This note has been updated to refer to the 2014 Credit Derivatives Definitions Protocol published by ISDA (see Examples of ISDA protocols).
ISDA documents: overview (UK)
An overview of the various ISDA documents used in derivatives transactions.
Introduction to derivatives
Derivatives (www.practicallaw.com/0-107-6094) are contracts whose financial value is derived by reference to an (underlying) asset, rate, index or instrument. They range from widely used products such as swaps (www.practicallaw.com/9-107-7353), futures (www.practicallaw.com/9-107-6631) and options (www.practicallaw.com/0-107-6937), to more exotic products such as credit default swaptions (www.practicallaw.com/9-375-9202).
For more information on different types of derivatives and their uses, see:
Derivatives fall into two main categories, depending on how they are traded:
Exchange traded derivatives. These are derivatives that are entered into through a regulated derivative exchange, similar to stock exchanges, such as the London International Financial Futures and Options Exchange (commonly referred to as LIFFE (www.practicallaw.com/6-107-6760)). They have standard terms and are generally traded in standard amounts and for standard periods. Exchange traded derivatives are highly regulated, as are the exchanges on which they are traded. The exchange acts as the intermediary for the derivative contract and effectively becomes the counterparty to each trading party, the credit risk taken on by each party to the transaction is therefore with the exchange. For more on exchange traded derivatives, see Practice note, Derivatives: overview: Exchange traded derivatives (www.practicallaw.com/8-385-8330).
Over-the counter (OTC) derivatives. OTC derivatives are directly negotiated derivatives which are tailored to the specific requirements of the parties. They are entered into directly between the parties rather than through an exchange. Accordingly, each party should consider very carefully the creditworthiness of the other when entering into such contracts. For more on OTC derivatives, see Practice note, Derivatives: overview: OTC derivatives (www.practicallaw.com/8-385-8330).
The International Swaps and Derivatives Association, Inc. (www.practicallaw.com/9-107-6730) (ISDA) is the dominant trade association for participants in the OTC derivatives markets. It was formed in 1985 and its members include almost all the major financial institutions, together with law firms and other interested parties. The main aims of ISDA are to:
Reduce the risk and cost of derivatives.
Streamline the documents used in the derivative markets.
Encourage the growth of markets in different derivative products
ISDA standard documents
As part of its aim of streamlining the documents used in the derivative markets, ISDA has developed a standard "document platform" for the documenting of derivative transactions. The standard documents include:
Forms of ISDA Master Agreement (ISDA Master Agreement). See ISDA Master Agreements.
A schedule to the ISDA Master Agreement (ISDA Schedule). See Schedule to the ISDA Master Agreement.
Forms of confirmation (ISDA Confirmation). See ISDA confirmations.
ISDA definitions. See ISDA definitions.
Credit support documents. See ISDA credit support.
Novation agreements. See ISDA novation agreements.
The diagram below represents the interconnection between the ISDA Master Agreement, the ISDA Schedule, the ISDA Confirmations, the ISDA definitions and the ISDA credit support documents.
ISDA regularly drafts practice statements, user guides, commentaries to standard ISDA documentation and supplements to the ISDA definitions. ISDA also promotes the understanding of derivatives through conferences and acts as a lobbyist on behalf of the industry.
Through their standardisation, ISDA documents provide the following advantages:
ISDA has available to it a number of legal opinions on the documents covering various issues and jurisdictions. The opinions are available to ISDA members.
They enhance liquidity in the market as parties become familiar with the terms and conditions applying to a particular product.
Judicial consideration (and market discussion) of the documentation reduces uncertainty in their interpretation.
They save time and expense in the negotiation and drafting of transactions.
They enable the market to better monitor the standard default and termination provisions.
Access to ISDA documents
Unfortunately Practical Law is unable to host, duplicate or otherwise provide subscribers with copies of ISDA’s standard documents. ISDA documents (in hard copy or electronic format) are available for purchase (although some are accessible free of charge) or download from the "Bookstore" pages of ISDA’s website (www.practicallaw.com/8-106-3790). However, some documentation is only available to ISDA members.
ISDA Master Agreements
The ISDA Master Agreement is a framework agreement between two parties under which individual derivatives transactions may be carried out. The ISDA Master Agreement is divided into two parts.
The first part constitutes a standard set of non-commercial terms and conditions. The terms and conditions include representations, undertakings, events of default, termination events, change of law provisions and transaction netting provisions. The second part constitutes a schedule which allows the parties to tailor the first part and agree certain commercial terms (see Schedule to the ISDA Master Agreement).
There are three commonly used versions of the ISDA Master Agreement:
Two 1992 versions:
a multicurrency cross-border version (1992 ISDA Master Agreement) which is designed for transactions with any international element (although it can be used where there is no international element); and
a local currency-single jurisdiction version which is designed for transactions where there is no international element.
