What is happening to ISDA documentation?

What is happening to ISDA documentation?

Aron BerketDirk-Jan GerritsRezah Stegeman

FMLUS - 17 May 2018

17 May 2018. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.© Simmons & Simmons LLP

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Programme

1. Recent developments1. Benchmarks2. Settled-to-market3. MiFID24. VM Requirements – FX Forwards

2. Upcoming developments1. Extended moratorium periods2. Phase 4/5 IM documentation

3. Brexit1. Impact on trading relationships2. Impact on the law governing ISDA documentation

Recent developments


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Which Document?

Impact?

What will be changed?

Benchmarks

2006 ISDA Definitions

Fallback Supplement (new)

Fallbacks already exist in Definitions

Strengthening via a voluntary supplement to Definitions

Identified fallbacks for IBOR trades will be incorporated intoDefinitions, spelling out alternative rates (RFRs + spread)

Only applicable to trades after 1 Jan 2018

A number of fallbacks

Final fallback: If no replacement, then no fault termination

Protocol? Parties to agree on certain optionalities?


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Which Document?

Impact?


Settled-to-market

ISDA/FOA Client Cleared OTC Derivatives Addendum

Switch from Collateralised-to-market -> Settled-to-market

Daily settlement rather than collateralisation

Results in reduction of assets

Economically no difference

Beneficial impact on leverage ratio of clearing brokers

Pricing benefit?

Amendment to agreement


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Which Document?

Impact?

What has changed?

MiFID2 impact on clearing documentation

Clearing broker documentation (e.g. ISDA/FIA Addendum)

Execution broker documentation (e.g. ISDA/FIA CDEA)

MiFID2/MiFIR

RTSs 2017/589 (RTS 6), 2017/582 (RTS 26) and 2017/2155 (indirect clearing)

2017 CDEA and ISDA/FIA Model Provisions– Annual performance review– Agreement on limits– Indirect clearing– Straight-through-processing

– OTC or ETD


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Which Document?

Impact?

What has / will be changed?

VM Requirements – FX Forwards

1995/2016 English law Credit Support Annex (CSA)

BCBS-IOSCO UMR Rules

EMIR Margin RTS

EMIR Refit

Physically settled FX Forwards will (potentially) not be subject to the EMIR VM requirements– Where neither counterparty is an investment firm

FX Swaps remain subject to UMR

Position AFM and DNB?

Upcoming developments


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Which Document?

Impact?


Commission reforms extend moratorium periods

ISDA Master Agreement

ISDA Resolution Stay Protocols

Pre resolution moratorium vs In resolution moratorium

Suspension period of 5 working days

CCP’s and compensation schemes not to be affected

Unclear suspension of payment obligations

Mismatch in relation to cleared transactions

Potential consequences for netting arrangements


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Which Document?

Impact?


Next Generation of ISDA Regulatory Initial Margin Documentation

ISDA Credit Support Documentation

Account Control Agreement

Additional Security Documents

Implementation EMIR Initial Margin Requirements for Phase 4 and Phase 5 are imminent (September 2019/2020)

Credit Support Documentation to be aligned with needs of Phase 4 and Phase 5 entities

Variety of additional credit support documentation

(Possibly) extensive negotiations

Issues under international private law


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IM Documentation Architecture

Phase I IM (English law / UK law) Phase IV/V IM (applicable law)

Security Agreement

Next Gen Collateral Transfer Agreement


Custody Agreement

Belgium / Luxembourg Security Agreement

ICSD Collateral Transfer Agreement

Membership Documents


Phase 1 IM CSA/CSD

Other custodians Other custodiansEuroclear/Clearstream

Brexit


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Which Document?

Impact?


Brexit impact on trading relationships

All (ISDA Master Agreement, Novation Agreement, ISDA 2016 VM CSA, CDEA and clearing agreement)

Novation agreement (added)

If crossborder licence for brokers, not much

If non-recognition of UK CCPs, create access to EU CCPs

If broker uses EU hub, relationship to be continued undernew documentation (+ possibly novation)

If broker uses EU hub and legacy trades;– remain in UK, split book (lack of netting)– novated to EU hub, converted to new trades that are

subject to 2016 VM CSA

(re)negotiation of all agreements if dealings with new EU hub


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Which Document?

Impact?


Brexit – governing law of the ISDA Master Agreement

ISDA Master Agreement (English law)

ISDA Credit Support Annex (English law)

EU regulation may no longer be applicable, e.g.:– Brussels I (Recast) – Rome I– BRRD

Enforceability of foreign judgements and interventionmeasures require amendments to the ISDA Master Agreement

ISDA prepares French and Irisch law governed ISDA Master Agreements as an alternative

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Questions?


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