International Swaps and Derivatives Association, Inc. ISDA 2013 DF AGREEMENT FOR NON-U.S. TRANSACTIONS The International Swaps and Derivatives Association, Inc. (“ISDA”) has prepared this explanatory memorandum to assist in your consideration of the form of the ISDA DF Agreement for Non-U.S. Transactions, published on November 15, 2013 (“Non-U.S. DF Agreement”).
THIS SUMMARY DOES NOT PURPORT TO BE AND SHOULD NOT BE CONSIDERED A GUIDE TO OR AN EXPLANATION OF ALL RELEVANT ISSUES OR CONSIDERATIONS IN CONNECTION WITH THE NON-U.S. DF AGREEMENT. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING THE NON-U.S. DF AGREEMENT. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH ANY OF ITS DOCUMENTATION OR OTHER DOCUMENTATION MAY BE PUT. Terms used in this memorandum and not otherwise defined have the meanings ascribed to them in the Non-U.S. DF Agreement
BACKGROUND On July 26, 2013, the Commodity Futures Trading Commission (“CFTC”) published an “Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations” (“Interpretive Guidance”) providing guidance as to when the CFTC will assert jurisdiction over swap transactions that occur outside of the United States.1 Pursuant to the Interpretive Guidance, in certain circumstances where there are specified U.S. elements to Swap transactions that occur outside of the United States, the CFTC has stated that it will expect compliance with a limited set of the requirements applicable to Swaps under the CEA and the CFTC regulations.
In particular, in circumstances where (a) one party to a transaction is a swap dealer registered with the CFTC that (i) would not be characterized as a “U.S. person” under the Interpretive Guidance or (ii) is a U.S. bank that transacts through a non-U.S. branch and (b) the other party is a non-U.S. person, certain “Transaction-Level Requirements” imposed under the CEA and CFTC regulations may not apply and the requirements that do apply will generally be more limited than those that would apply to transactions between U.S. persons. In these circumstances, the need for additional documentation may depend on a variety of considerations, including the specific CFTC requirements that apply to the situation, the existing documentation between the parties and the local law in their respective jurisdictions.
Parties in these circumstances who conclude that they do require additional documentation for purposes of establishing compliance with applicable CFTC requirements may use one or both of the Dodd-Frank Protocols previously published by ISDA for these purposes.2 However, the Dodd-Frank Protocols include some agreements that may not be relevant to parties outside of the United States. Therefore, ISDA has produced the Non-U.S. DF Agreement to provide a documentation solution tailored to persons and transactions outside of the United States by including only those agreements that may be relevant to such persons and transactions on the basis of the Interpretive Guidance.
Please note that the precise documentation of each individual relationship remains the responsibility of the parties concerned, and ISDA does not assume any responsibility for any use to which the Non-U.S. DF Agreement may be put, including its use in connection with any privately negotiated derivatives transaction. Each party using the Non-U.S. DF Agreement must satisfy itself that the terms thereof are appropriate for its relationship, have been properly used and/or adapted and have generally been properly drafted, in each case, to reflect the intentions of the parties. SCOPE AND STRUCTURE OF THE NON-U.S. DF AGREEMENT As noted above, the Non-U.S. DF Agreement provides agreements intended to be useful in circumstances where one party is either a non-U.S. swap dealer or a U.S. bank that is a swap dealer and transacts exclusively out of non-U.S. branches, and the counterparty is a non-U.S. person (including, but not limited to, circumstances where the latter person is guaranteed by a U.S. person or acting as an “affiliate conduit” for purposes of the Interpretive Guidance). In these circumstances the parties may be subject to requirements that the CFTC categorizes as “Entity-Level Requirements” or “Category A” “Transaction-Level Requirements.”3 The Non-U.S. DF Agreement includes terms intended to be useful in addressing each of these sets of requirements. The agreement does not include terms addressing requirements that the CFTC categorizes as “Category-B Transaction-Level Requirements” as the Interpretive Guidance does not generally require compliance with those requirements by the parties for whom the Non-U.S. DF Agreement has been prepared.
