Compliance With Dodd-Frank Swaps Provisions: Update on Key Deadlines Under ISDA Dodd-Frank Protocols

The ISDA March 2013 Dodd-Frank Protocol (the “March 2013 Protocol”)¹ is now open for adherence by market participants that trade swaps subject to the CFTC’s jurisdiction. This Protocol follows on the ISDA August 2012 Dodd-Frank Protocol (the “August 2012 Protocol”) and addresses additional CFTC rule requirements that apply in respect of swaps trading.² This alert provides a brief overview of both Protocols and highlights key next steps for funds, operating companies, securitization vehicles and other end-users that trade swaps and that may wish to use these industry-standard procedures to address applicable CFTC requirements.

Swap dealers (“SDs”) and major swap participants (“MSPs”) are subject to the CFTC’s external business conduct rules, which impose certain requirements on SDs and MSPs in trading swaps with counterparties. (So far, only a handful of MSPs have registered with the CFTC. This alert therefore focuses on swaps trading with SDs, although many of the same concepts would apply to swaps trading with MSPs.) Initially, a number of provisions of the external business conduct rules³ covered by the August 2012 Protocol were scheduled to go into effect on or about October 15, 2012. But, in August 2012, the CFTC extended the compliance deadline until January 1, 2013. On December 18, 2012, the CFTC promulgated interim final rules for SDs and extended the compliance date for a second time, until May 1, 2013. The same interim final rule extended the compliance date for rules covered by the March 2013 Protocol (which are noted below) until July 1, 2013.

To date, nearly 9,000 market participants have adhered to the August 2012 Protocol. Firms that have not taken the steps necessary to adhere to the August 2012 Protocol or otherwise effected appropriate bilateral amendments to their trading documentation should consider doing so soon. Otherwise, those firms may risk possible interruption to their swaps trading with SDs that are subject to the business conduct rules that went into effect on May 1, 2013.

Like its predecessor, the March 2013 Protocol is intended to facilitate compliance with certain CFTC Dodd-Frank rulemakings by providing a standardized way of amending swap documentation to cover those new requirements. The March 2013 Protocol addresses three final CFTC rules with which compliance will be required by July 1, 2013:

• The CFTC’s first clearing determination (as discussed in our separate alert, this release mandates clearing for certain classes of interest rate swaps and credit default swaps);⁴
• The end-user exception to the clearing requirement for swaps, as applicable;⁵ and
• The CFTC’s final rule governing, among other things, requirements related to swap trading relationship documentation.⁶

The March 2013 Protocol adds notices, representations and covenants necessary to comply with requirements in respect of these rules, which must be satisfied by the time that swap transactions are offered and executed.

Like the August 2012 Protocol, the March 2013 Protocol also includes bilateral document delivery requirements, including a Protocol Questionnaire, which allows an adhering party to provide certain identifying and contact information, identifies whether the adhering party falls into certain regulatory categories established in the Commodity Exchange Act and in CFTC regulations, and specifies whether the adhering party wishes to avail itself of certain exceptions or exemptions from the applicable CFTC rules.

As with the August 2012 Protocol, the online portal ISDA Amend may be used to automate the exchange of information and documents between counterparties and will be available for questionnaire submission starting on May 24, 2013. Market participants that wish to adhere to the March 2013 Protocol must submit an adherence letter to ISDA along with a one-time fee of $500.

It is important to note that the two Protocols are separate and that adherence to the August 2012 Protocol does not address adherence to the March 2013 Protocol. As a result, firms should consider reviewing their trading relationships and, as they deem necessary or appropriate, taking the required steps through ISDA Amend to enter into the March 2013 Protocol ahead of the July 1 deadline.

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Please feel free to reach out to your regular contacts at the Firm if you have any questions about the matters addressed in this alert. In addition, you are welcome to contact the members of the Firm’s Derivatives/CFTC Group set forth above.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Arnholz-John
Auerbach-Reed
Springer-William
Sterling-Joshua

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¹ Relevant documents are available at: http://www2.isda.org/functional-areas/protocol-management/protocol/12.
² Relevant documents are available at: http://www2.isda.org/functional-areas/protocol-management/protocol/8.
³ Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, available at: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-1244a.pdf.
⁴ Clearing Requirement Determination Under Section 2(h) of the CEA, available at: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-29211a.pdf.
⁵ End-User Exception to the Clearing Requirement for Swaps, available at: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-17291a.pdf.
⁶ Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, available at: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-21414a.pdf.