IQ3 Group - ISDA August 2012 DF Protocol

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Implementing
Dodd-Frank Title VII
The Dodd-Frank Act has broad and deep implications that will touch
every corner of finance. Title VII impacts the OTC derivatives market.
This presentation provides an overview of ISDA‘s DF Protocol and a
proposal for rapid delivery of the DF Protocol effort using Scrum.

Copyright © 2012 – IQ3 Solutions Group – All rights reserved.

…………………….……..........

Dodd-Frank Act
ISDA August 2012 DF Protocol

Change is the only constant...


Swaps Regulation
• As a result of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, the CFTC will write rules to regulate the swaps marketplace. The CFTC
has identified 38 areas where rules are necessary.
• The Dodd-Frank Act also contains more than 90 provisions that require
SEC rulemaking, and dozens of other provisions that give the SEC
discretionary rulemaking authority. To date, the SEC has put in place a
framework that will support a new regulatory regime designed to bring
greater transparency and access to the securities-based swaps market.
• The ISDA August 2012 D-F Protocol (the ―DF Protocol‖) is part of ISDA‘s
Dodd-Frank Documentation Initiative aimed at assisting the industry in
implementing and complying with the regulatory requirements imposed
under Title VII of the Dodd–Frank Act.
• In order to facilitate implementation of Dodd-Frank, ISDA plans to launch
future Protocols to simplify documentation changes for upcoming CFTC and
SEC final rules, as well as changes under EMIR, MiFiD and MiFIR.


ISDA’s DF Protocol
• The DF Protocol is designed to allow swap market participants to amend
their ISDA Master Agreements to facilitate compliance with the CFTC‘s
Dodd-Frank regulatory requirements.
• The DF Protocol is intended to facilitate industry compliance with seven final
rulemakings by allowing market participants to:
– (i) supplement the terms of existing master agreements under which parties may
execute Swaps, or
– (ii) enter into an agreement to apply selected Dodd-Frank compliance provisions
to their trading relationship in respect of Swaps.
• The DF Protocol adds notices, representations and covenants responsive to
Dodd-Frank requirements that must be satisfied at or prior to the time that
Swap transactions are offered and executed.
• Also, the DF Protocol includes additional bilateral delivery
requirements, including a Questionnaire, to facilitate compliance with ―know
your counterparty‖ information requirements under Dodd-Frank.


CFTC Covered Rules
• The DF Protocol is intended to address the requirements of the following
final CFTC rules (Covered Rules) including the external business conduct
rule (―EBC Rule‖) [See 77 FR 9734 – 9835]:
– External Business Conduct Standards for Swap Dealers (SDs) and Major Swap
Participants (MSPs)
– Large Trader Reporting for Physical Commodity Swaps
– Position Limits for Futures and Swaps
– Real-Time Public Reporting of Swap Transaction Data
– Swap Data Recordkeeping and Reporting Requirements
– SD and MSP Recordkeeping, Reporting and Duties Rules; Futures Commission
Merchant (FCM) and Introducing Broker (IB) Conflicts of Interest Rules, and
Chief Compliance Officer Rules for SDs, MSPs, and FCMs
– Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and
Transition Swaps


EBC Compliance
• On August 27, 2012, the CFTC published final rules for Confirmation,
Portfolio Reconciliation, Portfolio Compression, and Swap Trading
Relationship Documentation Requirements for Swap Dealers and Major
Swap Participants. Section III.C of that rule extends the compliance date
for the following EBC Rule provisions until January 1, 2013:
– 23.402(b) ―Know your counterparty‖ requirements
– 23.410(c) ―Confidential treatment of counterparty information‖
– 23.430 ―Verification of counterparty eligibility‖
– 23.431 ―Disclosures of material information‖ including ―Scenario Analysis‖
[23.431(a),(b), and (c)]
– 23.432 ―Clearing disclosures‖
– 23.434 ―Recommendations to counterparties—institutional suitability‖
[23.434(a)(2),(b), and (c)]
– 23.440 Requirements for SDs acting as advisors to Special Entities‖
– 23.450 ―Requirements for SDs and MSPs acting as counterparties to
Special Entities‖


