ISDA 2018 U.S.

Resolution Stay Protocol,

Protocol and ISDA March 2013 Dodd-Frank
Protocol

Nguyen Hoang Anh 21 February 2020

Managing Partner
+84 912 040 024
[email protected]
Content

• Part A: ISDA 2018 U.S. Resolution Stay Protocol

• Part B: Protocol and ISDA March 2013 Dodd-Frank Protocol
Part A. ISDA 2018 U.S. Resolution Stay
Protocol
U.S. QFC Resolution Stay Regulation (the
“Regulation”) and ISDA 2018 U.S.
Resolution Stay Protocol (the “ISDA Stay
Protocol”)
Executive Summary:
• Who does it impact? The Regulation applies to all U.S.
GSIBs and their subsidiaries globally and all U.S. operations
of foreign GSIBs ("covered entities"), and their
counterparties that have entered into a qualified financial
contract ("QFC") with such GSIBs that contains direct
default or cross-default rights that may be exercised
against such GSIB and/or explicitly restrict the transfer of a
QFC in resolution ("covered QFCs")
U.S. QFC Resolution Stay Regulation (the
“Regulation”) and ISDA 2018 U.S.
Resolution Stay Protocol (the “ISDA Stay
Protocol”)
• QFCs include swaps and other derivatives, repo and reverse
repo transactions, securities lending and borrowing
transactions, securities contracts, commodity contracts,
forward contracts, and guarantees of or other credit
enhancements related to the contracts
• How do counterparties comply with the Regulation? By
adhering to the ISDA Stay Protocol
The Regulation - Overview

• Background: U.S. prudential regulators issued the

Regulation to address concerns about global systemically
important banks ("GSIBs") being "too-big-to-fail" arising
out of the financial crisis, including the Lehman bankruptcy
• Purpose: To enable authorities to orderly resolve failing
GSIBs by mitigating the destabilizing impact of QFC
closeouts on the financial system
What does the Regulation require?
• Recognise U.S. Special Resolution Regimes ("SRRs") (the
"Stay and Transfer")
- Counterparties must acknowledge existing statutory
rights of the FDIC to (i) impose a temporary stay (up to
48 hours) on the ability of qualified financial contract
("QFC") counterparties to exercise default rights and (ii)
transfer QFCs of the failed GSIB to a 3rd party or bridge
institution without consent of counterparties, if a U.S.
SRR is invoked (i.e., Federal Deposit Insurance Act
("FDIA") or Orderly Liquidation Authority ("OLA"))
- Addresses extraterritoriality issue: QFCs governed by
non-U.S. law or with non-U.S. counterparty require
express acknowledgement so that the Stay and Transfer
cannot be challenged outside the U.S.
What does the Regulation require?
- Where the resolution action taken under a resolution
proceeding is successful, the temporary stay may
become permanent unless certain conditions allow
counterparties to exercise default rights (creditor
protections)
• Extinguish Cross Defaults (the “No Cross-Default”)
- Counterparties must contractually agree to not (i)
exercise cross-default rights if GSIB parent/affiliate
enters insolvency (so long as direct GSIB entity is
continuing to perform) or (ii) restrict transfer of such
GSIB parent/affiliate credit supports (e.g., guarantees)
What does the Regulation require?
- Addresses cross-default issue: Under U.S. law, FDIA and
the U.S. Bankruptcy Code does not provide statutory
right to stay cross-default rights so the Regulation
requires contractual agreement to the cross-default
stay
- Example: Counterparty has an ISDA with a GSIB entity
(e.g., Bank of America, N.A., Citibank N.A.) with a
guarantee from the GSIB parent (e.g., Bank of America
Corporation, Citigroup Inc.). GSIB parent enters
insolvency. Counterparty cannot exercise cross-default
rights or restrict guarantee transfer so long as GSIB
entity continues to fully perform
The Regulation - Scope
Product Scope
• Regulation applies to covered qualified financial contracts
(covered QFCs)
- QFCs includes a wide range of securities contracts,
commodity contracts, forward contracts, repurchase
agreements, and swap agreements, including:
+ over-the counter and listed derivatives, including
spot FX/commodities
+ repo and reverse repo transactions
+ securities lending and borrowing transactions
+ contracts for the purchase or sale of securities, CDs
or mortgage loans
The Regulation - Scope
+ guarantees or other credit supports related to the
foregoing
+ Excludes: (a) commercial loans, including mortgage
lending; and (b) M&A transactions
- Covered QFCS are QFCs that contain direct default or
cross default rights that may be exercised against a
covered entity and/or explicitly restrict the transfer of a
QFC from a covered entity, e.g., spot FX would only be
considered a covered QFC if subject to a master
agreement that contain default rights or transfer
restrictions
The Regulation - Scope
Entity Scope
• Regulation applies to all U.S. GSIBs and their subsidiaries
globally and all U.S. operations of foreign GSIBs (covered
entities)
• Designated GSIBs are established by the Financial Stability
Board (FSB) and a list is published each year in November
• 8 current U.S. GSIBs are BofAML, BNY Mellon, Citi,
Goldman Sachs, JPMorgan, Morgan Stanley, State Street,
and Wells Fargo
The Regulation - Scope
• Regulation requires counterparties of covered entities to:
- Comply with respect to all subsidiaries of a GSIB (GSIB
Group) it has covered QFCs with - no cherry-picking
among subsidiaries allowed; and
- GAAP or IFRS consolidated counterparty affiliates with
covered QFCs facing the same GSIB Group must also
comply with the Regulation.
 The Regulation – Application to
counterparties

