ISDA Protocol: EMIR compliance and swap market agreements

ISDA Protocol:  EMIR compliance and swap market agreements

With a 15th September compliance deadline only a few weeks away, Matthew Dening of Sidley Austin LLP comments on the International Swaps and Derivatives Association’s (ISDA’s) EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol, under which parties will be able to amend the terms of their derivatives documentation.


ISDA recently launched the 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol and Reporting Guidance Note.  The Protocol is designed to allow swap market participants to simultaneously amend the terms of an agreement covered by the Protocol to reflect certain portfolio and dispute resolution obligations imposed by EU Council Regulation 648/2012 on over-the-counter derivatives, central counterparties and trade repositories (EMIR).

Why has ISDA published the Protocol?

Following the recent financial crisis, global regulators have focussed on introducing new legislation designed to reform the derivatives market. In the EU, such legislation is set out in EMIR (published in August 2012). ISDA has been assisting market participants with their new compliance obligations in the EU and elsewhere and the Protocol is the latest publication in a catalogue of such initiatives.

The Protocol enables participants in the derivatives market to address certain of the requirements under EMIR which are due to be implemented on 15 September 2013. By adhering to the Protocol, parties can reduce the number of bilateral amendments required to their derivatives documentation in order to address these requirements.

How does the Protocol work?

If both parties to an ISDA Master Agreement or other agreement covered by the Protocol adhere to the Protocol, that agreement is deemed to be amended by the inclusion of language that provides for the following:

•    an agreement between the parties as to the arrangements for the reconciliation of portfolios

•    a dispute resolution process between the parties

•    a confidentiality waiver to help parties comply with their reporting obligations under EMIR which are expected to start applying from 1 January 2014 and

•    remedies for breach of the Protocol

Portfolio Reconciliation

EMIR requires entities which it categorises as financial counterparties (FCs) and non-financial counterparties (NFCs) to agree in writing a means by which portfolios of uncleared over-the-counter (OTC) derivative contracts are to be reconciled with each of their counterparties. A party adhering to the Protocol elects to be either:

•    an entity which sends portfolio data, or

•    an entity which receives portfolio data

The elections of two adhering parties will determine the method of reconciliation which will apply to the portfolios of OTC derivative contracts between such parties. For example, if both entities elect to be data sending entities, the process for reconciliation of portfolio data between such entities will involve an exchange of information, rather than a one-way delivery. The reconciliation process must cover key trade terms and the valuation attributed to each contract. A party adhering to the Protocol can indicate that it may use a third party service provider to assist with the reconciliation.

Dispute Resolution

EMIR requires FCs and NFCs to have procedures in place with each of their counterparties to identify and resolve certain disputes relating to uncleared OTC derivative contracts. The Protocol sets out the arrangements which will apply between adhering parties as to the identification and resolution of disputes. In accordance with EMIR’s requirements, a specific process applies if the matter in dispute is not resolved within five business days.

Confidentiality Waiver

The confidentiality waiver contained in the Protocol is intended to address the fact that various legal, regulatory or other limitations could prohibit the disclosure of information that a party is required to report under EMIR’s reporting obligations. Parties adhering to the Protocol consent to a broad disclosure of information. The waiver is expressed to override any contrary agreement that may be in place between the parties.

Remedies for Breach

The Protocol expressly provides that if an adhering party fails to comply with the Protocol, such failure will not constitute an event of default or any other event which permits either party to terminate a transaction under an agreement covered by the Protocol—although this provision is without prejudice to other remedies available by law.

Should you adhere?

The Protocol, adherence to which involves a one-time fee of US$500 (payable to ISDA), will doubtless be a cost-effective way of complying with the requirements addressed by the Protocol.

Entities subject to EMIR should bear in mind that not all of the obligations under EMIR which will apply from 15 September 2013 can be addressed by way of adherence to the Protocol. For example, EMIR requires FCs to report certain outstanding disputes to their relevant national competent authority. This type of obligation cannot be addressed by way of contractual amendment and FCs will need to ensure they have the necessary procedures in place to submit these reports themselves.

There are also a number of provisions of the Protocol to which potential adherents may wish to give further consideration. For example, some parties may consider that the confidentiality waiver overrides existing confidentiality restrictions between adhering parties in a manner that goes beyond what is necessary to facilitate reporting.

What are the alternatives?

Market participants which are subject to EMIR and which do not adhere to the Protocol will need to enter into bilateral arrangements with their counterparties to address the portfolio reconciliation and dispute resolution requirements imposed by EMIR. Given that 15 September 2013 is not far away, it may be challenging to address these matters via bilateral arrangements.

This was first published as a News Analysis piece in LexisPSL Financial Services. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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