THIS FAQ DOES NOT PURPORT AND SHOULD NOT BE CONSIDERED
TO BE A GUIDE TO OR EXPLANATION OF ALL RELEVANT ISSUES OR CONSIDERATIONS
IN CONNECTION WITH THE PROTOCOL. PARTIES SHOULD THEREFORE CONSULT WITH
THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR
TO USING THE PROTOCOL. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH
ANY OF ITS DOCUMENTATION OR ANY DEFINITION OR PROVISION CONTAINED THEREIN
MAY BE PUT.
Why is the 2001 ISDA Credit Support Protocol necessary?
The 2001 ISDA Credit Support Protocol was the product of member input following market events in 1997 and 1998, such as the Asian currency crisis and the Russian debt default. These market events necessitated a re-consideration of the credit support documentation and members determined that tightening the timeframes in the documentation, as well as streamlining the dispute resolution procedures and refining the terminology in the documentation was necessary.
For an institution to amend all affected contracts to incorporate these standard amendments would involve significant time and expense if undertaken through bilateral negotiation between all counterparties. ISDA is therefore sponsoring a multilateral amendment mechanism - the 2001 ISDA Credit Support Protocol.
Parties that have a significant number of credit support arrangements outstanding with counterparties may find the Protocol a useful means of affecting amendments to those existing arrangements. Parties may also wish to consider the use of the 2001 ISDA Margin Provisions, particularly with new counterparties. The issues addressed by the Annexes to the Protocol are consistent with the 2001 ISDA Margin Provisions.
How does the 2001 ISDA Credit Support Protocol work?
The Protocol reflects an innovative procedure that allows for the amendment of the 1994 ISDA Credit Support Annex and/or the 1995 Credit Support Annex. The Protocol builds on the simple principle that parties to such agreements may make an offer to one or more of their counterparties to amend any outstanding credit support annexes.
A bank, corporation or other derivative user would indicate its participation in the Protocol arrangement by sending an Adherence Letter (a signed original, together with a conformed copy) to ISDA’s office in London or New York. This allows the firm to specify which of five standardized amendments it wishes to make with other Protocol adherents. By submitting the Adherence Letter, the firm agrees that each outstanding 1994 ISDA Credit Support Annex and/or 1995 ISDA Credit Support Annex is amended in all areas where an election made in its Adherence Letter matches that made in an Adherence Letter submitted by one of its counterparties. The amendment and adherence process, among other matters, is set out in the Protocol itself, which is published on the Association’s web site, along with a form of the Adherence Letter.
Names of adhering parties are listed on ISDA’s web site, where there is access to scanned copies of Adherence Letters. For security reasons only the conformed copies of Adherence Letters will be displayed. Protocol adherents therefore simply monitor the web site to determine which of their counterparties have adhered and to check for matching elections.
The Protocol will be open for adherence between 1 August 2001 and 28 February 2002.
Protocol adherents may elect some or all of the standardized amendments, may send subsequent Adherence Letters covering new amendments and may specify a cut off date in respect of their own adherence. Protocol adherents may not revoke agreement with matches once they are made and may not vary the standardized clauses (except of course through direct bilateral negotiation and agreement).
Whom is the 2001 ISDA Credit Support Protocol designed for?
The Protocol is designed for all types of users of derivatives: banks, corporations, governments, investment firms, insurance companies, pension funds and other firms with credit support arrangements documented using ISDA documentation. The Protocol saves your firm money by cutting down on the time and expense involved in negotiating and agreeing to contractual changes bilaterally with all your counterparties. It provides an easy way to monitor changes through the web site. In addition, the Protocol reflects market consensus on standardized changes to ISDA documentation.
Does my firm need to do anything after sending in the Adherence Letter?
Yes! Firms still need to monitor adherence, match Adherence Letters, satisfy themselves as to signing authority and negotiate with partly matched and non-adhering counterparties where necessary. However, even with these steps and procedures, the Protocol provides for significant cost savings over bilateral negotiation.
Why is there a limited adherence period for the Protocol?
A limited adherence period is provided so that parties who need to enter into bilateral negotiations with a counterparty will be able to identify them and agree to any terms not agreed through the Protocol process.
Are all my ISDA credit support arrangements covered by the Protocol?
All credit support arrangements governed by either the 1994 ISDA Credit Support Annex or the 1995 ISDA Credit Support Annex between two adherents will be amended to the extent Adherence Letters match and to the extent that the matched amendments apply to those credit support arrangements. Parties wishing to amend the 1995 ISDA Credit Support Annex (Japanese law) or the 1995 ISDA Credit Support Deed (English law) to include similar provisions should consult their legal and other advisers to determine how best to accomplish the amendments.
Will the Protocol allow my firm to amend Credit Support Annexes executed after the date of adherence?
