CFTC Disallows Use of ISDA®-FIA Cleared Derivatives Execution Agreement | Practical Law

CFTC Disallows Use of ISDA®-FIA Cleared Derivatives Execution Agreement | Practical Law

The CFTC issued final rules which effectively disallow the use of the FIA-ISDA Cleared Derivatives Execution Agreement. (Note that this rule does not apply to the ISDA-FIA Cleared Derivatives Addendum, only to the execution agreement.).

CFTC Disallows Use of ISDA®-FIA Cleared Derivatives Execution Agreement

Practical Law Legal Update 7-532-3336 (Approx. 3 pages)

CFTC Disallows Use of ISDA®-FIA Cleared Derivatives Execution Agreement

by PLC Finance
Published on 09 Apr 2012 • USA (National/Federal)
The CFTC issued final rules which effectively disallow the use of the FIA-ISDA Cleared Derivatives Execution Agreement. (Note that this rule does not apply to the ISDA-FIA Cleared Derivatives Addendum, only to the execution agreement.).
On April 9, 2012, the CFTC adopted a final rule generally disallowing the use of the FIA-ISDA® Cleared Derivatives Execution Agreement, a template published by the Futures Industry Association (FIA) and ISDA on June 16, 2011, which is intended to assist swaps market participants with managing the contractual relationships involved in the swaps clearing process (see Legal Update, ISDA and FIA Publish Standard Execution Agreement for Cleared OTC Derivatives Transactions). The rule lists the CFTC's concerns that the FIA-ISDA Cleared Derivatives Execution Agreement:
  • Contains provisions which would create "sublimits" for the customer for trades with a swap dealer (SD), which would result in restrictions of customer counterparties.
  • Could delay the acceptance of trades.
  • Would disclose the identity of the customer's counterparty to the SD clearing member which would lead to greater information exchange and could ultimately force the customer to execute the transaction with the clearing member's trading desk affiliate.
In order to address these concerns, the CFTC's final rules prohibit arrangements involving futures commission merchants (FCMs), SDs, MSPs or DCOs that:
  • Disclose the identity of a customer's original executing counterparty.
  • Limit the number of counterparties with whom a customer may enter into a trade.
  • Restrict the size of the position a customer may take with any individual counterparty, apart from an overall credit limit for all positions held by the customer.
  • Impair a customer's ability to execute a trade on terms that have a reasonable relationship to the best terms available.
  • Prevent the acceptance of trades within a specified time frame.
Through these measures, the rule effectively prohibits the use of the FIA-ISDA Cleared Derivatives Execution Agreement. The final rules are effective as of October 1, 2012.
Note that this rule does not apply to the ISDA-FIA Cleared Derivatives Addendum (see Legal Update, ISDA and FIA Publish Cleared Derivatives Addendum). The rule discussed in this Update is unrelated to that document, which is widely used by market participants.
"ISDA" is a registered trademark of the International Swaps and Derivatives Association, Inc. (ISDA). ISDA is not a sponsor of Practical Law and had no part in the development of this resource.