Process / Architecture
• Swap dealers need to capture/integrate Questionnaire information provided
by counterparties into their systems prior to trading with that counterparty.
• Counterparties should therefore adhere to the DF Protocol at their earliest
convenience and work towards providing the Questionnaire to their dealer
counterparties as soon as possible thereafter (either by the ISDA Amend
solution or by another means as designated by their dealer counterparty).
• The basic architecture of the DF Protocol consists of four documents:
– (I) an Adherence Letter
– (II) the Questionnaire
– (III) the Protocol Agreement
– (IV) the DF Supplement
• In addition, a fifth document, the DF Terms Agreement extends to situations
in which parties may wish to transact in swaps without the benefit of having
a pre-executed master agreement between them.


Document #1: Adherence Letter

• The Adherence Letter must be signed and submitted by each party agreeing to the
terms of the Protocol Agreement in order to participate in the Protocol.*
– Adhering parties must include name, address, and other non-sensitive data.
– Each adhering party must specify the address (electronic or otherwise) and means by which
party will receive Questionnaires as a Protocol Participant from other Protocol Participants.
• Letter is uploaded and available for public view, like prior ISDA adherence letters.
– Submit Adherence Letter
http://www2.isda.org/functional-areas/protocol-management/submit-adherence-letter/
– Adhering Parties
http://www2.isda.org/functional-areas/protocol-management/protocol-adherence/8
– Check Letter Status
http://www2.isda.org/functional-areas/protocol-management/protocol-step3/

*Market participants who have previously adhered to an ISDA protocol are familiar with doing so using a process
that involves submitting signed and conformed copies of an adherence letter to a designated email address.
A new process was established in August 2012, when ISDA, in an effort to provide a more streamlined and efficient
process, developed a technical solution to further automate the adherence process. The adhering party still needs
to provide an adherence letter signed by an authorized signatory in order to validate the adherence, but the new
process is online and allows the adhering party to monitor the status from the submission to the approval.

Document #2: Protocol Agreement

• Establishes an agreed process for amending agreements that govern the terms and
conditions of one or more transactions in swaps and/or entering into a ―DF Terms
Agreement‖. Each such agreement is defined as a ―Protocol Covered Agreement.‖
• Defines ―PCA Principal‖ as a party who is or may become a principal to one or more
swaps under a Protocol Covered Agreement, and ―PCA Agent‖ as a party who has
executed a Protocol Covered Agreement as an agent on behalf of PCA Agent(s).
• Specifies that a person may participate in the DF Protocol as a PCA Principal or PCA
Agent (or both), but that only a party that executed an existing Protocol Covered
Agreement may use the Protocol to supplement that Protocol Covered Agreement.
• Each PCA Principal and PCA Agent directly participating in the Protocol through
execution of an Adherence Letter is provided the ability to supplement Protocol
Covered Agreements by completing one or more Questionnaires.
• Provides that Protocol Participants that exchange Questionnaires in the manner
proscribed supplement the Protocol Covered Agreements for swaps between PCA
Principals named in such Questionnaires by incorporating Schedules 1 and 2 from
the DF Supplement. Additional schedules of the DF Supplement are incorporated
only if both of the relevant PCA Principals have elected to do so.
• The Protocol Agreement also includes provisions designed to work with the DF
Supplement by establishing that information delivered by a Questionnaire is
considered ―DF Supplement Information‖ for purposes of the DF Supplement.


Document #3: Questionnaire

• The basic document used by Protocol Participants to supplement Protocol Covered
Agreements. Protocol Participants may complete and exchange Questionnaires to
supplement their mutual Protocol Covered Agreements.
• Provides for the delivery of required information about a Protocol Participant (or in the
case of a Questionnaire delivered by a PCA Agent, its PCA Principals) to counterparties.
– Questionnaire includes representations as to the legal status of the relevant PCA Principal(s)
(e.g., eligible contract participant, swap dealer, major swap participant, special entity, etc.).
– A PCA Agent who has an existing ―umbrella‖ agreement with a swap dealer for multiple
underlying clients may complete and deliver Questionnaire(s) on behalf of such clients.
• The Questionnaire allows a PCA Principal to make various elections under the DF
Supplement, including DF Schedules supplementing its Protocol Covered Agreements.
• A Protocol Participant is permitted to complete more than one Questionnaire so that it
may deliver different Questionnaires to different counterparties under the Protocol.
• A Protocol Participant completing the Questionnaire online through ISDA Amend will
have the ability to deliver the Questionnaire through ISDA Amend exclusively to other
Protocol Participants that it has specifically approved.


