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Copyright © 2012 – IQ3 Solutions Group – All rights reserved. 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 ISDAs 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... …………………….……
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. 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 ISDAs 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. ISDAs DF Protocol The DF Protocol is designed to allow swap market participants to amend their ISDA Master Agreements to facilitate compliance with the CFTCs 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. 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. 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 –23.430Verification of counterparty eligibility –23.431Disclosures of material information including Scenario Analysis [23.431(a),(b), and (c)] –23.432Clearing disclosures –23.434Recommendations to counterpartiesinstitutional suitability [23.434(a)(2),(b), and (c)] –23.440Requirements for SDs acting as advisors to Special Entities –23.450Requirements for SDs and MSPs acting as counterparties to Special Entities
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. 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. 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 –Adhering Parties –Check Letter Status *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 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. 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. 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. 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. Dodd-Frank Act Supplemental Information Vision builds motivation... …………………….……
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. Dodd-Frank Titles The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 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. Key CFTC Final Rules CFTC, Final Rule, Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 Fed. Reg (Feb. 17, 2012); CFTC, Final Rule, Large Trader Reporting for Physical Commodity Swaps, 76 Fed. Reg (July 22, 2011); CFTC, Final Rule, Position Limits for Futures and Swaps, 76 Fed. Reg (Nov. 18, 2011); CFTC, Final Rule, Real-Time Public Reporting of Swap Transaction Data, 77 Fed. Reg (Jan. 9, 2012); CFTC, Final Rule, Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg (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 (Apr. 3, 2012); and CFTC, Final Rule, Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps, 77 Fed. Reg (June 12, 2012).
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. 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. Disclaimer
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. Swap Dealer - §1.3(ggg)(1)
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. Swap Dealer - §1.3(ggg)(4)
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. Swap Dealer - §1.3(ggg)(5)
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. End-User Exception - §2(h)(7)(A)
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. Client Case Study Overview of Project A problem well defined is halfway to a solution... …………………….……
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. 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 efforts 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. 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. Project Risk / Focus Given midstream engagement, focus s/b quality and risk management + communications and reporting.
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. IQ3 Group Intelligent Solutions Joining the abstract with the concrete... …………………….……
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. Who is IQ3 Group? 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. IQ3 Group is an alliance of consulting professionals focused on delivering solutions to firms operating in the commodity and financial industries.
Copyright © 2012 – IQ3 Solutions Group – All rights reserved. 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 Mobile:
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