The Protocol is relevant for parties that entered into credit derivatives transactions referencing German banks. On July 21, 2018, a change in German law allowed German banks to issue two types of senior unsecured debt obligations – senior preferred and senior non-preferred. On November 26, 2018, the ISDA Credit Steering Committee issued a statement regarding changes to the documentation practice for credit default swap transactions referencing German banks to allow for trading of CDS on both senior preferred and senior non-preferred terms. The Protocol amends legacy transactions referencing certain German banks to apply these new documentation terms to ensure fungibility with new transactions.
Specifically, the Protocol changes the Transaction Type from “Standard European Financial Corporate” to “Standard European Senior Non Preferred Financial Corporate” or “European Financial Corporate” to “European Senior Non Preferred Financial corporate” and replaces any reference to a Credit Derivatives Physical Settlement Matrix published prior to December 8, 2017 with the Credit Derivatives Physical Settlement Matrix published on December 8, 2017 for relevant transactions.
Please refer to the “Frequently Asked Questions” below for more information on the background and substance of the Protocol. Adherence to the Protocol is open to ISDA members and non-members. Parties will pay a one-time fee of $500 to ISDA for each adherence to the Protocol.
Please Note: The Cut-off Date for adherence to this Protocol was extended to Friday, April 26, 2019. The Cut-off Time remains 5:00 p.m., New York time. The Implementation Date is now May 11, 2019.
**IMPORTANT UPDATE on the ISDA 2019 German Bank CDS Protocol:** This protocol is now closed as of 5 pm, New York time, on Friday, April 26, 2019, and per the terms of the protocol agreement you are no longer able to submit an adherence letter for this protocol. ISDA has determined that ten Reference Banks have adhered to the Protocol as at 5pm New York time on Friday, April 26, 2019, and therefore the Protocol Effectiveness Condition is satisfied.
On February 15, 2019, ISDA held a webinar to explain the Protocol. Links to the webinar material are below.
ISDA 2019 German Bank CDS Protocol
Open from February 6, 2019 to April 26, 2019
ISDA has prepared this list of frequently asked questions to assist in your consideration of the ISDA 2019 German Bank CDS Protocol (the Protocol).
THESE FREQUENTLY ASKED QUESTIONS DO 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 PROTOCOL. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING OR ADHERING TO THE PROTOCOL. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH ANY OF ITS DOCUMENTATION OR OTHER DOCUMENTATION MAY BE PUT.
These frequently asked questions are divided into the following two sections:
- GENERAL QUESTIONS
- ADHERENCE PROCESS QUESTIONS
- Why was the Protocol created?
The Protocol is relevant for parties that entered into credit derivatives transactions referencing certain German banks and including any index transactions that reference such German banks, such as the iTraxxTM.Europe index.
In 2015, by statute Germany made all senior bank debt subject to loss absorption, making such debt equivalent to senior non-preferred debt issued by banks in other EU jurisdictions. For a period of time there was no framework for the issuance of senior preferred debt by German banks. On July 21, 2018, a change in law allowed German banks to issue two types of senior unsecured debt obligations – senior preferred and senior non-preferred. This is similar to the position in certain other EU countries (e.g., under French law for French banks).
The ISDA Credit Steering Committee proposed that the trading convention for single-name and index CDS referencing a German bank at the senior non-preferred level and documented under the 2014 ISDA Credit Derivatives Definitions (the “2014 Definitions”) should use the “Standard European Senior Non Preferred Financial Corporate” Transaction Type. The “Standard European Senior Non Preferred Financial Corporate” Transaction Type applies the Additional Provisions for Senior Non-Preferred Reference Obligations (published on December 8, 2017) (the “Supplement”).
The Supplement expressly envisages that a Standard Reference Obligation may have one of three levels of seniority (Senior, Senior Non-Preferred and Subordinated). The ISDA Credit Steering Committee proposal was intended to facilitate the trading of CDS linked to German bank Reference Entities at both the senior preferred and senior non-preferred levels.
The EMEA Credit Derivatives Determinations Committee (the “DC”) has considered the treatment of certain legacy market standard senior CDS transactions incorporating the 2014 Definitions and referencing a German bank Reference Entity. Subject to certain exceptions, the DC has determined that such transactions are to be treated as senior non-preferred CDS transactions.
The purpose of the Protocol is to ensure that the documentation for legacy in-scope single name and index transactions expressly states that such transactions are senior non-preferred and reflects the new trading convention proposed by the ISDA Credit Steering Committee.
- What are the requirements for the Protocol to apply to a Transaction?
The Protocol only applies to Protocol Covered Transactions. A Protocol Covered Transaction must reference a German bank Reference Entity that falls within the scope of Schedule 3 of the Protocol (such entities, a “Covered Entity”).