Document #4: DF Supplement
Document #5: Terms Agreement

• The DF Supplement sets forth certain standardized representations,
acknowledgments, notifications and agreements relating to Covered Rules.
– Representations and covenants are set forth in various ―DF Schedules.‖
– DF Schedules 1 and 2 are automatically incorporated into Protocol Covered Agreements
through the exchange of Questionnaires. However, certain sections of Schedule 2 are only
applicable to certain types of counterparty pairs based on representations they have made to
each other in their Questionnaires.
– DF Schedules 3-6 are optional and applicable only if both PCA Principals with respect to a
pair of exchanged Questionnaires have elected to apply them.
• The DF Terms Agreement serves the limited purpose of allowing parties to apply
selected provisions of the DF Supplement to their trading relationship in respect of
swaps, irrespective of whether or not such relationship is governed by an existing
written agreement. The DF Terms Agreement is a ―bare-bones‖ agreement that:
– (i) sets forth its intended scope;
– (ii) provides that the parties thereto automatically agree to incorporate DF Schedules 1 and 2
into such agreement;
– (iii) allows the parties thereto to elect to incorporate DF Schedules 3 through 6; and
– (iv) includes basic representations, governing law, address for notices and other basic
contract provisions.

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Dodd-Frank Act
Supplemental Information

Vision builds motivation...


Dodd-Frank Titles
• The Dodd-Frank Wall Street Reform and Consumer Protection Act was
signed into law on July 21, 2010. It contains 848 pages and sixteen titles:
– Title I: Financial Stability
– Title II: Orderly Liquidation Authority
– Title III: Transfer of Powers to the Comptroller of the Currency, the FDIC, and the FRB
– Title IV: Regulation of Advisers to Hedge Funds and Others
– Title V: Insurance
– Title VI: Improvements to Regulation of Bank Holding Company and Depository Institutions
– Title VII: Wall Street Transparency and Accountability
– Title VIII: Payment, Clearing, and Settlement Supervision
– Title IX: Investor Protections and Improvements to the Regulation of Securities
– Title X: Bureau of Consumer Financial Protection
– Title XI: Federal Reserve System Provisions
– Title: XII: Improving Access to Mainstream Financial Institutions
– Title XIII: Pay It Back Act
– Title XIV: Mortgage Reform and Anti-Predatory Lending Act
– Title XV: Miscellaneous Provisions
– Title XVI: Section 1256 Contracts


Key CFTC Final Rules
• CFTC, Final Rule, Business Conduct Standards for Swap Dealers and Major Swap Participants
With Counterparties, 77 Fed. Reg. 9734 (Feb. 17, 2012);
• CFTC, Final Rule, Large Trader Reporting for Physical Commodity Swaps, 76 Fed. Reg. 43851
(July 22, 2011);
• CFTC, Final Rule, Position Limits for Futures and Swaps, 76 Fed. Reg. 71626 (Nov. 18, 2011);
• CFTC, Final Rule, Real-Time Public Reporting of Swap Transaction Data, 77 Fed. Reg. 1182
(Jan. 9, 2012);
• CFTC, Final Rule, Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136
(Jan. 13, 2012);
• CFTC, Final Rule, Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and
Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules;
and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 Fed. Reg. 20128 (Apr. 3, 2012); and
• CFTC, Final Rule, Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and
Transition Swaps, 77 Fed. Reg. 35200 (June 12, 2012).