The 2002 master agreement (2002 ISDA Master Agreement) which is a modified version of the 1992 ISDA Master Agreement and is designed for use on all types of derivatives transactions. For more information on the 2002 ISDA Master Agreement, see Drafting note, 2002 ISDA master agreement and schedule (www.practicallaw.com/8-201-8419).
This note will concentrate on the terms of the 1992 and 2002 ISDA Master Agreement.
The first part of the 1992 and 2002 ISDA Master Agreement includes the following 14 sections:
Events of default and termination events.
Early termination; close-out netting.
Offices: multibranch parties.
Governing law and jurisdiction.
Market practice is not to amend the pre-printed first part of the ISDA Master Agreement, but to set out negotiated modifications to it in the ISDA Schedule.
Legal opinions on the effectiveness of the close-out netting provisions in the 1992 and 2002 ISDA Master Agreement are available to ISDA members on the ISDA website (www.practicallaw.com/1-517-7205).
Schedule to the ISDA Master Agreement
The ISDA Schedule forms the second part of the 1992 and 2002 ISDA Master Agreement. It allows the parties to tailor the terms set out in the first part of the agreement to their requirements and circumstances. Within the ISDA Schedule, it is possible to provide that certain provisions in the relevant ISDA Master Agreement apply to both parties, to one party or to neither and for additional provisions to be included.
The negotiation of the ISDA Schedule is important. It determines the parameters for future derivatives dealings between the parties and is often the most contentious part of agreeing to a set of ISDA documents.
The ISDA Schedule is divided into five parts:
Part 1 covers the tailoring of the termination provisions in the relevant ISDA Master Agreement.
Part 2 covers tax representations.
Part 3 covers the agreement to deliver documents.
Part 4 covers administrative matters, such as addresses for notices, governing law and netting.
Part 5 allows for the inclusion of additional provisions.
If there is an inconsistency between the ISDA Schedule and the first part of the relevant ISDA Master Agreement, under section 1(b) of the 1992 and 2002 ISDA Master Agreement, the terms of the ISDA Schedule will prevail subject, however, to any contrary terms contained in a relevant ISDA Confirmation.
For more information on the schedule to the 2002 ISDA Master Agreement, see Drafting note, 2002 ISDA master agreement and schedule (www.practicallaw.com/8-201-8419).
A derivative transaction is usually initiated over the telephone. The terms discussed by the parties are documented by one party in an ISDA Confirmation which is then forwarded to the other party for acceptance.
It is most important that the written acceptance of the ISDA Confirmation is obtained from the other party. Although the ISDA Confirmation may contain wording along the lines that if it is not acknowledged or corrected by the counterparty within a certain time frame the details of the ISDA Confirmation will be considered correct, disputes can nevertheless arise as to what was agreed between the parties (for example, see Legal update, Can you rely on an ISDA confirmation? (www.practicallaw.com/2-422-1676)).
The ISDA Confirmation, often in letter format, sets out the economic and commercial terms of each individual transaction entered into under the ISDA Master Agreement. The ISDA Confirmation includes:
The key dates relevant to the transaction.
Payment obligations and payment mechanisms for the transaction.
Administrative details, such as bank accounts.
The incorporation of the relevant ISDA definitions (see ISDA definitions).
As a derivative product matures, ISDA will normally produce a set of definitions and/or standard conditions to govern the product and, where relevant, a standard confirmation which, by reference, will incorporate the terms, conditions and definitions for the product (commonly referred to as a "short-form confirmation").
Examples of derivative products that have given rise to standard terms and conditions for a particular product (and which are available on the ISDA website (www.practicallaw.com/8-106-3790)) are:
EU Emission allowance transactions.
Interest rate swaps (www.practicallaw.com/2-107-6286) (to the extent they are over-the-counter interest rate swaps that have common, pre-agreed terms. For details, see Legal update, ISDA publishes Market Agreed Coupon confirmation for interest rate swaps (www.practicallaw.com/8-526-7288)).
Though most confirmations are standardised by ISDA, parties should consider whether:
The ISDA Confirmation needs to include any additional terms relevant to the particular transaction and/or disapply any provisions contained in the ISDA Master Agreement.
Credit support needs to be provided by the counterparty (see ISDA credit support).
A "short-form" ISDA Confirmation needs to be distinguished from a "long-form" ISDA Confirmation. In a long-form confirmation most of the economic and commercial terms and conditions are spelt out in full within the ISDA Confirmation itself. A short-form confirmation will rely upon a set of ISDA definitions for a particular product to set out the mechanics of the transaction and will incorporate those definitions by reference within the confirmation (for more on the ISDA definitions, see ISDA definitions). Examples of relevant pro forma short-form confirmations are often attached to their corresponding ISDA definitions.
Common to all confirmations, is the need for the parties to complete various options within the confirmations themselves.
