Terms "Swap" and "Security-based Swap" Triggering Title VII Compliance). Shortly thereafter, the CFTC clarified in No-action Letter 12-17, issued on October 12, 2012 (12-17 Letter), its view that the newly enacted definition of the term "swap" included any guaranty of a swap. Further, Section 723(a)(2) of the Dodd-Frank Act amended Section 2(e) of the CEA to make it "unlawful" for any person other than an ECP to enter into a swap unless the swap is entered into on or subject to the rules of a registered swap exchange (referred to under Dodd-Frank as a designated contract market (DCM)). Therefore, as of March 31, 2013, the swap guarantees of non-ECPs are unenforceable unless entered into on a DCM. This, of course, includes swap guarantees made by non-ECPs in loan documents.

Swap guarantees are often included in loan documents because borrowers frequently enter into swaps in connection with their credit facilities to hedge certain related risks (see Practice Note, Derivatives: Commercial Uses). While these swap obligations are typically documented separately under an ISDA Master Agreement and related documents, guaranty of these swap obligations is often covered by the guaranty and collateral provisions of the loan agreement itself, or wrapped into the related security documents. This guaranty is typically provided to the lender or syndicate by the borrower and its subsidiaries (and sometimes certain other parties). As of March 31, 2013, if these obligations include swap obligations, each such subsidiary (and any other party) that is included in the loan documents as a guarantor of these obligations will be required to be an ECP when the swap is entered into for the swap guaranty to be enforceable (unless entered into on a DCM, which is rare).

In other words, the guarantees made under or in connection with the loan agreement are unenforceable to the extent the guaranteed obligations include swap obligations guaranteed by non-ECP borrower subsidiaries (or other parties). Further, because loan guarantees are rarely severable, there is a risk that the entire loan guaranty could be rendered unenforceable.

The ISDA documentation includes the following provisions designed to address this issue:

The ISDA Exclusionary Terms and Keepwell Terms can be used individually or in combination to address the ECP swap guarantor rule.

The ISDA Exclusionary Terms allow parties to a transaction to clarify that any guarantees that have been provided in connection with the transaction do not cover swap obligations to the extent that the relevant guarantor is not an ECP at the time of the execution of the guaranty or the swap (whichever is later). Because the CFTC's position as stated in No-action Letter 12-17 is limited to guarantees and excludes other credit support arrangements, the ISDA Exclusionary Terms do not address loan obligations secured by the assets of non-ECPs. The ISDA Exclusionary Terms are also drafted to exclude application to any guarantor that has represented in writing that it is an ECP as of the applicable date.

The ISDA Keepwell Terms provide basic keepwells that allow parties to specify which participants in a transaction are the providers and recipients of keepwells and contain default elections for situations where such specification is not feasible or desirable. Under the default election of the ISDA Keepwell Terms, each corporate entity that is a guarantor of swap obligations and has more than $10,000,000 in total assets or that is otherwise eligible to confer ECP status provides a keepwell to each other guarantor of the same obligations that is not an ECP but is eligible under the express terms of the CEA or CFTC's Regulations to become an ECP through keepwell support. This may, of course, be modified.

The ISDA Exclusionary Terms and Keepwell Terms have been structured like ISDA product definitions and can therefore be incorporated into documentation by reference in the same manner as ISDA product definitions such as the 2003 ISDA Credit Derivatives Definitions may be. Of course the parties may modify or supplement these provisions to accommodate their specific transaction or group of transactions.

The LSTA also recently published similar sample provisions designed to address this issue. The LSTA provisions are not designed to be incorporated by reference into new or existing documents, but rather are designed to be inserted directly into documentation. One notable difference is that the LSTA provisions are designed to cover credit support and collateral arrangements other than guarantees.

For more details on this issue, see Practice Note, The Dodd-Frank Act’s Swap Guarantor Rule: Implications for Secured Bank Financings .

For details on another important aspect of ISDA's Dodd-Frank Documentation Initiative, see Practice Note, The ISDA Dodd-Frank Protocol.

For detailed information on ISDA swap documentation generally, see Practice Note, ISDA Documents: Overview (US).