Disclaimer
• IQ3 SOLUTIONS GROUP DOES NOT GIVE LEGAL OPINIONS
• The decision flow charts herein are based on CFTC and SEC Final Rulings
of Title VII of the Dodd-Frank Act. It is of a general nature and cannot
substitute for the advice of a licensed professional, i.e., by a competent
authority with specialized knowledge who can apply it to the particular
circumstances of your case. Please contact a local bar association, law
society or similar association of jurists in your legal jurisdiction to obtain a
referral to a competent legal professional if you do not have other means of
contacting an attorney-at-law, lawyer, civil law notary, barrister or solicitor.
• No warranty whatsoever is made that the decision flow charts herein are
accurate. Law varies from place to place and it evolves over time—
sometimes quite quickly. Even if a process flow relating to a regulator
definition is accurate, it may only be accurate in a specific jurisdiction. In
addition, the law may have changed, been modified or overturned by
subsequent development since date of presentation.
• Nothing herein should be construed as an attempt to offer or render a legal
opinion or otherwise engage in the practice of law.


Swap Dealer - §1.3(ggg)(1)
§1.3(ggg)(1) Definition of Swap Dealer - Decision Flow Chart
Apply Excluded Activity Apply Activity Apply Orig. Loan Apply de minimis Not deemed a
Statutory Tests Determination Exclusion(s) Exclusion(s) Exemptions ―Swap Dealer‖

Fail Fail Yes Yes Yes

Swap Apply Statutory Meet Definition Meet Definition Meet de min. Scope
Applicable? Pass Pass No No No
Dealer? Tests? of Exclusion? of Orig. Loan? Exemption? Limited?
Disjunctive (ie, ―engages in
any one of these activities‖)

1 Apply Statutory Definition 2 Statutory Definitions‘ Tests 3 Excluded Swap Activity 4 Depository Originating Loans 5 De minimis Exception 6 Scope of Designation
Interpretive Guidance Part II.A.4
swaps entered into for the purpose
of accommodating counterparty’s Part II.A.4.a Dealer-Trader
needs or demands… irrespective Inter-affiliate activities Insured depository inst. De Minimis Exception Application to limit...
Dealer-trader distinction forms basis x x x x
§1.3(ggg)(6)(i) §1.3(ggg)(5)(i) §1.3(ggg)(4) §1.3(ggg)(3)
of having a hedging consequence for framework…[See: 75 FR 80177]*

Part II.A.4.b Holding Out Indicia Each swap entered into...
Holds itself out as... Cooperative activities Considered loan orig.
x Holding itself out as… Commonly x x See §1.3(ggg)(4) Swap Dealer
§1.3(ggg)(1)(i) §1.3(ggg)(6)(ii) §1.3(ggg)(5)(ii)
known in trade as… [See note 187.] Flow Chart All Categories

Part II.A.4.c Market Making Apply via registration
Makes a market in... Loan shall not include:
x Routinely standing ready to enter x
§1.3(ggg)(1)(ii) §1.3(ggg)(5)(iii) Commission shall determine/grant Limited
into swaps at request/demand...
limited designation of categories Designation
Part II.A.4.d Regular Business Person‘s own account...
Regularly enters into...
x (i) purpose of satisfying counterparty; x §1.3(ggg)(2) Exception See §1.3(ggg)(5)
§1.3(ggg)(1)(iii) See discussion 77 FR
(ii) separate profit center; (iii) staffing ...not regular business Flow Chart
at 30610, Part II.A.4.d.
Part II.A.4.e Hedging Physicals
Commonly known in... Hedging physicals
x x
§1.3(ggg)(1)(iv) (i) mitigate price risk; (ii) physical §1.3(ggg)(6)(iii)
channel; (iii) reduce commercial risk;
(iv) sound practices; (v) not evasive
Staff “element of def. should be Registered floor traders See §(ggg)(6)(iv) See §(ggg)(6)(i) See §(ggg)(6)(ii) See §(ggg)(6)(iii)
applied in a reasonable manner” x
§1.3(ggg)(6)(iv) Flow Chart Flow Chart Flow Chart Flow Chart
Part II.A.4.f Floor Traders