Because adherence to the Protocol by two parties to an ISDA Credit Support Annex amends the ISDA Credit Support Annex between them, it follows that the Protocol will only be effective in respect of ISDA Credit Support Annexes actually existing at the time the second of the parties adheres. It would not be possible to amend something which does not currently exist. However, the Annexes to the Protocol may be used in connection with a pending or unexecuted ISDA Credit Support Annex by making express reference to the Annexes to the Protocol.
What documentation should be used if a party wants to amend its Credit Support Annex bilaterally?
ISDA has developed Forms of Amendment to allow for the incorporation of the Protocol Annexes. Click here for the Forms of Amendment.
Will the Protocol be effective in respect of credit support arrangements entered into after the date of adherence?
As noted above, the Protocol procedure itself is only relevant for ISDA Credit Support Annexes existing at the time of adherence. However, where new credit support arrangements are entered into after the date of adherence pursuant to an ISDA Credit Support Annex existing at the day of adherence, those transactions will be subject to the amendment provisions contained in the Annexes to the Protocol. This is, of course, subject to any limitations contained in the Annexes.
Can only English and New York law contracts be covered by the Protocol?
Yes. The Protocol is intended to cover the 1994 ISDA Credit Support Annex (New York law) and the 1995 ISDA Credit Support Annex (English law). The 1995 ISDA Credit Support Annex (Japanese law) and the 1995 ISDA Credit Support Deed (English law) are not covered.
Can my firm modify the wording of the Protocol or the substantive clauses?
No. Any changes to the standardized wording set out in the Protocol or to the standard form Adherence Letter will be considered invalid. (Counterparties can, of course, negotiate and agree to any changes bilaterally outside the scope of the Protocol. The Protocol in no way inhibits this freedom of contract.)
Does my firm have to accept all of the Protocol provisions?
Firms do not have to accept all the standardized amendments and the Adherence Letter allows adherents to elect one or more of the amendments.
Can my firm revoke its participation in the Protocol?
Once an Adherence Letter has been accepted by ISDA, a firm is bound by all amendments elected by way of the matching procedure with counterparties which have already adhered to the Protocol or which adhere before the end of the Protocol adherence period, 28 February 2002.
However, a firm may send a further notice to ISDA, specifying an earlier cut-off date in respect of their own adherence. The effect of such a Revocation Notice will be to withdraw adherence as of the future date specified. Although amendments already made will not be revoked, any subsequent adherence by one of the firm’s counterparties will be ineffective in respect of an ISDA Credit Support Annex between them.
Is ISDA providing accompanying legal opinions on the Protocol?
ISDA’s London and New York counsel have prepared legal opinions on the effectiveness of the Protocol arrangement under English and New York law. Copies of these opinions are available here.
How can I check the signing authority of other Protocol adherents?
For security reasons, Adherence Letters on the ISDA web site will have signatures conformed into type and signing authority information will not be displayed. Any supporting documents delivered to ISDA will not be made available (except in special cases). However, should firms wish to take steps to ascertain signing authority, the posted Adherence Letter will include a contact name and details.
Can my firm get copies of supporting documents or hard copies of Adherence Letters?
Should firms wish to obtain hard copies, each Adherence Letter posted on ISDA’s web site will include a contact name and details of the person who can send them these documents. In special circumstances only (e.g., litigation), ISDA can provide certified copies of the documents held.
Can I use one Adherence Letter for all my firms’ affiliates?
No. A separate Adherence Letter should be submitted for each legal entity adhering to the Protocol. This is to ensure that all Adherence Letters are submitted in the same form and to preserve a straightforward mechanical process of administration.
What changes will the Protocol make to my ISDA Credit Support Annex?
The Protocol only amends existing Credit Support Annexes by way of the standardized provisions where Adherence Letters match. The possible areas of amendment are:
What is the relationship between the 2001 ISDA Margin Provisions and the 2001 ISDA Credit Support Protocol?
The 2001 ISDA Credit Support Protocol offers counterparties the ability to amend the 1994 ISDA Credit Support Annex (New York law) and/or the 1995 ISDA Credit Support Annex (English law) in order to take advantage of significant operational changes effected in the 2001 ISDA Margin Provisions, such as transfer timing, dispute resolution and substitutions or exchanges related to credit support. The 2001 ISDA Margin Provisions are more far-reaching than the amendments contemplated by the 2001 ISDA Credit Support Protocol, in that they offer a new architecture for credit support documentation by providing in one document an integrated set of mark-to-market operational provisions with the different legal approaches and choices of governing law available in three out of the four credit support documents (excluding the 1995 ISDA Credit Support Deed). The 2001 ISDA Margin Provisions also employ a greater use of “plain English” in the terminology, making it easier for new entrants and non-lawyers to understand the document. In addition, the 2001 ISDA Margin Provisions offer a more streamlined Supplement and several forms of notices relating to the operational provisions. The 2001 ISDA Credit Support Protocol is more limited, in the sense that parties select from a menu of annexes in order to allow them to tailor what amendments they feel are necessary to make to their existing Credit Support Annexes.
