ISDA launched the 2014 Credit Derivatives Definitions Protocol in August and derivatives market participants have until Sept 12th to implement these ‘new definitions’. Kristin Boggiano of Schulte Roth & Zabel shares some last minute clarifications firms, especially, buy-side participants, may find useful in the run up to the deadline.
Q. Are these definitions part of Dodd Frank or EMIR?
A. There seems to be some confusion as to whether the new definitions and protocol are connected to Dodd-Frank or EMIR. They are not. The new definitions and protocol reflect market participants’ desire to update the 2003 credit derivatives definitions based upon issues that arose over the past several years. The new definitions also have nothing to do with the SEC/CFTC distinction between security-based swaps and swaps.
Q. Why is the deadline so quick?
A. The deadline is this Friday because ISDA would like to coordinate with the September Credit Default Swap (CDS) “roll date” where the new matrix will contain the 2014 definitions.
Q. What happens if my firm doesn’t implement the new protocol by September 12th?
A. If you do not sign up to the protocol by this Friday, you may always enter into the protocol bilaterally with your dealer counterparties.
Q. If I just trade swaptions do I need to consider the protocol?
A. You need to pay attention to the protocol if you trade certain single name, swaptions, and index CDS transactions. If you trade these products, signing up to the protocol may amend your existing trades.
Q. I understand there are excluded entities. What does this mean and how do I learn more?
A. There is a list of “excluded reference entities.” If you adhere to the protocol, excluded names will not move to the 2014 definitions. We have had several fund clients look through the list of excluded reference entities (which you can easily find on ISDA’s website here) and since 100% of their transactions referenced excluded entities, they didn’t need to sign up to the protocol. It’s very important to check this list daily as it is being updated by ISDA and may be amended prior to the effective date of the protocol. (Given that there are material changes impacting the protocol, parties may revoke adherence to the protocol prior to 5pm this Friday, which is the adherence deadline.)
Q. What types of swaps are excluded from the protocol?
A. Certain classes of swaps are entirely excluded from the protocol, including loan only CDS, municipal CDS and CDS on abs. It’s not expected that these products will trade with the new definitions.
Q. Some index CDS are excluded and others not? Why?
A. Index CDS may have both included and excluded reference entities, which means that some names will be on the 2003 definitions and some on the 2014 definitions.
Q. What do my traders need to be aware with the new protocol?
A. Traders need to be aware of new material economic terms going forward – there are two new credit events – the governmental intervention credit event and asset package credit event. These terms are not incorporated by the protocol to existing transactions because they would materially modify the economic terms.
Traders need to know whether their contracts are on the 2003 or 2014 if they are terminating by entering into an offsetting transaction.
For more information about the substantive changes to the 2014 definitions and the protocol, here is the SRZ alert.