In order to facilitate selecting the terms that may be applicable to a particular pair of counterparties depending on which set(s) of CFTC requirements may apply, the Non-U.S. DF Agreement is structured as a modular agreement with three parts, a “base” agreement and two Annexes.
Each of the Annexes addresses one of the categories of CFTC requirements noted above: Annex I addresses “Entity-Level Requirements” (e.g., swap reporting and record-keeping requirements) and primarily includes provisions that are reproduced or adapted from the ISDA August 2012 DF Supplement. This Annex may be useful whenever one of the parties is a non-U.S. swap dealer or a bank swap dealer operating out of a non-U.S. branch. Annex II addresses “Category-A Transaction-Level Requirements” (e.g., swap trading relationship documentation, clearing, agreed swap valuation processes and portfolio reconciliation) and primarily includes provisions that are reproduced or adapted from the ISDA March 2013 DF Supplement. Annex II is intended for use in the more limited circumstance where either (i) a non-U.S. swap dealer transacts with a non-U.S. person that is guaranteed by a U.S. person or functions as an “affiliate conduit” of a U.S. person or (ii) a U.S. swap dealer that is a bank transacts through a non-U.S. branch with a non-U.S. person (including a non-U.S. person that is guaranteed by a U.S. person or functions as an “affiliate conduit” of a U.S. person).
The base agreement functions primarily as a “wrapper” for the two Annexes and includes various miscellaneous terms to set up the scope and operation of the agreement. The base agreement also includes notice provisions and basic representations as to the accuracy of information provided in the Annexes as well as terms for the updating of such information. These provisions are adapted from provisions from the Dodd-Frank Protocols but apply to the relationship between the parties in all cases and were included in the base agreement to avoid duplication in the Annexes.
Parties considering use of the Non-U.S. DF Agreement should note that it is not a protocol. There is no separate adherence letter or standardized adherence process through ISDA and the agreement must be executed bilaterally. The agreement can be fully customized by the parties. In addition, parties considering whether to use the Non-U.S. DF Agreement in lieu of the Dodd-Frank Protocols should note that unlike the Dodd-Frank Protocols, the Non-U.S. DF Agreement does not function as a supplement to parties’ existing agreements governing Swaps. Instead, it is a separate agreement that applies to the parties’ trading on a relationship basis (i.e., it is not limited to swap trading under existing agreements governing Swaps). Each of the Annexes to the agreement specifies the scope of transactions that the Annex covers.
RELATIONSHIP TO OTHER ISDA PUBLICATIONS The Non-U.S. DF Agreement includes selected provisions from the Dodd-Frank Protocols and the included provisions generally follow the language from the relevant Protocol. The Non-U.S. DF Agreement is not intended to supplant the Dodd-Frank Protocols. A pair of counterparties that has already supplemented their existing swap agreements pursuant to each of the Dodd-Frank Protocols would not need to use the Non-U.S. DF Agreement.
The Non-U.S. DF Agreement does not reproduce representations contained in the Cross-Border Swaps Representation Letters published by ISDA4 regarding the parties’ status under the Interpretive Guidance as the agreement is for use by parties who have already established their respective statuses under the Interpretive Guidance. Instead, the agreement contains acknowledgments from each party that these representations, or such other evidence as such party shall require as to the matters in the letters, have already been received by the parties.
SPECIFIC TERMS In a few cases, provisions in the Non-U.S. DF Agreement have been updated relative to the corresponding provisions in the Dodd-Frank Protocols to address recent regulatory developments. In addition a few provisions have been modified for ease of use.
Status of Information. Sections 4, 5 and 6 of the base agreement include terms relating to the accuracy and updating of representations and information provided in connection with the Non-U.S. DF Agreement as well as reliance on such information and representations. While these terms are based on provisions that were included in each of the Dodd-Frank Protocols, they have been simplified to reflect that the Non-U.S. DF Agreement provides an integrated set of representations and notice provision and does not require cross-references to a Protocol Questionnaire or a separate underlying agreement. In addition, the reliance provision contained in Section 6 differs from the corresponding Protocol provisions. It does not address events of default in other agreements given that the Non-U.S. DF Agreement operates as an independent agreement rather than as a supplement to an existing master agreement that may include events of default.