The ISDA Confirmation normally states that it supplements the ISDA Master Agreement. In turn, the ISDA Master Agreement provides that the master agreement and all confirmations (and accordingly all transactions evidenced by the confirmations) form a single agreement between the parties (for example, see section 1(c) of the 1992 and 2002 ISDA Master Agreement). These provisions attempt to avoid what is commonly referred to as "cherry-picking".
Cherry-picking occurs where an insolvency practitioner (such as a liquidator (www.practicallaw.com/3-107-6771)) recognises only those transactions which are beneficial to the insolvent party and disclaims the others. If the transactions under an ISDA Master Agreement collectively constitute one agreement, an individual transaction should not then be capable of being disclaimed to the exclusion of the other transactions.
The effectiveness of the "single agreement" provisions in defeating a cherry-picking claim is dependent upon the jurisdiction governing the relevant insolvency proceeding. Legal opinions covering this issue are available to ISDA members on the ISDA website (www.practicallaw.com/8-106-3790).
For an overview on the rights of a liquidator to disclaim contracts see Practice note, Reviewable transactions in corporate insolvency: Disclaimer of onerous property (www.practicallaw.com/5-107-3979).
If there is an inconsistency between the ISDA Confirmation and the ISDA Schedule or the ISDA Confirmation and the ISDA Master Agreement, under section 1(b) of the 1992 and 2002 ISDA Master Agreement, the terms of the ISDA Confirmation will prevail.
Sometimes, an individual transaction may be entered into before an ISDA Master Agreement has been concluded. In such a case, the ISDA Confirmation will usually provide that it is subject to the terms of a standard form ISDA Master Agreement (normally the 1992 ISDA Master Agreement or the 2002 ISDA Master Agreement) without the ISDA Schedule. However, there are risks associated with relying upon confirmations that make reference to a standard form ISDA Master Agreement which has not been signed by the parties, particularly if more than one form of ISDA Master Agreement has been referred to by the parties when entering into derivative transactions. For a case illustrating this risk, see Legal update, Can you rely on an ISDA confirmation? (www.practicallaw.com/2-422-1676).
From time to time ISDA publishes standard definition booklets for particular products. Definitions for a particular product are incorporated by reference in the ISDA Confirmation, thereby avoiding the need for detailed and complex definitions to be set out within the confirmation itself (see ISDA confirmations).
Definitions published to date include definitions for:
Interest rate and currency derivatives (the most recent are the 2006 ISDA Interest Rate and Currency Derivatives Definitions (the 2006 ISDA definitions)).
Commodity derivatives (the 2005 ISDA Commodity Definitions).
Credit derivatives. For an overview on the current credit derivatives definitions, see Practice note, The 2003 ISDA Credit Derivatives Definitions (www.practicallaw.com/0-380-8160). A revised version of the credit derivatives definitions is going live on 22 September 2014 (see Legal update, 2014 ISDA Credit Derivatives Definitions published (www.practicallaw.com/2-558-9526)).
Equity derivatives (the most recent are the 2011 ISDA Equity Derivatives Definitions, see Legal update, ISDA Publishes 2011 Equity Derivatives Definitions (www.practicallaw.com/3-506-8620)).
Foreign exchange and currency option derivatives (the 1998 FX and currency option definitions).
The 2006 ISDA definitions are an update of the 2000 interest rate and currency definitions (see Legal update, ISDA publishes 2006 Definitions (www.practicallaw.com/5-212-1955)) and are intended to provide the basic framework for the documentation of privately negotiated interest rate and currency derivative transactions. The 2006 definitions also deal with fundamental issues such as day count conventions and business day definitions and therefore tend to be used in the documenting of other types of privately negotiated derivative transactions.
When negotiating an ISDA Confirmation, the parties can agree to incorporate, amend and/or disapply any of the provisions of any applicable definitions as they see fit.
ISDA credit support
Each party to an OTC derivative transaction will face some credit exposure to the other party. In order to reduce this exposure, the parties may agree at the outset that, if the net mark to market (www.practicallaw.com/8-107-6820) value of the transactions under an ISDA Master Agreement falls below a certain amount, the party out of the money must deliver a certain amount of collateral (www.practicallaw.com/3-107-5936) (normally cash or securities) to its counterparty. These provisions are usually annexed to the ISDA Schedule in a pre-printed ISDA credit support annex and/or contained in a pre-printed ISDA credit support deed.
The following standard credit support documents have been published by ISDA:
English law credit support annex.
English law credit support deed.
New York law credit support annex.
English law Standard credit support annex.
New York law Standard credit support annex.