(i) registered CFTC Reg §3.11; (ii)
“Hedging is not dealing activity” enters into with proprietary funds via
Swaps entered into for the purpose of DCM/SEF, clears via DCO; (iii) is not
hedging or mitigating commercial risk affiliated with SD; (iv) does not Commissions interpret reference ―for its own account‖ to refer to a person who enters into a
participate in RFQ process; (v) does swap as a principal, and not as an agent. A person who enters into swaps as an agent for
not provide clearing services; (vi) customers (ie, customers‘ accounts) would be required to register as FCM, IB, CPO or CTA.
does not qualify under §(ggg)(6)(iii)
or §(kkk); (vii) does not participate in Swap Dealer Non-Dealer Non-Dealer Swap Dealer
DCM or SEF market making For own account; For own account; Note: regulations read exclusion for swap
program; (viii) recordkeeping as if SD regular business Counterparty not regular business Counterparty activities that are not part of ‗‗a regular
business‖; not exclusion from definition.
Thus requirement to maintain records
Part II.A.4.g Interpretive Issues Functional Approach: Identify swap dealers as Non-Dealer showing activities are excluded.
Definition not susceptible to bright- those persons whose function is to serve as the
line test; multi-factor interpretation points of connection in the swap markets. Counterparty

Copyright © 2012 – IQ3 Solutions Group –(See 77 FR at reserved. FR at 80177)
Functional Approach All rights 30598 and 75 Copyright © 2012 IQ3 Solutions Group


§1.3(ggg)(4) Swap Dealer De Minimis Exception - Decision Flow Chart

Swap
Not ―Swap Dealer‖
dealing No §1.3(ggg)(4)(i) states: person (a) not currently registered as SD (b) shall be deemed
―Swap Dealer‖ (No de minimis)
activity? not to be a SD as result of swap dealing activity involving counterparties (c) so long
as the swap positions connected with those dealing activities (d) [entered] over the
course of the immediately preceding [period], (e) have an aggregate gross notional
Part II.A.4 Statutory Tests
amount of no more than… [eg, equivalent to 50,000 GC @ $1600 over 12 months]
Yes Definition of ―Swap‖, etc.

De minimis exception Voluntary registration Registration period
a Registered? Yes b x
§1.3(ggg)(4)(i) §1.3(ggg)(4)(vi) §1.3(ggg)(4)(iii)

$3 billion is equivalent
(i) Federal Agency; (ii) State, State agency, city, to 18,750 gold futures
―Swap Dealer‖ county, municipality; (iii) employee benefit plan; contracts @ px = $1600 Act §4s(b) [77 FR 2613]
Effective: 10/12/2012
clock ―not ticking‖ (iv) any governmental plan; or (v) any endowment
No Submits complete
application for registration
―Special entity‖ counter- Aggregate Gross Notional ―Swap Dealer‖
No d Deemed SD if >$25 mil. Earlier of...
party §4s(h)(2)(C) Registration
Phase in level: $25 mil.
Not ―Swap Dealer‖ §1.3(ggg)(4)(iii)
Not deemed SD if <$3 billion Two mths after month-end
Activity if <$25 million*
$1a(47) Final Yes exception not applicable
preceding Aggregate Gross Notional Yes
Rule pub?
12 mths? After
Phase in level: $3 billion
Phase-in
Issued 8/13/2012 Is counterparty >Phase in Applicability
No Yes No termination x
Yes + 60 days: 10/12/2012 special entity? level? §1.3(ggg)(4)(iv)
date

Aggregate Gross Notional
§1a(47) Dodd-Frank Activity Before
No
c Final Rules, Effective <12 mths since Phase in level: $8 billion
Date 60 days post pub. 10/12/2012? Not ―Swap Dealer‖ §1.3(ggg)(4)(iv)
Meets de minimis ―Swap Dealer‖
Definition of ―Swap‖, etc. if <$8 billion (Not Swap Dealer) SD may apply to withdraw Withdrawal
§1.3(ggg)(4)(iv)
No provided registered 12 mths
SD Withdraw?
$8 billion is equivalent
to 50,000 gold futures
contracts @ px = $1600
Earlier of [A] SDR Decision Tree
Phase-in Period
1 e (4)(ii)(C) or Swap Data Reporting
§1.3(ggg)(4)(ii)(A)
(D)? Compliance Effective Date Issued 7/23/2012
+ 60 days: 9/21/2012

