In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the trading of over-the-counter (“OTC”) derivatives is subject to regulation by the Commodity Futures Trading Commission (“CFTC”).
The CFTC requires “Swap Dealers” to comply with certain rules including business conduct standards and swap data recordkeeping and reporting requirements, among others. Swap “end-users” (including hedge funds and private equity funds) are not required to comply with these rules, but Swap Dealers will be required to obtain certain information from their counterparties at the time that new swap transactions are entered into. This client alert describes two impending deadlines for swap end-users, the CICI/LEI Identifier (April 10, 2013) ISDA August 2012 and the Dodd-Frank Protocol (May 1, 2013).
All swap counterparties that are not Swap Dealers or Major Swap Participants must obtain a CFTC Interim Compliant Identifier (“CICI”) by April 10. The CICI is a unique numeric identifier that is assigned to every entity that participates in the OTC swaps market. Following the completion of the global initiative for the Legal Entity Identifier (“LEI”), an entity’s CICI will become its LEI. An entity can register for a CICI at http://www.ciciutility.org. There is a US$200 fee for registering for a CICI.
ISDA August 2012 Dodd-Frank Protocol
To comply with CFTC rules, Swap Dealers will seek to add certain provisions to existing OTC derivative agreements such as the ISDA Master Agreement published by the International Swaps and Derivatives Association (“ISDA”). The ISDA August 2012 Dodd-Frank Protocol (the “Protocol”) includes notices, representations, and covenants that will supplement the transacting parties’ existing swap documentation in order for Swap Dealers to comply with the CFTC’s rules and so that end-users do not experience a disruption in trading. Swap Dealers likely will refuse to enter into new over-the-counter CFTC-regulated derivatives after May 1, 2013, with a fund that has not adhered to the Protocol. Therefore, end-users that wish to continue trading swaps should complete the Protocol by May 1, 2013.
The Protocol consists of five sections: (1) the Protocol Agreement; (2) an Adherence Letter; (3) the DF Questionnaire; (4) the DF Supplement; and (5) the DF Terms Agreement.
- The Protocol Agreement sets forth the agreement of the parties on the manner in which they may supplement an existing swap agreement (“Protocol Covered Agreement”) or enter into a DF Terms Agreement.
- The Adherence Letter evidences a counterparty’s agreement to be bound by the Protocol.
- The DF Questionnaire allows a party to provide information about itself, make certain safe-harbor elections, and identify the counterparties with whom it is willing to apply DF Supplement provisions.
- The DF Supplement contains representations, covenants, disclosures, acknowledgements, and notifications related to the CFTC rules that counterparties may apply to their swap trading relationship.
- The DF Terms Agreement allows counterparties to apply selected provisions of the DF Supplement to their swaps trading relationship, regardless of whether the counterparties have an existing master swap agreement.
Completing the Protocol
- The Adherence Letter can be completed on ISDA’s website. There is a US$500 fee payable to the ISDA to submit an Adherence Letter.
- Complete the DF Questionnaire. This can be completed through research firm “Markit’s ISDA Amend Service,” an online system that allows a counterparty to send Questionnaires to multiple counterparties.
- The DF Questionnaire can also be downloaded from the ISDA website.
- Exchange DF Questionnaires with Swap Dealers through Markit’s ISDA Amend Service or send the DF Questionnaire(s) directly to Swap Dealer(s).
- For counterparties that do not have master swap agreements in place, the DF Terms Agreement is an optional section of the DF Questionnaire that establishes the necessary documentation.
Disclaimer: The opinions expressed herein are those of the authors and other contributors and do not necessarily reflect the views of the Firm. This is not intended as specific legal advice for any purpose.