2008 ISDA credit support annex (Loan/Japanese Pledge).
2001 ISDA margin provisions.
In March 2010, ISDA published two papers on the use of collateral in the OTC market. The first paper provides an overview of current market practice on the use of collateral by different types of derivatives counterparties. The second paper analyses the risk associated with under-collateralisation and over-collateralisation related to independent amounts provided under ISDA credit support annexes (the term "independent amounts" is defined by the credit support annexes and forms part of the calculation of the overall collateral amount that must be delivered between the parties). For more detail on the papers, see Legal update, ISDA publishes papers on OTC bilateral collateralisation practices and independent amounts (www.practicallaw.com/2-501-7080).
Legal opinions on the effectiveness of ISDA credit support documents are available to ISDA members on the ISDA website (www.practicallaw.com/1-517-7205).
In June 2010, ISDA published guidance on best practices for collateral management under the credit support deed, the English law credit support annex and the New York law credit support annex (see Legal update, ISDA publishes guidance on collateral management best practice (www.practicallaw.com/1-502-7089)).
English law credit support deed
Under the credit support deed, the party receiving the collateral takes a security interest over the collateral which can be enforced if there is a default by its counterparty. The credit support deed is governed by English law.
English law credit support annex
Unlike the credit support deed, the English law credit support annex is not intended to create a security interest in the collateral transferred under it. Instead, title to the collateral passes to the party receiving the collateral. If there is a default by its counterparty, the party holding the collateral can net off the amount of collateral it holds against what is owed under the transactions covered by the ISDA Master Agreement.
When it comes to returning the collateral, the party holding the collateral only needs to return money and/or securities equivalent to the collateral held (it does not need to return the actual collateral received). The annex is governed by English law.
New York law credit support annex
The New York law credit support annex is designed to cover US dollar cash and securities only and acts as a security under New York law in much the same way as the credit support deed does under English law.
Standard credit support annex
In June 2013, ISDA published a new Standard Credit Support Annex (SCSA), which is intended to align the collateral mechanics and economics of bilateral OTC derivatives with collateralisation of cleared derivatives transactions. The publication of the SCSA follows ISDA's announcement, in November 2011, that it would develop a standard form credit support annex as part of its ongoing efforts to produce more standardised derivatives documentation. The main features of the SCSA serve to:
Remove the optionality found in the existing ISDA Credit Support Annex (CSA) including, for example, by:
- designating cash as the sole eligible collateral for variation margin; and
- grouping exposures and collateral into five designated currency "silos".
Promote the universal adoption of overnight index swap (OIS) discounting for derivatives, in order to align interest accruals on cash collateral with discount rates for the underlying derivatives transactions.
Create a homogeneous collateral valuation framework, designed to mitigate exposure to cross-currency settlement (or "Herstatt") risk and to reduce novation and valuation disputes.
The rationale for, and the principle features of, the SCSA are as originally announced by ISDA in November 2011 (for details, see Legal update, Standard Credit Support Annex (SCSA) for OTC Derivatives Proposed by ISDA (www.practicallaw.com/6-511-1288)).
ISDA's SCSA is available in two formats; as an English law SCSA and as a New York law SCSA. As with the traditional CSAs, the English law SCSA operates to transfer full legal title in the collateral to the collateral holder, whereas a pledgor under a New York law SCSA grants a security interest in the collateral to the secured party.
ISDA acknowledges significant logistical impediments to global adoption of the SCSA, which would require procedural and technological convergence among a wide range of firms and advocates a gradual implementation of the SCSA, allowing firms to "move at the pace they deem appropriate." ISDA does not envision compulsory use of the SCSA at any time. For more information on the publication of the SCSA, see Legal update, Standard Credit Support Annex for OTC derivatives published by ISDA (www.practicallaw.com/9-531-6924).
2008 ISDA credit support annex (Loan/Japanese Pledge)
The 2008 ISDA Credit Support Annex (Loan/Japanese Pledge) is designed to cover assets located in Japan, such as cash and marketable securities situated in Japan.
2001 ISDA margin provisions
As an alternative to the English and New York law credit support annexes, ISDA has published what is commonly referred to as the 2001 ISDA margin provisions (the margin provisions).
The margin provisions act as a supplement to the ISDA Master Agreement and allow the parties to elect security terms similar to the English law credit support annex or the New York law credit support annex with optional Japanese law provisions for Japanese collateral. The main differences between the margin provisions and the English and New York law credit support annexes are:
The margin provisions have been written in plain English.
The margin provisions generally have tighter time frames for the delivery of collateral and the resolution of disputes.
The margin provisions can be used simultaneously with more than one ISDA Master Agreement (including a master agreement other than an ISDA Master Agreement).
The English and New York law credit support annexes tend to be more frequently used than the margin provisions.
For a practical guide to ISDA's English law Credit Support Annex and Credit Support Deed, including an overview of the legal framework and mechanics of ISDA's collateralisation documents, as well as of the key issues relating to credit support, margin and overcollateralisation, see Practice note, ISDA's English law credit support documents (www.practicallaw.com/8-521-1814).