In addition, to qualify as a Protocol Covered Transaction, the documentation relating to a transaction must, inter alia,:
- Incorporate the 2014 Definitions;
- Specify either the “Standard European Financial Corporate” or the “European Financial Corporate” as the Transaction Type for the relevant Covered Entity;
- Either (i) specify “Standard Reference Obligation” as applicable and the Seniority Level is not specified as “Subordinated” for the relevant Covered Entity or (ii) specify a Reference Obligation for the relevant Covered Entity that was (1) issued prior to July 21, 2018 and upon issue such Reference Obligation was a senior unsecured debt obligation or (2) issued on or after July 21, 2018 and upon issue such Reference Obligation was a senior non-preferred debt obligation.
- What does the Protocol do?
As noted above, the purpose of the Protocol is to harmonise the documentation applicable to in-scope legacy transactions referencing German bank Reference Entities with the new trading convention proposed by the ISDA Credit Steering Committee.
Therefore, the Protocol changes the Transaction Type for a Covered Entity in a Protocol Covered Transaction from “Standard European Financial Corporate” to “Standard European Senior Non Preferred Financial Corporate” or from “European Financial Corporate” to “European Senior Non Preferred Financial Corporate” (as applicable).
To the extent that a Protocol Covered Transaction incorporates a version of the Credit Derivatives Physical Settlement Matrix that pre-dates the Supplement, the Protocol deems the version of the Credit Derivatives Physical Settlement Matrix published on December 8, 2017 to apply (as such version includes the updated Transaction Types).
- Will transactions in respect of Reference Entities that do not have Standard Reference Obligations be covered?
Any transaction in respect of a Reference Entity that is a Covered Entity and in respect of which “Standard Reference Obligation” is specified as applicable for such Covered Entity and the Seniority Level is not specified as “Subordinated” will be within the scope of the Protocol (assuming the transaction otherwise meets the requirements of the Protocol).
However, where a Protocol Covered Transaction references a Covered Reference Entity and such transaction has no Reference Obligation or Prior Reference Obligation as (i) no Standard Reference Obligation has been selected for such Covered Entity; and (ii) the parties did not select an alternative Non-Standard Reference Obligation, then such transaction will be excluded from the Protocol.
- Where can I find a list of the German banks Reference Entities to which the Protocol may be relevant?
Schedule 3 of the Protocol sets out the list of the German bank Reference Entities within the scope of the Protocol. The list can also be found here. If a transaction otherwise meets the requirements of the Protocol and references one of the Reference Entities in Schedule 3, then the amendments set out in the Protocol will apply.
- How are cleared transactions affected by the Protocol?
It is not anticipated that all CCPs will adhere to the Protocol. Those CCPs that do not adhere are expected to reflect the Protocol changes by operationally updating all impacted transactions if the market adopts the Protocol.
If a CCP adheres to the Protocol, any transactions between its clearing members and that CCP will be amended and clients of those clearing members will need to adhere to the Protocol to ensure their trades are properly documented.
For details, please contact the relevant CCP.
ADHERENCE PROCESS QUESTIONS
- Is there a closing date for adherence to the Protocol?
Yes. The original cut-off date for adherence to this Protocol was February 27, 2019. The deadline has been extended to April 26, 2019.
- How do I submit my Adherence Letter?
Each entity executing an Adherence Letter will access the Protocol Management section of the ISDA website at www.isda.org to enter information online that is required to generate its form of Adherence Letter. Either by directly downloading the populated Adherence Letter from the Protocol Management system or upon receipt via e-mail of the populated Adherence Letter, the entity must print, sign and upload the signed Adherence Letter as a PDF (portable document format) attachment into the Protocol Management system. Once the signed Adherence Letter has been approved and accepted by ISDA, the Protocol adherent will receive an e-mail confirmation of the Protocol adherent’s adherence to the Protocol.
ISDA keeps the executed copy of the Adherence Letter for its files and does not share the executed copy with anyone else. Please do not send your original Adherence Letter(s) by mail to ISDA.
- Can entities that are not ISDA members sign up to the Protocol?
Yes. The Protocol is open to any entity. ISDA members and non-ISDA members alike adhere to the Protocol in the same way.
- What is a conformed copy?
A conformed copy of the Adherence Letter means that the name of the authorized signatory (for example, Patricia Smith) is typed rather than having Patricia Smith’s actual signature on the letter. ISDA only posts on its website the conformed copy of all Adherence Letters. A conformed copy of each Adherence Letter containing, in place of each signature, the printed or typewritten name of each signatory will be published by ISDA so that it may be viewed by all Protocol Participants.
- Who is an authorized signatory?
An authorized signatory to the Adherence Letter is an individual who has the legal authority to bind the adhering institution.
- Can I change the text of the Adherence Letter?
No. The Adherence Letter must be in the same format as the form of letter published in the Protocol and generated by the Protocol Management webpage.