Is the contract a QFC? NO Out of Scope

YES

NO CROSS DEFAULT STAY AND TRANSFER

Does the QFC have Does the QFC have direct default rights
cross-default rights or is NO NO Out of Scope
or transfer restrictions?
there a credit support
transfer restriction?
YES

Is the covered QFC governed by non-

YES U.S. law OR with a non-U.S. NO Out of Scope
counterparty?

YES

COUNTERPARTY MUST COMPLY WITH THE REGULATION

ISDA Stay Protocol
Adherence to the ISDA Stay Protocol
• ISDA has published the ISDA Stay Protocol to facilitate
compliance with the Regulation
- Section 1 of the ISDA Stay Protocol addresses the Stay
and Transfer requirement under the Regulation
+ The ISDA Stay Protocol requires acknowledgement
of not just U.S. SRRs but SRRs of 5 other
jurisdictions (U.K., France, Germany, Switzerland,
and Japan)
- Section 2 of the ISDA Stay Protocol addresses the No
Cross-Default requirement under the Regulation
- The ISDA Stay Protocol amends all covered QFCs with
all covered entities, achieving compliance in one step
ISDA Stay Protocol
- Adherence fee is $500 per entity.
• Counterparties can elect to comply through a bilateral
amendment
- No adherence fee but will involve bilateral legal review
costs
- Does not contain enhanced creditor protections
provided in the U.S. Protocol (discussed below)
Compliance through the ISDA Stay Protocol provides
enhanced creditor protections
• Adherence to the ISDA Stay Protocol provides
counterparties beneficial enhanced creditor protections,
which are not permitted in a bilateral amendment
How do clients comply?
• Step 1: Obtain a Legal Entity Identifier (LEI) on GMEI
Utility (https://www.gmeiutility.org/index.jsp) or GS1
Global LEI Service (https://www.lei.direct/lei-
services/your-lei-in-3-steps/)
- An LEI is a unique code associated with a single legal
entity and is a reference data tool used to standardize
how a counterparty is identified on financial
transactions
- Create an Account - If client does not have an account,
create an account either through GMEI Utility
(https://www.gmeiutility.org/login.jsp) or through GS1
Global LEI Service
(https://www.lei.direct/lei-services/create-an-
account/)
How do clients comply?
- Apply for an LEI
+ GMEI Utility provides a video tutorial on how to
register an entity for an LEI at
https://dtcclearning.com/videos-page/player/90/74
2.html
+ GS1 Global LEI Service provides instructions at
https://www.lei.direct/fileadmin/user_upload/LEI-
direct-Guide-to-LEI-application.pdf
- Receive LEI - An LEI is usually issued within 48-72 hours
- Renew LEI - An LEI must be renewed on an annual
basis; check to make sure an existing LEI is still active
How do clients comply?
• Step 2A: If adhering to the ISDA Stay Protocol, Deliver
Adherence Letter via ISDA
- Delivery of the Adherence Letter will sign up
counterparty to the ISDA Stay Protocol.
- A step-by-step guide on the adherence process is
available at https://www.isda.org/a/PFjEE/How-to-
Adhere-to-2018_U.S._Resolution_Stay_Protocol.pdf
- ISDA has also published FAQs on the ISDA Stay Protocol
at https://www.isda.org/a/8FjEE/ISDA-2018-U.S.-
Protocol-FAQs-Final.pdf
How do clients comply?
- All material relevant to the ISDA Stay Protocol can be
found on ISDA’s main site at
https://www.isda.org/protocol/isda-2018-us-resolution-
stay-protocol/11
• Step 2B: ONLY FOR AGENTS/ASSET MANAGERS - Provide
Client Information on IHS Markit
- If adhering to the ISDA Stay Protocol as agent/asset
manager for some but not all clients, identify clients it is
adhering on behalf of through ISDA Amend on IHS Markit
+ ISDA and IHS Markit have developed a technology-
based solution, ISDA Amend, for agents/asset
managers to efficiently share client information with
permissioned covered entities
How do clients comply?
+ Client identification options: If adhering “on behalf
of some but not all clients” or “all funds EXCEPT,”
agent can identify a positive list of each client
adhering to the U.S. Protocol or a negative list of
clients excluded from adherence, respectively
- Step 2B is not applicable for single entity adherences or
agents/asset managers adhering “on behalf of all
clients”
How do clients comply?
• New Covered QFCs – Compliance Options
- If a new covered QFC is entered into after adherence to
the ISDA Stay Protocol or effective date of bilateral
amendment, the covered QFC will need to become
compliant through incorporation of ISDA Stay Protocol
terms (if adhered to ISDA Stay Protocol) or
incorporation of required Regulation terms (if amended
bilaterally).
Part B. Protocol and ISDA March 2013
Dodd-Frank Protocol
ISDA March 2013 Dodd-Frank Protocol (the
“2013 Protocol”)
Why a second Dodd-Frank Protocol?
• On Sept. 11, 2012, the CFTC adopted new rules relating to
swap trading relationship documentation ("STRD"),
portfolio reconciliation and confirmations. The rules
included explicit requirements for documentation
unrelated to the 2012 Protocol
• On December 13, 2012, the CFTC issued a mandatory
clearing determination for certain classes of IRS and CDS.
Mandatory clearing necessitated further documentation to
manage the implementation process. Use of the "end-user
clearing exception" also required documentation
ISDA March 2013 Dodd-Frank Protocol (the
“2013 Protocol”)
The function of the 2013 Protocol:
• The 2013 facilitates the swap dealers’ and major swap
participants’ compliance with certain swap dealer external
business conduct rules of the CFTC that were published
after the 2012 Protocol by providing a standardized way of
amending existing swap documentation to respond to
these requirements. The 2013 Protocol addresses the
requirements of the following three CFTC final rules:
ISDA March 2013 Dodd-Frank Protocol (the
“2013 Protocol”)
- 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)
2013 Protocol - Function