ISDA novation agreements
In order to standardise how a party to a transaction governed by an ISDA Master Agreement can transfer (commonly referred to as novate) its rights and obligations under the transaction to a third party, ISDA published a standard novation agreement, the 2002 ISDA Novation Agreement which references the 1992 ISDA Master Agreement. Depending upon the election of the parties, the agreement can be governed by either New York or English law.
In 2004, ISDA published the 2004 ISDA novation definitions which contains a form of confirmation which incorporates definitions and a novation agreement similar to the 2002 ISDA Novation Agreement. However, the novation agreement under the 2004 definitions covers several different ISDA Master Agreements including the 1992 ISDA Master Agreement and the 2002 ISDA Master Agreement.
In January 2011, ISDA published a revised novation confirmation for use for the novation of credit derivative transactions. According to the ISDA, the revised novation confirmation is based on Exhibit C to the ISDA 2004 Novation Definitions, incorporating the changes introduced by the 2009 ISDA Credit Derivatives Determinations Committees, Auction Settlement and Restructuring CDS Protocol into the New Transaction. For more information on auction settlement and the changes introduced by ISDA, see Practice note, The Auction Settlement and Restructuring Supplement to the 2003 ISDA Credit Derivatives Definitions (www.practicallaw.com/8-508-0969).
Credit derivative novations
On 25 August 2010, ISDA issued a press release announcing a project to streamline the novation process for credit derivative (www.practicallaw.com/4-500-1342) trades. The project, called Credit Consent Equals Confirmation, allows parties to provide their consent to and legal confirmation of a novation simultaneously in an automated process, replacing the current two-step process of consent followed by confirmation. For detail on the project, see Legal update, ISDA announces changes to its credit derivative novation process (www.practicallaw.com/3-503-1735).
ISDA often publishes amendments to the ISDA Master Agreement to cover particular situations and/or products. To incorporate the amendments into an ISDA Master Agreement without the need for each ISDA Master Agreement to be renegotiated, ISDA may publish a "protocol".
A protocol allows parties to sign up to all or any amendments to the ISDA Master Agreement by delivering an adherence letter to ISDA. If both parties to an ISDA Master Agreement have delivered an adherence letter for a particular protocol, the relevant ISDA Master Agreement will be deemed amended to the extent the two adherence letters commonly adopt the protocol.
ISDA displays on its website the adherence letters it has received as well as the parties that have signed up to the relevant protocol, thus enabling parties to determine which of their master agreements have been amended.
Examples of ISDA protocols
The following are examples of protocols which have been published by ISDA:
2010 Short Form HIRE Act
On 30 November 2010, ISDA published the 2010 ISDA Short Form HIRE Act Protocol (Short Form Protocol) to amend the 1992 and 2002 ISDA Master Agreements and the schedules thereto. The amendments are necessary to address changes in law made by the Hiring Incentives to Restore Employment Act (HIRE Act). The HIRE Act was enacted in the US on 18 March 2010 and imposes US withholding tax on "dividend equivalent payments," effective for payments made on any swap after 14 September 2010, regardless of the date the swap was entered into. The Short Form Protocol supersedes the August 2010 protocol and aims to lessen the administrative burdens of amending pre-existing ISDA agreements to achieve wider market acceptance.
Master FX Novation and Cancellation
On 25 March 2011, ISDA published the Master FX Novation and Cancellation Protocol (FX Protocol). The FX Protocol covers foreign exchange products confirmed under the 1998 FX and currency option definitions, enabling parties to accommodate the transfer by novation of Covered Transactions and, in some case, the Cancellation of Linked Covered Transactions (as those terms are defined in the FX Protocol).
Illegality and Force Majeure
On 11 July 2012, ISDA published the Illegality/Force Majeure Protocol (IFM Protocol). The IFM Protocol is part of ISDA's Eurozone contingency planning activity to address issues that may arise should a Eurozone member leave the Eurozone. The Protocol allows parties to amend their 1992 ISDA Master Agreements to reflect the Illegality and Force Majeure provisions of the 2002 ISDA Master Agreement (2002 Agreement). Illegality provisions are a key issue when analysing derivative documentation for potential effects of a Eurozone member's departure from the currency union (for example, if a departing member state imposed capital and/or exchange controls which made it unlawful for a party in that country to meet its Euro-denominated payment obligations). It is anticipated that the more developed illegality provisions in the 2002 Agreement may be helpful in this circumstance. The 2002 Agreement also includes a Force Majeure Termination Event.
August 2012 and March 2013 Dodd-Frank Protocols
August 2012 Dodd-Frank Protocol
On 13 August 2012, ISDA launched its August 2012 Dodd-Frank Protocol (DF Protocol), the first in a series of protocols aimed at assisting the OTC derivatives industry in implementing regulatory requirements under Title VII of the US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The DF Protocol is part of ISDA's Dodd-Frank Documentation Initiative, aimed at providing a standard set of amendments to ISDA documents to help update existing swap relationship documentation for Dodd-Frank Act compliance purposes. The DF Protocol addresses the requirements of final Dodd-Frank rules that will become effective in due course.