What choices do counterparties now have in documenting their credit support arrangements?
In essence, counterparties can document their credit support arrangements in one of three ways: (i) they can continue to use any of the four credit support documents: the 1994 ISDA Credit Support Annex (New York law); the 1995 ISDA Credit Support Annex (English law); the 1995 ISDA Credit Support Deed (English law); or the 1995 ISDA Credit Support Annex (Japanese law); (ii) they can submit an Adherence Letter to ISDA between 1 August 2001 and 28 February 2002, amending their existing 1994 ISDA Credit Support Annex (New York law) and/or the 1995 ISDA Credit Support Annex (English law); or (iii) they can execute the 2001 ISDA Margin Provisions with their counterparty.
Are there proposed amendments to the 1995 ISDA Credit Support Deed or the 1995 ISDA Credit Support Annex (Japanese law)?
No. ISDA's members determined that the 1995 ISDA Credit Support Deed was an infrequently used document and that amendment would not be heavily requested by the membership. It was also felt that the 1995 ISDA Credit Support Annex (Japanese law) could be addressed by use of Part 4 in the 2001 ISDA Margin Provisions.
Does the 2001 ISDA Credit Support Protocol relate to the 1998 EMU Protocol or the 1999 EMU Protocol (Greece)?
No. The 1998 EMU Protocol and the 1999 EMU Protocol (Greece) are separate and stand-alone Protocols relating to the introduction of the Euro in relation to derivatives transactions entered into under ISDA Master Agreements. The adherence periods for both of these Protocols have closed. Further information about these Protocols can be obtained on ISDA’s web site by clicking here.
Annexes in the 2001 ISDA Credit Support Protocol
What is the purpose of the Transfer Timing Annex?
Tightening the timeframes for the transfer of credit support to reduce settlement risk was one of the primary rationales behind the Transfer Timing Annex. It was also intended to bring the transfer timing of credit support more in line with related markets, such as the exchange-traded derivatives markets and the securities repurchase and stock lending markets.
What is the purpose of the Dispute Resolution Annex?
The purpose of the Dispute Resolution Annex was to tighten the timing of and improve the procedures for dispute resolution. The Dispute Resolution Annex sets forth procedures that define the responsibilities of each party to provide information to the other in the event of a dispute, the nature of that information and the timeframe in which that information must be provided. The procedures cover disputes relating to Delivery Amounts and Return Amounts and disputes relating to the Value of Transfers of credit support.
What is the purpose of the Dispute Termination Event Annex?
The Dispute Termination Event Annex defines a new term, Dispute Termination Event. If parties adhere to Annex 2 (Dispute Resolution – New York law) or Annex 7 (Dispute Resolution - English law), then they should consider whether they want to adhere to Annex 3 and Annex 8, respectively.
What is the purpose of the Substitutions (New York law) or Exchanges (English law) Annex?
The purpose of the Substitutions/Exchanges Annex was to reduce the timeframe associated with the substitution or exchange of credit support between parties.
What is the purpose of the Definitions Annex?
The Definitions Annex sets forth those defined terms which require amendment or introduction in light of amendments effected through the Transfer Timing Annex, the Dispute Resolution Annex and the Substitutions/Exchanges Annex. A party adhering to Annexes 1, 2, 4, 6, 7 and/or 9 would most likely also adhere to Annex 5 and/or Annex 10, as relevant, since defined terms in Annex 5 and Annex 10 are used in Annexes 1, 2, 4, 6, 7, and/or 9.
What is ISDA’s role in the Protocol?
ISDA acts as an agent for participating firms. It will receive Adherence Letters, update the web site and scan conformed Adherence Letters. The Association also publishes the Protocol and provides information about the arrangement.
How can my firm participate in the ISDA Protocol?
Firms can participate by downloading all necessary information from the ISDA web site and then submitting a signed Adherence Letter, as well as a conformed copy of that Adherence Letter, accompanied by the appropriate payment, to either ISDA’s London or New York office.
Are parties required to provide evidence of authority to ISDA?
No. Parties can provide evidence of authority to ISDA if they choose, but are not required to do so.
What will ISDA do with evidence of authority submitted to it?
ISDA will hold any evidence of authority in its files for safekeeping. Copies of this evidence of authority will only be provided in special circumstances, such as litigation. Parties are encouraged to contact their counterparties directly if they require such evidence for their files. Each adhering party will provide in their Adherence Letter details of a person to contact regarding such information.
How much does the Protocol cost?
There is a flat charge of $500 for adherence. Each legal entity requires a separate Adherence Letter.
How can I get a copy of the 2001 ISDA Credit Support Protocol?
Copies of the Protocol, the Adherence Letter and information about ISDA’s role and other aspects of the Protocol are available on our website here.