On March 22, 2013, ISDA opened the DF Protocol 2.0 for adherence to market participants. The DF Protocol 2.0 is part of ISDA’s documentation initiative aimed at assisting the derivatives industry in implementing and complying with the regulatory requirements imposed under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The DF Protocol 2.0 facilitates the swap dealers’ and major swap participants’ compliance with certain swap dealer external business conduct rules of the Commodity Futures Trading Commission (“CFTC”) that were published after the ISDA August 2012 Dodd-Frank Protocol (“DF Protocol”) by providing a standardized way of amending existing swap documentation to respond to these new requirements. The June 10 mandatory clearing phase-in for certain non-swap dealer financial businesses and the July 1 compliance date for certain business conduct rules are important drivers of this protocol effort. The DF Protocol 2.0 addresses the requirements of the following three CFTC final rules:

  • CFTC, Final Rule, Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 Fed. Reg. 55904 (September 11, 2012);
  • CFTC, Final Rule, End-User Exception to the Clearing Requirement for Swaps, 77 Fed. Reg. 42559 (July 19, 2012); and
  • CFTC, Final Rule, Clearing Requirements Determination Under Section 2(h) of the CEA, 77 Fed. Reg. 74284 (Dec. 13, 2012).

The DF Protocol 2.0 allows market participants to (i) supplement the terms of existing ISDA Master Agreements or (ii) enter into an agreement to apply select Dodd-Frank compliance provisions to their swap trading relationship, including, among other things, terms governing payment obligations or an agreement by the parties to clear certain swap transactions.

The DF Protocol 2.0 basic architecture is similar to the DF Protocol. It consists of four documents: (1) the adherence letter, (2) the protocol agreement, (3) the protocol questionnaire and (4) the DF supplement. The substantive provisions in the DF Protocol 2.0 are in the DF supplement which consists of following four Schedules:

  • Schedule 1: definitions
  • Schedule 2: general terms for parties’ agreements with respect to confirmation documentation, clearing and end-user exception, and Orderly Liquidation Authority notices;
  • Schedule 3: parties’ agreements regarding the daily valuation of swaps for swap trading relationship documentation purposes and related dispute resolution procedures; and
  • Schedule 4: parties’ agreements regarding the portfolio reconciliation process.

Schedules 1 and 2 are deemed incorporated into existing documentation once a party adheres to the DF Protocol 2.0. Schedules 3 and 4 are optional.

The DF Protocol 2.0 includes additional bilateral delivery requirements, including a protocol questionnaire, to allow counterparties to make certain elections related to their swap trading relationship under Dodd-Frank. Notably, any party that selected “No Answer” in response to the question whether or not it is a “financial entity” in the DF Protocol questionnaire must now, in the DF Protocol 2.0 questionnaire, answer the question of whether or not it is a “financial entity” with a “yes” or “no” response.1

Like the DF Protocol, adhering parties may use the online system “ISDA Amend” to submit and exchange documents and questionnaires with counterparties. Questionnaire submission will be available on May 24, 2013. There is no cut off date for adherence. As with the DF Protocol, there is a $500 fee to ISDA to adhere to the DF Protocol 2.0.

For more information on the topics raised in this Legal Update, please contact Joshua Cohn at +1 212 506 2539 or Pamela J. Sackmann at +1 212 506 2640.

1 This is an apparent response to rules relating to swap trading relationship documentation and confirmation timing.