The DF Protocol allows market participants to:
Supplement the terms of existing ISDA Master Agreements under which the parties to the agreement may execute individual swaps and derivatives transactions.
Enter into an agreement to apply selected Dodd-Frank compliance provisions to their swaps and derivatives trading relationship.
Annotated versions of DF Protocol documentation are available from the ISDA website.
March 2013 Dodd-Frank Protocol 2.0
In March 2013, ISDA released its March 2013 Dodd-Frank Protocol 2.0 (Protocol 2.0), part of ISDA's Dodd-Frank Documentation Initiative (see Legal update, ISDA Releases Dodd-Frank Protocol 2.0 for IBC Swap Dealer Rules (www.practicallaw.com/2-524-3771)). Protocol 2.0 is intended to aid compliance with the US Commodity Futures Trading Commission's internal business conduct rules for swap dealers and major swap participants which address:
- Swap transaction confirmation.
- Swap portfolio reconciliation.
- Swap portfolio compression.
- Swap trading relationship documentation.
- The commercial end-user exception from mandatory swap clearing requirements.
- Swap clearing determinations under Section 2(h) of the US Commodities Exchange Act.
Dodd-Frank / EMIR Extension Agreement
In September 2013, ISDA published the DFP2 to EMIR Top Up Agreement (Extension Agreement). The Extension Agreement is for parties who have already adhered to Protocol 2.0 (referred to in this ISDA publication as "DFP2"), to agree changes to Protocol 2.0 to comply with the portfolio reconciliation and dispute resolution requirements imposed by Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR). Broadly, the Extension Agreement helps to facilitate compliance with EMIR, and the Dodd-Frank Act, by allowing two parties to agree bilaterally to use their existing arrangements under Protocol 2.0 to help them meet their portfolio reconciliation and dispute resolution requirements under EMIR, without additionally adhering to ISDA's 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol, published in July 2013 (see EMIR PR Protocol).
For more information on the DF Protocol (as well as Protocol 2.0), see Practice note, Dodd-Frank Quick and Easy: The ISDA Dodd-Frank Protocol (www.practicallaw.com/1-524-7048).
For links to resources on the impact of the Dodd-Frank Act on the swaps and derivatives sector, including its effect on non-US companies, see Practice note, Derivatives: overview (UK): Dodd-Frank Act (www.practicallaw.com/8-385-8330).
On 15 August 2012, ISDA published the ISDA 2012 FATCA Protocol (FATCA Protocol), which offers market participants an efficient way to amend their ISDA Master Agreements to address the effects of the US Foreign Account Tax Compliance Act (FATCA) withholding tax on payments under derivatives transactions. The FATCA Protocol:
Carves out the FATCA withholding tax from the payer tax representations that parties to the ISDA Master Agreement must make.
Places the burden of the FATCA withholding tax on the recipient of payments by carving out the FATCA withholding tax from the definition of "Indemnifiable Tax" in the ISDA Master Agreement (see Drafting note, 2002 ISDA master agreement and schedule: Section 3(e): Payer tax representations (www.practicallaw.com/8-201-8419)).
For further details of the FATCA Protocol, see Legal update, ISDA Publishes 2012 FATCA Protocol for Amending Swap Documents (www.practicallaw.com/7-520-9996).
For details of how FATCA affects equity derivatives transactions in particular, see Practice note, Equity derivatives: overview (UK): FATCA: implications for equity swaps (www.practicallaw.com/9-504-8361).
2013 EMIR Non-Financial Counterparty Representation
On 8 March 2013, ISDA published its EMIR Non-Financial Counterparty Representation Protocol (EMIR NFCR Protocol) together with a standard form Timely Confirmation Amendment Agreement (TCAA).
The EMIR NFCR Protocol allows parties to amend the terms of their ISDA Master Agreements to reflect certain risk mitigation requirements imposed by Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR).
Article 11 of EMIR requires counterparties to OTC derivative contracts that cannot be cleared by a central clearing counterparty (CCP (www.practicallaw.com/7-107-5920)) to mitigate their trading risks by using a number of different techniques. These techniques are designed to reduce counterparty and operational risks of trading in uncleared OTC derivatives and reflect the protections that would have been provided if the transaction had been centrally cleared.
The EMIR NFCR Protocol includes a mechanism for non-financial counterparties (NFCs) to represent:
Their status as NFCs.
Whether they are below the clearing threshold set out in Article 10 of EMIR (see Practice note, EMIR: requirement to clear OTC derivative contracts through a CCP: The clearing threshold (www.practicallaw.com/7-518-8927)).