§1.3(ggg)(4)(ii)(B) §1.3(ggg)(4)(ii)(C) §1.3(ggg)(4)(ii)(D)
Staff report 77 FR 2136 Act §1a(49) or §1a(33)
<30 months following date h Phase-in termination date Phase-in termination date
§1.3(ggg)(4)(ii)(B) N Swap Data Reporting Later of... N Final Rules, Effective
SDR receives swap data set 9 mths after Report not established: 5 years
Compliance: 7/16/2012 Date 60 days post pub.
Swap Data Recordkeeping Definition of SD and MSP

Act §1a(49) or §1a(33) §1.3(ggg)(4)(ii)(D)
Swap Data Reporting Act §1a(47) Final Rules
g f See SDR Effective 2 5 years following date Issued 8/13/2012
77 FR 2136 Y Issued, Effective Date
Date Decision Tree [A] SDR receives swap data + 60 days: 10/12/2012
60 days post pub.
Definition of ―Swap‖, etc.
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. [A] Effective Date: Initiation of Swap Data Reporting
Copyright © 2012 IQ3 Solutions Group

§1.3(ggg)(5) Definition of Swap Dealer - Decision Flow Chart

See §1.3(ggg)(5) Meets requirement of Considered loan orig.
2
Flow Chart §1.3(ggg)(5)(i)(E) §1.3(ggg)(5)(ii)

Yes

Insured depository inst. Source of
1
(―IDI‖) §1.3(ggg)(5)(i) principal amt Not connected to IDI directly
No No
=>aggregate originating loan transfers loan?
§1.3(ggg)(5)(i)(E) notional amt? §1.3(ggg)(5)(ii)(A)
Swap entered into… Swap entered into…
...execution of agmt ...transfer of principal or
Yes IDI part of
syndicate of
lenders of loan No
Swap =<90 Swap =<90 source?
Not connected to Not connected to Meets requirement of §1.3(ggg)(5)(ii)(B)
No days before days before No
originating loan originating loan §1.3(ggg)(5)(i)(D)
agmt? transfer? or Purchases or
§1.3(ggg)(5)(i)(A)
receives
participation in No
Yes Yes Yes
loan? §1.3(ggg)(5)(ii)(C)

Source of or
Swap =<180 Swap =<180 Otherwise is
Not connected to Not connected to principal amt Not connected to Not connected to
No days after days after No No source of funds No
originating loan originating loan =>aggregate originating loan originating loan
amgt? transfer? transferred?
notional amt?
§1.3(ggg)(5)(i)(A) §1.3(ggg)(5)(ii)(D)
§1.3(ggg)(5)(i)(D)(3)
Yes
Yes Yes

Meets requirement of IDI committed Term ―sham‖:
Not connected to Loan shall not include: i) regulatively defined?
§1.3(ggg)(5)(i)(A) =>10% of max No x
originating loan §1.3(ggg)(5)(iii) ii) fraud consequence?
principal amt?
See 77 FR at 30620,
§1.3(ggg)(5)(i)(D)(2) 30622, 30623, 30708
Yes
§1.3(ggg)(5)(iii)(A)
Swap terms
Not connected to
§1.3(ggg)(5)(i)(B)(1) directly related No Any trans. that Not connected to
originating loan IDI sole source No
to loan terms? Not connected to is a ―sham‖ originating loan
of funds under No
originating loan
loan?
Yes §1.3(ggg)(5)(i)(D)(1) §1.3(ggg)(5)(iii)(B)
Any synthetic Not connected to
No
loan (CDS, etc) originating loan
Swap required
Not connected to Meets requirement of
§1.3(ggg)(5)(i)(B)(2) as condition to No
originating loan §1.3(ggg)(5)(i)(C)
hedge risk
See 17 CFR Part 43;
Yes 17 CFR Part 45;
Yes 17 CFR Part 46
Yes

