ISDA 2019 NTCE Protocol

Open from September 16, 2019

Closed on November 8, 2019

The ISDA 2019 NTCE Protocol allows parties to amend their legacy transactions to incorporate the 2019 Narrowly Tailored Credit Event Supplement to the 2014 ISDA Credit Derivatives Definitions (the “Supplement”).  The Protocol is relevant to all parties that conduct over-the-counter, uncleared, credit derivative transactions which incorporate the 2014 ISDA Credit Derivatives Definitions and in which the Reference Entity is not a Sovereign (as defined in the 2014 Definitions). If a transaction has multiple Reference Entities, some of which are Sovereigns and others that are not, the changes will only apply to the non-Sovereign Reference Entities. For those firms that solely have cleared trades, adherence to the Protocol is not required.  Please note that the anticipated Implementation Date of the Protocol is January 13, 2020, which will match the publication date of an updated physical settlement matrix to accommodate new trading incorporating the Supplement.  The CCPs will also incorporate the Supplement into cleared trades on the Implementation Date.

Please Note: The Cut-off Date for adherence to this Protocol has been further extended to Friday, November 8, 2019 at 12 noon. The Cut-off Time for purposes of revoking adherence remains 5:00 p.m. New York time. The Implementation Date remains January 13, 2020.

Please find a link here to a webinar regarding the Protocol that was presented on September 16, 2019.  A link to the audio only version may be found here and you may download the slides to the presentation here.

**IMPORTANT UPDATE on the ISDA 2019 NTCE Protocol:** This protocol is now closed as of 12 pm, New York time, on Friday, November 8, 2019, and per the terms of the amended protocol agreement you are no longer able to submit an adherence letter for this protocol. ISDA has determined that nine Reference Banks have adhered to the Protocol as at 5pm New York time on Friday, November 8, 2019, and therefore the Protocol Effectiveness Condition is satisfied.

ISDA 2019 NTCE Protocol

Open from September 16, 2019 to October 28, 2019

ISDA has prepared this list of frequently asked questions to assist in your consideration of the ISDA 2019 NTCE Protocol (the Protocol).

Please Note: The Cut-off Date for adherence to this Protocol has been extended to Monday, October 28, 2019. The Cut-off Time remains 5:00 p.m., New York time. The Implementation Date remains January 13, 2020

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

GENERAL QUESTIONS

  1. Why was the Protocol created?

The Protocol is relevant to all parties that enter into uncleared credit derivatives transactions which incorporate the 2014 ISDA Credit Derivatives Definitions.  Please note that firms with only cleared credit derivative transactions do not need to adhere to this Protocol (details below).

In April 2018, ISDA published a statement from its Board of Directors noting “press reports of instances of credit default swap (CDS) market participants entering into arrangements with corporations that are narrowly tailored to trigger a credit event for CDS contracts while minimizing the impact on the corporation, in order to increase payment to the buyers of CDS protection.” The ISDA Board of Directors was of the view that “narrowly tailored defaults […] could negatively impact the efficiency, reliability and fairness of the overall CDS market.”

The U.S. Commodity Futures Trading Commission Divisions of Clearing and Risk, Market Oversight, and Swap Dealer and Intermediary Oversight also published a statement that the “CDS market functions based on the premise that firms referenced in CDS contracts seek to avoid defaults, and as a result, the instruments are priced based on the financial health of the reference entity. However, recent arrangements appear to involve intentional, or ‘manufactured,’ credit events that could call that premise into question”. Similarly, the UK Financial Conduct Authority published a statement that “‘manufactured’, events […] can severely harm confidence and trust in the credit derivatives market”.

On July 15, 2019, ISDA published the 2019 Narrowly Tailored Credit Event Supplement to the 2014 ISDA Credit Derivatives Definitions (the “Supplement”) to address the impact of narrowly tailored credit events (“NTCEs”). The Supplement implements two sets of changes that were the subject of previous public consultations (available here and here). The Supplement will be incorporated for new trades on corporate and financial Reference Entities by updating the ISDA Credit Derivatives Physical Settlement Matrix.  The Supplement will not apply to transactions which reference sovereign Reference Entities.

The purpose of the Protocol is to incorporate the terms of the Supplement for legacy uncleared in-scope single name and index transactions to match the new trading standard.  Please note:  The new trading standard shall take effect on the same date that the terms of the Supplement apply to the legacy in-scope transactions (the Implementation Date, as defined below) and the CCPs implement the new terms for cleared trades (more information below).

  1. What are the requirements for the Protocol to apply to a Transaction?

The Protocol only applies to Protocol Covered Transactions and Protocol Covered Agreements, which encompass transactions or master confirmation agreements that incorporate the 2014 Definitions and in which the Reference Entity is not a Sovereign (as defined in the 2014 Definitions). If a transaction has multiple Reference Entities, some of which are Sovereigns and others that are not, the changes will only apply to the non-Sovereign Reference Entities.

The Protocol will not apply to transactions documented using the 2003 ISDA Credit Derivatives Definitions.

  1. What does the Protocol do?

As noted above, the purpose of the Protocol is to incorporate the terms of the Supplement for legacy in-scope single name and index transactions to match the new trading standard, which will incorporate the terms of the Supplement.

The Protocol therefore amends the documentation for in-scope transactions to incorporate the Supplement and to make “Fallback Discounting” and “Credit Deterioration Requirement” applicable for such transactions.

  1. How are cleared transactions affected by the Protocol?

For those firms that solely have cleared trades, adherence to the Protocol is not required.  CCPs are expected to reflect the Protocol changes to the transactions they clear by an amendment to their clearing rules. The CCPs will make their rule changes pursuant to their individual rule change approval processes, and the final implementation date will be aligned so that the changes will go into effect for trades cleared at different CCPs and for uncleared trades at the same time. For further details on an individual CCP’s process, please contact the relevant CCP.

  1. What is the timeline for implementation?

The (i) implementation of the Supplement for legacy uncleared transactions, (ii) the implementation of the CCP rule changes for cleared transactions incorporating the terms of the Supplement and (iii) the implementation of the new trading standard, will all be scheduled for the same day, the Implementation Date (as defined in the Protocol).  The Implementation Date is currently January 13 2020.  The Protocol provides ISDA with the authority to change the Implementation Date upon notice if ISDA determines that it is reasonably necessary to effect the intentions of the Protocol.  This ensures that ISDA can align the incorporation of the Supplement for legacy uncleared transactions with the incorporation of the Supplement (by way of CCP rule changes) into cleared transactions, in the event regulatory approval or other operational factors are delayed.  In the unlikely event regulatory approval is not given to a CCP, ISDA also has the authority to reopen the revocation period for the Protocol.

ADHERENCE PROCESS QUESTIONS

  1. Is there a closing date for adherence to the Protocol?

Yes. The cut-off date for adherence to this Protocol has been extended to October 28, 2019.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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 Agreement, using a single Adherence Letter, would only pay a single adherence fee for that Adherence Letter.

  1. 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 cut-off date (October 14, 2019). Although the cut-off date can be 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.

  1.       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.

  1. What is an LEI number or Pre-LEI?

An LEI number or 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.

SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS

  1. 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.