The TCAA is a form of agreement that market participants can use as part of their tool kit for compliance with the obligation imposed by EMIR to provide timely confirmation of an uncleared OTC derivative contract.
For further details of the EMIR NFCR Protocol, see Legal update, ISDA 2013 EMIR NFC Representation Protocol and Timely Confirmation Amendment Agreement (www.practicallaw.com/8-525-0805).
For information on the requirements under EMIR, see Practice note, EMIR: risk mitigation requirements for uncleared OTC derivatives (www.practicallaw.com/9-519-7327).
2013 Reporting Protocol
On 10 May 2013, ISDA published the 2013 Reporting Protocol (Reporting Protocol), together with principal and agent side letters for use in place of the protocol. The Reporting Protocol allows parties to amend the terms of their ISDA Master Agreements to address possible restrictions to a party's ability to comply with mandatory trade reporting requirements imposed by EMIR and the European Commission's proposed Markets in Financial Instruments Regulation (MiFIR).
Restrictions might arise because of existing statutory, regulatory or contractual obligations preventing parties from disclosing information in relation to their derivative contracts. The protocol aims to assist parties overcome these limitations by providing for counterparty consent to disclosure of restricted information.
For parties that do not wish to adhere to the Reporting Protocol but prefer to amend the bilateral terms of their agreements with another counterparty, ISDA has published a form of side letter (one for principals and another for agents) incorporating the same consent provisions found in the protocol.
For further details of the Reporting Protocol and side letters, see Legal update, ISDA 2013 Reporting Protocol (www.practicallaw.com/8-528-5715).
For information on EU current and proposed reporting requirements, see Practice notes, EMIR: overview: The reporting obligation (www.practicallaw.com/3-521-4532), EMIR: requirement to report trades in derivatives (www.practicallaw.com/0-528-2886) and Derivatives trading: Inter-relationship between EMIR and MiFIR: Transaction reporting (www.practicallaw.com/6-521-1607).
2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol
On 19 July 2013, ISDA published the 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (EMIR PR Protocol). The protocol enables parties to ISDA Master Agreements to amend the terms of their agreements to reflect certain portfolio reconciliation and dispute resolution obligations imposed by EMIR.
EMIR requires parties to agree with their counterparties the terms on which portfolios will be reconciled before entering into an OTC derivative contract. The EMIR PR Protocol provides alternative methods of portfolio reconciliation:
- Mutual exchange of portfolio data.
- One-way delivery of portfolio data.
When concluding contracts with each other, EMIR also requires parties to have agreed detailed procedures and processes relating to:
- The identification, recording and monitoring of disputes relating to the recognition or valuation of the contract and to the exchange of collateral between counterparties.
- The timely resolution of disputes with a specific process for those disputes that are not resolved within five business days.
The EMIR PR Protocol provides a method for the identification, monitoring and resolution of disputes without overriding the existing dispute resolution methods that the parties may have agreed. In addition, the delivery of a dispute notice under the EMIR PR Protocol is expected to assist parties to identify the point in time from when the five business days resolution period begins.
The EMIR PR Protocol also includes a confidentiality waiver to ensure that the parties can keep records, report trades and disclose information without breaching confidentiality restrictions that they may be under. However, ISDA points out that parties should be aware that the waiver, consents and acknowledgements set out in the EMIR PR Protocol are not necessarily sufficient to overcome any prohibition or impediment to disclosure under the laws of every jurisdiction.
ISDA subsequently published a standard amendment agreement (the 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Standard Amendment Agreement) for use by parties wishing to amend their ISDA Master Agreements to help them comply with EMIR's respective obligations (see Legal update, ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Standard Amendment Agreement (www.practicallaw.com/9-538-6506)). Use of the agreement (which operates to amend Part 5 of the Schedule to the ISDA Master Agreement) is optional.
In September 2013, ISDA published the DFP2 to EMIR Top Up Agreement (Extension Agreement). For details, see Dodd-Frank / EMIR Extension Agreement.
For further details of the EMIR PR Protocol, see Legal update, ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (www.practicallaw.com/0-535-3968).
For information on EMIR's portfolio reconciliation and dispute resolution requirements, see Practice note, EMIR: risk mitigation requirements for uncleared OTC derivatives (www.practicallaw.com/9-519-7327), in particular the section on Procedures to measure, monitor and mitigate risk: Level 2 technical standards (www.practicallaw.com/9-519-7327).
2013 Discontinued Rates Maturities Protocol
On 11 October 2013, ISDA published the 2013 Discontinued Rates Maturities Protocol (DRM Protocol). The DRM Protocol enables adhering parties to amend the terms of certain protocol-covered transactions for which the publication of certain rates has been discontinued by the rate provider.