Duration does Is Swap Reporting guidance...
Meets requirement of Not connected to Swap connected
not extend No accepted by No §1.3(ggg)(5)(i)(F)
§1.3(ggg)(5)(i)(B) originating loan to orig. loan
beyond loan? DCO? [ref: 7 U.S.C. 6r]

Copyright © 2012 IQ3 Solutions Group
§1.3(ggg)(5)(i)(C)

End-User Exception - §2(h)(7)(A)

CEA §2(h)(7)(A) End-User Exception - Decision Flow Chart Responsibility of
(1) Form and manner...
CEA §2(h)(7)(A) Reporting CP
CEA §2(h)(1)(A) requires swaps to be:
End-User 1) cleared through DCO unless exception [§2(h)(7)]
Swap required to i Notice of election
Exception to 2) reported to SDR
Clearing clear via DCO 3) executed on DCM or SEF, unless not available...
ii Identity of electing
§39.6(b)(2) Annual Filing…
§39.6(d)(i) Financial entity Reporting under this paragraph
No
―Financial entity‖ means: §2(h)(7)(C)(i)(VIII) shall be iii Info previously provided (2) shall be effective for 365 days
(I) swap dealer; (II) security-based swap exempt if certain type of bank following date of first §(b)(1)(iii)
dealer (III) major swap participant; (IV) report; amend as necessary
Elect EU major security-based swap participant; §39.6(d)(ii) Financial entity
―Electing counterparty‖ (V) commodity pool; (VI) private fund Electing counterparty is not a
exception from §2(h)(7)(C)(i)(VIII) shall be (A)
§39.6(a)(1) [Title 15 §80b-2]; (VII) employee benefit financial entity §2(h)(7)(C)(i)?
§2(h)(1)(A)? exempt if <$10 billion assets
plan [Title 29, §1002(3),(32)]; (VIII)
banking/financial [Title 12, §1843(k)]
Electing §2(h)(7)(C)(iii)
Yes 1
§39.6(a)(1)(i) or §2(h)(7)(D), if yes?
Reporting counterparty
Not a ―financial entity‖
§39.6(c) reasonable basis to believe
CEA §2(h)(7)(A)(i) Exempt from definition as
Flow Chart electing counterparty meets 2
CEA §2(h)(7)(C) per §39.6(d), if yes?
requirements for an exception to
clearing req. §39.6(b)(3)

Electing counterparty is using
See §39.6(c)
Hedge or §39.6(a)(1)(ii) §39.6(a)(1)(iii) (B) swaps to hedge or mitigate
Flow Chart
mitigate risk? commercial risk per §39.6(c)?
Hedge/commercial risk Provide info specified in
Report to SDR
CEA §2(h)(7)(A)(ii) §39.6(b) to SDR or to
See §45.8
§39.6(b)(1)(iii)(B) Commission
(C) How meets obligations...
§39.6(c)(1)(i) Appropriate to
reduction of risks arising from: Yes
Written credit support
1
§39.6(a)(2) agreement (CSA)
§39.6(c)(1)(i)(A) >1 electing, provide info Reporting
SDR
A Potential change in specified in §39.6(b) Counterparty? Yes Pledge or segregated
available? 2
value of assets... CEA §2(h)(7)(A)(iii) See §45.8 assets (CSA)

§39.6(c)(1)(i)(B) Written third-party
No 3
B Potential change in No guarantee
value of liabilities...
Available financial
§39.6(c)(1)(i)(C) Report to Commission 4
Responsibility of resources
§39.6(c)(1)(ii) Qualifies as bona See §45.8
B Potential change in Reporting CP
fide hedging under CEA
value of services...
Means other than §§
5
(b)(1)(iii)(C)(1),(2),(3),(4)
§39.6(c)(1)(i)(D)
§39.6(c)(1)(iii) Qualifies for §39.6(c)(2)(i) Not used for
D Potential change in
hedging treatment under... speculation, investing, trading...
value of commodities...
Issuer of securities under 1934
(D)
Act §12, or files reports §15(3)
§39.6(c)(1)(i)(E) FASB Accounting §39.6(c)(2)(ii) Not used to §240.3a67-4 of Title VII
E Potential change in A Standards Code 815 hedge risk of another swap,
value of interest, FX... (aka FASB No. 133) unless other position is hedge... 1 SEC Central Index Key

§39.6(c)(1)(i)(F) GASB Statement 53, Board review/approved
2
F Change in value of FX B Accounting/Reporting exempt trans? 2(h)(1),(8)
of assets/ liabilities... for Derivatives
Copyright © 2012 – IQ32012 IQ3 Solutions Group rights reserved.
Copyright © Solutions Group – All Reporting under End-User Exception

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Client Case Study
Overview of Project

A problem well defined is halfway to a solution...


