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ISDA® Publishes Sample 'Special Entities' Letter for Swap Dealers
Practical Law Legal Update 8-525-9392 (Approx. 4 pages)
ISDA® Publishes Sample 'Special Entities' Letter for Swap Dealers
by PLC Finance
| Published on 22 Apr 2013 • USA (National/Federal) |
ISDA has published a sample letter that swap dealers (SDs) may provide to their swap counterparties that are non-ERISA "special entities" in order to comply with final Dodd-Frank external business conduct (EBC) rules (also referred to as external business conduct standards or EBCS) for SDs and MSPs.
On April 18, 2013, ISDA® published a sample letter designed to help swap dealers (SDs) comply with final Dodd-Frank external business conduct (EBC) rules (also referred to as external business conduct standards or EBCS) that prescribe how SDs must interact with certain "special entities" with which they enter into swaps. Under the final ECBS, which go into effect May 1, 2013, SDs must ensure that they remain independent of special entities in their swap dealings, or face increased advisory responsibilities. Special entities are certain local, state and federal government entities and qualified retirement plans. The letter is designed to help SDs document their independence from non-ERISA special entities with which they enter into swaps, helping these SDs to take advantage of certain safe harbors contained within the final EBCS.
The letter, which is part of ISDA's Dodd-Frank Documentation Initiative, contains various disclosures and representations from both parties outlining the independence of the SD. The letter can be provided at the outset of communication by an SD with a non-ERISA special entity swap counterparty or potential counterparty prior to entering into a swap agreement with the counterparty to ensure that all communications relating to entering into the swap are covered by the safe harbor. This letter is not necessary for parties that have already entered into the August 2012 Dodd-Frank Protocol Supplement Schedule 4, as that Schedule contains representations that qualify the SD for the same safe harbor.
Specifically, in the letter, the SD discloses that it:
- Is not acting in the best interests of the counterparty in entering into the swap.
- Is acting in its own interests as a swap counterparty.
- Has not expressed an opinion as to whether the counterparty should enter into the swap.
The counterparty represents that:
- It will not rely on any recommendations from the SD in entering into the swap.
- The SD has not expressed an opinion as to whether the counterparty should enter the swap.
- Each swap will be evaluated by the counterparty's qualified independent representative without respect to any recommendations from the SD.
The representations contained in this letter are sufficient to qualify the participating SD for the applicable safe harbor under 17 C.F.R. § 23.440, which relieves it from having to engage in any heightened suitability analysis for the swap in question and from qualifying as an advisor under the CEA. While the EBCS also apply to MSPs that enter into swaps with special entities, ISDA did not address MSPs in the letter.
For more information on swaps with special entities and the special requirements surrounding them, see Practice Note, Swap Dealers and MSPs: Final Dodd-Frank External Business Conduct (EBC) Rules: Swaps with Special Entities.
For more information about the final Dodd-Frank EBCS for SDs and MSPs, see Practice Note, Swap Dealers and MSPs: Final Dodd-Frank External Business Conduct (EBC) Rules.
"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.