Specifically, the DRM Protocol applies to transactions where the rate provider for a floating rate option stops publishing one or more maturities for the floating rate option, but continues to publish maturities which are longer and shorter than the discontinued maturity. The DRM Protocol enables parties to amend the terms of their transactions so that the rate specified will be determined by interpolating the nearest shorter rate and nearest longer rate to the discontinued rate for the floating rate option.
For further details of the DRM Protocol, see Legal update, ISDA 2013 Discontinued Rates Maturities Protocol (www.practicallaw.com/0-545-6787).
For information on LIBOR rates that have been discontinued by the British Bankers' Association (BBA), see Practice note, LIBOR review and reform: overview for finance lawyers: BBA timetable for discontinuation (www.practicallaw.com/4-521-7144).
For information on guidance from ISDA for market participants with outstanding trades that reference suspended ISDAFIX rates, see Practice note, Derivatives: overview (UK): ISDAFIX - new administrator and guidance (www.practicallaw.com/8-385-8330).
2013 ICE Brent Protocol
On 8 November 2013, ISDA published the 2013 ICE Brent Protocol (Brent Protocol). The Brent Protocol enables parties to amend the terms of derivatives transactions that are governed by an ISDA Master Agreement and reference ICE Brent futures (or options on ICE Brent futures). The amendments address the impact of the decision by ICE Futures Europe (one of the world's largest energy futures and options exchanges) to:
- Change expiry dates for ICE Brent futures and options contracts to a month-ahead expiry calendar with respect to March 2016 and later contract months.
- Require a cash adjustment as a result of such change.
For further details of the Brent Protocol, see Legal update, ISDA 2013 ICE Brent Protocol (www.practicallaw.com/5-548-6466).
2014 Collateral Agreement Negative Interest Protocol
On 12 May 2014, ISDA published the 2014 Collateral Agreement Negative Interest Protocol (Negative Interest Protocol). In recent years, overnight indexed swap (OIS) rates, which are used to calculate the interest paid on cash collateral, have approached zero and into negative territory for certain currencies. This has led to a need for clarity over how negative rates, and the payment of interest on posted collateral, should be calculated and treated in standard collateral documentation. The Negative Interest Protocol enables adhering parties to amend the terms of certain collateral agreements to account for negative interest amounts on cash collateral. The amendments set out in the Negative Interest Protocol make it clear that the party pledging cash collateral would pay interest to the collateral receiver in the event of negative interest rates, by paying the "absolute value" of the applicable interest amount for that interest period.
For further details of the Negative Interest Protocol, see Legal update, ISDA 2014 Collateral Agreement Negative Interest Protocol published (www.practicallaw.com/1-568-3548).
2014 Credit Derivatives Definitions Protocol
On 21 August 2014, ISDA published the 2014 Credit Derivatives Definitions Protocol (CDD Protocol). The CDD Protocol enables parties to amend the terms of their existing transactions so that they incorporate the provisions of the 2014 Credit Derivatives Definitions (2014 Definitions). The 2014 Definitions are a revised version of the 2003 ISDA Credit Derivatives Definitions (2003 Definitions) and are scheduled to go live on 22 September 2014 (see Practice note, The 2003 ISDA Credit Derivatives Definitions: Introducing the 2014 Credit Derivatives Definitions (www.practicallaw.com/0-380-8160)). Adherence to the CDD Protocol is optional, and parties may continue to have their credit derivatives transactions governed by the 2003 Definitions.
Other ISDA documents
ISDA user guides
ISDA has published user guides to assist in the understanding of a number of the ISDA standard documents. For example, ISDA has published user guides on the 1992 and the 2002 ISDA Master Agreement as well as the ISDA credit support documents.
Following an extensive consultation on the use of arbitration for disputes arising in connection with derivative transactions under the ISDA Master Agreements, ISDA has also published an arbitration user guide. The 2013 ISDA Arbitration Guide provides an overview of arbitration and sets out a wide range of model arbitration clauses. For further details, see Practice note, Derivatives: overview (UK): Arbitration under ISDA Master Agreement (www.practicallaw.com/8-385-8330).
ISDA clearing documentation
ISDA (together with other trade associations) supports a suite of clearing documents, all of which are hosted on its website (www.practicallaw.com/8-106-3790). The documentation of clearing arrangements is largely beyond the scope of this note but the following legal updates provide information on some of ISDA's latest publications in this area:
In addition, ISDA and FIA Europe have jointly published the European Cleared Derivatives Execution Agreement (European Execution Agreement) for principal-to-principal client clearing. The European Execution Agreement is intended to be a standardised starting point for negotiating execution agreements under English law for swaps that are intended to be cleared by non-US central counterparties (see Legal update, ISDA/FIA European Cleared Derivatives Execution Agreement published (www.practicallaw.com/1-568-3534)).
ISDA documents: United States
For a detailed discussion on ISDA documents in the context of US law, see Practice note, ISDA Documents: Overview (US) (www.practicallaw.com/1-386-3976).