In addition, on December 13, 2012, the CFTC adopted a mandatory clearing provision for certain interest rate swaps and credit derivatives. On 19 July 2012, the CFTC adopted a definitive rule providing for an exemption for end-users from the clearing obligation for swaps subject to mandatory clearing (the end-user exception). The March 2013 Protocol provides for a mechanism for an end-user to inform its counterparties whether it is currently subject to a mandatory clearing obligation and is allowed to choose the end-user exception. The March 2013 Protocol is largely intended to facilitate compliance with CFTC rules by swap dealers and major swap participants who require these parties to: (i) receive securities for swaps for risk management purposes and (ii) participate in portfolio reconciliation. We will start with an overview of these CFTC rules to facilitate understanding of the protocol. The March 2013 Protocol also refers to the CFTC`s mandatory compensation provision and the end-user exception discussed in the context of the protocol requirements. Pursuant to Section 4s(i)(1), the CFTC issued settlements of 23,500 to 23,505 under the CFTC Final Rule, Confirmation, Portfolio Reconciliation, Portfolio Compression and Swap Trading Relationship Documentation Requirements for Swap Dealers and Key Swap Participants (collectively, The final rules).3 The final rules will come into effect on July 1 for swap traders and major swap participants. 2013, unless the compliance date is postponed. End-users should carefully review the March 2013 protocol and ensure that they understand it. In particular, if they do not have ISDA framework agreements (or equivalent documents) to settle future trade, they should choose to conclude the FRAMEWORK AGREEMENT of the ISDA 2013 DF Protocol or to enter into an ISDA Framework Agreement (or equivalent documentation) with any relevant CFTC swap entity. The March 2013 ISDA-D-F Protocol (the “DF 2.0 Protocol”) is part of ISDA`s Dodd-Frank Documentation Initiative, which aims to help industry implement and comply with regulatory requirements under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). To facilitate the implementation of the Dodd-Frank Rules, ISDA plans to introduce future protocols to simplify documentation changes for the upcoming CFTC and SEC Final Rules, as well as changes to EMIR, MiFiD and MiFIR.
Annex 3 applies to end-users, as indicated above under “The Questionnaire — Main Elections; Choice of Schedule 3” and will come into force when CFTC Regulation 23.504 applies to CFTC swap units, which is expected to be July 1, 2013 (STRD compliance date). The basic architecture of the DF 2.0 protocol is similar to the DF protocol. It consists of four documents: (1) the Letter of Accession, (2) the Memorandum of Understanding, (3) the Protocol Questionnaire and (4) the DF Supplement. The key provisions of protocol DF 2.0 are contained in Supplement DF, which includes the following four annexes: Protocol DF 2.0 allows market participants to (i) supplement the terms of existing ISDA Framework Agreements or (ii) enter into an agreement to apply certain Dodd-Frank compliance provisions to their swap business relationships, including, but not limited to the terms of payment obligations or an agreement between the Parties to clear certain swap transactions. On 22 March 2013, ISDA published the March 2013 DF Protocol, and on 20 May 2013, ISDA Amend1 became available for adoption of questionnaires under the new Protocol. The March 2013 Protocol (which is completely separate from the August 2012 ISDA-DF Protocol) focuses on the commodity futures trading commission (CFTC) requirements that apply to swap traders and key swap participants in terms of documentation of swap trading relationships, portfolio reconciliation and clearing information requirements. Unlike PREVIOUS ISDA protocols, where amendments were made only with the delivery of a letter of consent by each party to the underlying document to be amended (i.e. a framework contract), this Protocol will contain additional bilateral requirements for the implementation of the amendments. Each Party submitting a letter of membership must also provide each counterparty concerned with a completed protocol questionnaire for the amendments to take effect.
As a result of these additional bilateral procurement requirements, ISDA, in collaboration with Markit, has developed a technology solution (the “ISDA Amend by Markit Solution”) to automate the information gathering process and enable the exchange of data and documents submitted to approved counterparties. The basic architecture consists of four documents: (I) a letter of accession, (II) the protocol agreement, (III) the protocol questionnaire and (IV) the DF supplement. Further information on the content of each of these documents is discussed in more detail in the March 2013 IsDA Summary of the Dodd-Frank Protocol: www2.isda.org/functional-areas/protocol-management/open-protocols/ swap dealers and major swap participants must have an agreed daily valuation methodology: (i) for the purpose of determining capital and margin requirements for uncleared swaps entered into by swap traders and large swap participants. (in accordance with Article 4s (e) of B. the ACE) and (ii) as part of the internal risk management systems of swap dealers and large swap participants (in accordance with Article 4s(j) of the CEA). Since neither the CFTC nor the Securities and Exchange Commission has so far adopted definitive rules regarding margin requirements for uncleared swaps, the valuation methodology contained in the March 2013 Protocol (referred to as risk assessment) is intended solely to ensure that swap dealers and key swap participants comply with the risk management requirements set out in Section 4s(j) – and is not binding on the parties for other purposes (including for the following purposes: setting margins in the context of existing exchange documents). Accordingly, Section 3.10 of the March 2013 Protocol provides that the Parties recognize that the adoption of margin agreements under Section 4s (e) may require additional agreement between the Parties for the purposes of such arrangements and for the purposes of Section 4s j. .