- Are there any costs to adhere to the Protocol?
Yes. Each party adhering to the Protocol must submit a one-time fee of U.S. $500 to ISDA at or before the submission of its Adherence Letter. Adhering Parties should review the documents to be amended to identify the entity that signed the documents, and the capacity in which such entity signed the documents, to determine which entity submits the Adherence Letter. For example, if a parent company/agent has signed the agreement on behalf of all entities within the group, then only the parent company/agent needs to adhere. However, if each group entity has its own agreement in place which it has itself executed as principal, then each such entity would need to adhere.
Each individual legal entity is considered a separate Adhering Party for this purpose and would need to pay the adherence fee, except that an Investment/Asset Manager/Agent that adheres on behalf of one or more underlying funds or principals for whom it has entered into a Protocol Covered Collateral Agreement, using a single Adherence Letter, would only pay a single adherence fee for that Adherence Letter.
- Can I revoke my participation in the Protocol?
Yes. Parties have the right to revoke their adherence by submitting a written revocation notice in the form set out in the Protocol. Any revocation notice must be submitted by the new cut-off date (Friday, April 26, 2019). Although the cut-off date can be further extended in certain circumstances set out in the Protocol, if the cut-off date is not extended, it will not be possible to revoke adherence after that date.
- Do I need to enter a Legal Entity Identifier (LEI)?
Yes, you must enter an LEI number to adhere to this protocol. An LEI number must be in the correct format (20 alphanumeric characters A-Z/0-9). If we cannot verify the LEI number you do have the option to continue with your adherence by clicking the “Proceed with unverified Pre-LEI/LEI” checkbox.
- What is an LEI number or Pre-LEI?
An LEI number Pre-LEI is a Legal Entity Identifier ("LEI") that should correspond directly to the True/Legal Name of the adhering entity. LEIs are issued by “Local Operating Units” (LOUs) of the Global LEI System.
- Do I need to enter a DTCC Account Number?
This is an optional field, however market participants are strongly encouraged to enter this number(s) for reconciliation purposes for each adhering entity. So if you are listing several funds, you should provide a DTCC number in the field provided for each fund. If you don’t know your DTCC Participant Account(s) there are a few options on obtaining this information. You can receive this information by contacting your Super Access Coordinator within your firm or you can email DerivSERV Operations at DerivSERV_Operations@dtcc.com.
SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS
- What if I am an investment or asset manager, and not all of my discretionary management agreements permit me to amend my client’s agreements?
If you are an investment or asset manager and act on behalf of multiple funds (each referred to here as a “client”), you may sign the Adherence Letter using one of the options below.
If you have authority to adhere on behalf of all of your clients but do not wish to identify them on the Adherence Letter, you may do so by selecting “Investment/Asset Manager/or other agent on behalf of a fund/multiple funds/or other principal” from the dropdown under “Adherence Type” and naming the Investment/Asset Manager/Agent. Standard language “acting on behalf of the funds, accounts or other principals listed in the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) and another Adhering Party” will be provided for you.
If you do not have authority from all your clients (or do have authority from all your clients and wish to identify them), you can adhere on behalf of those clients whose permission you have by selecting “Investment/Asset Manager/or other agent on behalf of some but not all funds/or other principal it represents” and naming the Investment/Asset Manager/Agent. Standard language “acting on behalf of the funds, accounts or other principals listed in the appendix to this Adherence Letter in relation to the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) on behalf of such fund, account or other principal and another Adhering Party” will be provided for you. You must then list the fund name(s) by either naming each in the field provided (“Name of Fund”) or selecting “Add more than 10 funds” and downloading a list of these funds.
The appendix to your Adherence Letter can either name the clients, or identify them with a unique identifier which will be known and recognized by all other Adhering Parties with which the relevant clients have entered into transactions. The appendix to your letter will be posted on the ISDA website with your Adherence Letter listing the clients or, if you have more than ten clients, we will add a link to a document listing these clients.
If you are using the second method above, any agreements or transactions which you enter into on behalf of clients that are not listed in your Adherence Letter(s) will not be covered by the Protocol. If you wish to implement the changes contained in the Protocol in those agreements or transactions, then you and the relevant counterparty would need to enter into a bilateral agreement to amend those Protocol Covered Agreements to include those changes.
If (a) you do not have authority from any of your clients or (b) you have authority from some clients only but you are not able to disclose such clients whether by name or a unique identifier, you cannot adhere to the Protocol on behalf of any such clients. In this case, you will need to enter into a bilateral amendment agreement with each relevant counterparty listing the clients whose agreements or transactions with that counterparty will be amended by incorporating the amendments made by the Protocol.
If you wish to adhere on behalf of clients, you must ensure that you have the authority to do so from all clients on whose behalf you enter into transactions covered by the Protocol.