Project Assumptions
• Description: Top 10 bank holding company has retained consultant to take
accountability for oversight of ISDA August 2012 DF Protocol initiative.
• Success Criteria: Accurately collect and process DF Protocol-related data
and documentation from known set of swap counterparties by 12/31/2012.
At end of engagement transfer knowledge of effort‘s planning, executing
and monitoring for future ISDA Protocol change management initiatives.
• Participants: Bank legal response team, program/project manager, existing
vendor, new vendor, multiple internal stakeholders (front to back office)
• Project Manager Role: Scope/plan project and then manage entire effort;
provide oversight and coordination; knowledge transfer upon project close.
– Deliverables: Defined in Statement of Work.
• Vendor Role: Provide call center infrastructure, non-attorney support,
facilitate client outreach, collect and enter as necessary counterparty data
from DF Protocol documents, quality reviews, and metrics reporting.
• Start/End Dates: Engagement is expected to start 10/31/2012 and continue
until 1/4/2013. Completion of DF Protocol is required by 12/31/2012.
• Locations: Work will be conducted at combination of locations, including at
client facilities on the West Coast and vendor facilities on the East Coast.

Project Deliverables
• Deliverables defined in Statement of Work include:
– Project plan including scope definition, key milestones and deliverables
• Schedule planning: work breakdown structure, activity duration, activity/resources
– Resource planning in collaboration with bank legal response team and vendors
• Roles and responsibilities for all impacted stakeholders including counterparties
• Application of scrum methodology in order to deliver objectives in the shortest time
– Communication plan for all impacted stakeholders including counterparties
• Development of key performance indicators/metrics and program status reporting
– Risk / quality plan involving quality assurance and scope/schedule/cost control
• Given midstream engagement, focus s/b risk mitigation, plus communications/reporting
– Post mortem documentation of approach, drivers, metrics and work completed
• Close of project encompasses knowledge transfer and project documentation handoff


Project Risk / Focus

Given midstream engagement, focus s/b quality and
risk management + communications and reporting.


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IQ3 Group
Intelligent Solutions

Joining the abstract with the concrete...


Who is IQ3 Group?
IQ3 Group is an alliance of consulting professionals focused on delivering
solutions to firms operating in the commodity and financial industries.
• It is one thing to see a problem clearly, it is another matter to act on it successfully.
Key is the ability to join the abstract with the concrete.
• We define successful consulting as the ability to embrace the client's vision and to
actualize change in the organization...
– Project Management: The science of delivering organizational change...
– Business Analysis: A problem well defined is halfway to a solution...
– Process Transformation: Re-engineering operational workflows...
– Systems Implementation: Automating redesign of business processes…

• Success depends on the ability to quickly access the information needed to
anticipate, evaluate, and adapt. This requires expertise.
• An expert is someone who succeeds in clarifying options and facilitating decisions
through knowing what to pay attention to and what to ignore.


…………………….……..........

When we are clear about what we believe in and what our values are, we can
envision the future we want to create. When we can envision the future we
want to create, we can determine what is most important in creating that
future, and take steps to make decisions, take action, and measure progress.
Vision builds motivation in those who see a common future, and visionary
people make decisions in the present based on the world they want to create.

For more information, contact:
Mack Frankfurter, Partner
mack.frankfurter@iq3group.com
Mobile: 310-849-5818
www.iq3group.com
http://iq3group.blogspot.com

IQ3 Group - ISDA August 2012 DF Protocol

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IQ3 Group - ISDA August 2012 DF Protocol