IQ3 Group - ISDA August 2012 DF Protocol

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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.

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IQ3 Group - ISDA August 2012 DF Protocol

  1. 1. …………………….…….......... 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.
  2. 2. …………………….…….......... Dodd-Frank Act ISDA August 2012 DF Protocol Change is the only constant... Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  3. 3. 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. Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  4. 4. 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. Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  5. 5. 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 Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  6. 6. 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‖ Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  7. 7. 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. Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  8. 8. 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. Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  9. 9. 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. Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  10. 10. 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. Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  11. 11. 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. Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  12. 12. …………………….…….......... Dodd-Frank Act Supplemental Information Vision builds motivation... Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  13. 13. 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 Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  14. 14. 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). Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  15. 15. 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. Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  16. 16. 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
  17. 17. Swap Dealer - §1.3(ggg)(4)§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 perioda 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 Noc 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
  18. 18. Swap Dealer - §1.3(ggg)(5) §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 Copyright © 2012 – IQ3 Solutions Group – All rights reserved. §1.3(ggg)(5)(i)(C)
  19. 19. 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
  20. 20. …………………….…….......... Client Case Study Overview of Project A problem well defined is halfway to a solution... Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  21. 21. 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. Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  22. 22. 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 Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  23. 23. Project Risk / Focus Given midstream engagement, focus s/b quality and risk management + communications and reporting.Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  24. 24. …………………….…….......... IQ3 Group Intelligent Solutions Joining the abstract with the concrete... Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  25. 25. Who is IQ3 Group?IQ3 Group is an alliance of consulting professionals focused on deliveringsolutions 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 clients 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. Copyright © 2012 – IQ3 Solutions Group – All rights reserved.
  26. 26. …………………….…….......... 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 Copyright © 2012 – IQ3 Solutions Group – All rights reserved.

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