The function of the 2013 Protocol contd.

• The 2013 Protocol addresses the following documentation
needs arising from the March Protocol Rules:
- Provides standardized swap trading relationship
documentation to comply with law in situations where
the parties have not negotiated an ISDA Master
Agreement or similar agreement
- Provides a contractually agreed methodology for the
daily valuation of all swaps (exclusively for internal risk
management purposes of an SD or MSP) to satisfy STRD
requirements. Fills gaps in this regard that may exist in
negotiated documents (including an ISDA Credit
Support Annex)
2013 Protocol - Function

- Provides a basic agreement for conducting mandatory

portfolio reconciliations in accordance with
requirements set out in CFTC Regulation 23.502
- Provides legal agreements to establish that existing
processes to match confirmations on an electronic
platform comply with confirmation requirements in
CFTC Regulation 23.501
- Provides each participant an opportunity to
communicate its status for purposes of implementation
of mandatory clearing, and related representations and
acknowledgements
2013 Protocol - Function

- Provides an opportunity for an end-user to make a one-

time election to use the “end-user clearing exception”
for IRS and CDS designated as subject to mandatory
clearing, and to provide a SD or MSP required
information in connection with such an election
- Provides necessary notices and disclosures (including
buy-side notices of status for purposes of “orderly
liquidation authority”
2013 Protocol - Operation
Operation of the 2013 Protocol:
• The 2013 Protocol may be used to amend existing
agreements governing swaps between an SD or a major
swap participant ("MSP") and any other party, including
another SD or MSP ("Protocol Covered Agreements" or
"PCAs")
• The 2013 Protocol permits customization of bilateral
amendments in certain respects based on the information
and elections provided by a participant in its March
Questionnaire
• Parties participating in the 2013 Protocol may selectively
deliver Questionnaires to dealers with whom they are
willing to use the 2013 Protocol to supplement PCAs
2013 Protocol - Operation

• The 2013 Protocol can be used to establish a deemed 2002

ISDA Master Agreement between parties for trades not
otherwise subject to a written agreement by checking a
box in the Questionnaire (i.e., trades already subject to a
written agreement would not be covered by the “deemed”
2002 ISDA Master Agreement)
Who can participate in the 2013 Protocol?
• Any party that (i) is an SD or an MSP, or (ii) has entered
into, or wishes to enter into, a Protocol Covered
Agreement with an SD or MSP and, in either case, wishes
to incorporate the representations, covenants and
agreements contained in the 2013 Protocol into its
Protocol Covered Agreements
2013 Protocol - Operation

• A participant can be a principal or an agent acting on

behalf of one or more principal(s)
• A participant may only supplement Protocol Covered
Agreements that it has directly executed (as principal or
agent) via the 2013 Protocol
2013 Protocol - Summary

Summary of the 2013 Protocol:

• The 2013 Protocol basic architecture is similar to the 2012
Protocol. It consists of four components: (1) the adherence
letter, (2) the protocol agreement, (3) the protocol
questionnaire and (4) the DF supplement. The substantive
provisions in the 2013 Protocol 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
2013 Protocol - Summary

- Schedule 3: parties’ agreements regarding the daily

valuation of swaps for swap trading relationship
documentation purposes and related dispute
resolution procedures
- 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 2013 Protocol.
Schedules 3 and 4 are optional
• The 2013 Protocol 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
Q&A
Disclaimer

• These materials are provided by ICML Advisory and reflect information as

of 15 February 2020
• The contents are intended to provide a general guide to the subject
matter only and should not be treated as a substitute for specific advice
concerning individual situations.
• You may not copy or modify the materials or use them for any
commercial purpose without our express prior written permission.