LEI/CICI. The LEI/CICI provision in Section 3 of Annex I is phrased slightly differently from the similar provision in the Dodd-Frank Protocols. This is to address recent action by the CFTC to recognize LEIs issued by providers endorsed by the Regulatory Oversight Committee of the global LEI system.5 International Swaps. The “International Swaps” provision in Section 7 of Annex I is phrased slightly differently from the similar provision in the August 2012 DF Supplement. This is solely for clarity and not is intended to be a substantive modification.
End-User Exception – Financial Entity Status. Section 5 of Annex II, addressing documentation requirements relating to use of an exemption or exception from mandatory clearing, combines provisions that were located in the Questionnaire and Supplement to the ISDA March 2013 DF Protocol. These provisions have been streamlined and reorganized for ease of use. In addition, Section 5(d) contains additional elections for specifying the exemption or exception that applies. These are included to reflect recent CFTC no-action and exemptive relief provided to “eligible treasury affiliates” and certain cooperative entities.
SEC Issuer/Filer. Parties completing Section 5(d)(iii) of Annex II to the Non-U.S. DF Agreement should note that the CFTC has interpreted the meaning of “issuer of securities” in this context in the same manner as the U.S. Securities and Exchange Commission did in its proposal for implementing the end-user exception to mandatory clearing of security-based swaps, and so the phrase has been interpreted to cover entities that are “controlled” by issuers of securities.6 SUBSTITUTED COMPLIANCE, EMIR AND CFTC LETTER 13-45 On July 11, 2013, the CFTC issued a no-action letter that allows market participants subject to Article 11 of the European Market Infrastructure Regulation (“EMIR”), to satisfy requirements under CFTC Regulations 23.501, 23.502 (other than 23.502(c)), 23.503, 24.504(b)(2) and 23.504(b)(4) by complying instead with corresponding EMIR requirements. The Non-U.S. DF Agreement does not include provisions relating to all of these rules, but Section 7 of Annex II does provide an agreement for the production of daily valuations intended to address the requirements of CFTC Regulation 23.504(b)(4) and Section 8 of Annex II provides an agreement for the conduct of portfolio reconciliations intended to address the requirements of CFTC Regulation 23.502. While the Non-U.S. DF Agreement does not include terms intended to assist parties in establishing compliance with parallel EMIR requirements, parties choosing to rely on the no-action letter should note that Annex II may be customized to delete Sections 7 and 8.7 Similarly, to the extent the parties are operating in a jurisdiction with rules that have been recognized by the CFTC as comparable to its own regulations for purposes of “substituted compliance” the parties may modify the Non-U.S. DF Agreement as appropriate. The substantive terms of the agreement are annotated with footnote citations to the relevant CFTC regulations for ease of reference.
1 78 Fed. Reg. 45292 (July 26, 2013).
2The ISDA August 2012 DF Protocol, published on August 13, 2012 and the ISDA March 2013 DF Protocol, published on March 22, 2013 (the “Dodd-Frank Protocols”).
3 See Interpretive Guidance at 45337-40.
4 Cross-Border Swaps Representation Letter published on August 19, 2013 and the Cross-Border Swaps Representation Letter for U.S. Banks published on September 16, 2013.
5 See, e.g., CFTC Press Release PR6758-13 (Oct. 30, 2013) and 78 Fed. Reg. 38954 (June 28, 2013).
6 See 77 Fed. Reg. 42560, 42570 (July 19, 2012) (citing 75 Fed. Reg. 79992, 79996 & n. 34 (Dec. 21, 2010)) (“[A] counterparty invoking the end-user clearing exception is considered by the [SEC] to be an issuer of securities registered under Exchange Act Section 12 or required to file reports pursuant to Exchange Act Section 15(d) if it is controlled by a person that is an issuer of securities registered under Exchange Act Section 12 or required to file reports pursuant to Exchange Act Section 15(d).”).
7 For example, appropriate parties could replace Section 8 of Annex II (portfolio reconciliation) with EMIR-compliant terms.