The Protocol enables parties to amend the terms of their ISDA Master Agreements to reflect certain know your counterparty requirements, and the consequences of transacting on the basis of an incorrect classification, imposed by EMIR.

The classification of parties and their counterparties determines whether or not (1) certain risk mitigation techniques required by EMIR and set out further in the regulatory technical standards published by the Commission and (2) in future, the clearing obligation, apply.

The Protocol includes a mechanism for non-financial counterparties (and third country equivalents) to represent their status as such (NFC Representation). The first part of the representation included by the amendment allows a party to represent that it is a non-financial counterparty or an entity established outside the European Union that would constitute a non-financial counterparty if it were established in the European Union (NFC) . The second part allows it to represent that it is a NFC below the clearing threshold (referred to as a NFC-), if that is the case. If a NFC is above the clearing threshold (that is, it is a NFC+), it can switch off that second limb of the representation.

Parties can adhere to the Protocol as Representing Parties (parties that give the NFC Representation) or Non-representing Parties (parties that do not give the NFC Representation). In that way, Adhering Parties that are not non-financial counterparties can take the benefit of the representation given by their counterparties that adhere as Representing Parties and both parties will benefit from the Breach of Representation provisions to prevent either party being in breach of its regulatory obligations.

The Protocol also provides a mechanism for Adhering Parties to notify their counterparties of a change in status (e.g. where a party that had been a NFC + drops below the clearing threshold and is no longer subject to the clearing obligation, where a party that had been a NFC- crosses the threshold, where a party that had been a NFC changes status such that it is no longer able to give the NFC Representation at all or where a party that had not been a NFC changes status such that it is able to give the NFC Representation).

The amendment addresses the situation where a transaction was entered into on the basis of a NFC- representation that turns out to have been incorrect at the time the transaction was entered into or at some time during the term of the transaction. Where the NFC- representation turns out to have been incorrect at the time the transaction was entered into and such transaction should have been cleared but was not because it was entered into on the assumption that it was not subject to the clearing obligation, the amendment requires the parties use all reasonable efforts to agree changes to the terms of such transaction to ensure that it can be cleared by the deadline under EMIR. Where the NFC- representation turns out to have been incorrect at the time the transaction was entered into or at some time during the term of the transaction and such transaction is not subject to the clearing obligation, the amendment requires the parties use all reasonable efforts to agree and implement all that is necessary to put in place additional applicable risk mitigation techniques imposed on non-cleared transactions by EMIR in such circumstances.

If the parties are unable to agree the necessary changes within the applicable timeframe, it will be an Additional Termination Event and either party can designate an Early Termination Date in respect of the relevant transaction, with the party that did not give the incorrect representation being entitled to determine the amount payable following such an Early Termination Date (or, if for some reason, both parties gave an incorrect representation in respect of the relevant transactions, with the amount payable following such an Early Termination Date being determined on a mid-market basis).

The amendment does not provide a mechanism for any changes to be made to transactions nor for any Additional Termination Event where a party has given a representation that it is a NFC but notified its counterparty that it is a NFC+ and this later turns out to be incorrect. This is because there is no obligation to “de-clear” transactions in such circumstances and because it is assumed that the transaction would have been entered into on terms suitable for clearing if such transaction was subject to the mandatory clearing obligation or on terms that included the higher risk mitigation techniques applicable to non-cleared transactions with NFC+ counterparties. The parties may have over complied with their regulatory requirement under EMIR but no change in the commercial bargain struck needs to be made to meet such regulatory requirements.

The language further clarifies that neither giving an incorrect representation (whether a NFC+ or a NFC- representation) nor failure to negotiate in good faith and a commercially reasonable manner to implement the changes required where an incorrect NFC- representation has been given will be an Event of Default under the ISDA Master Agreement. The rationale behind this is that the specific remedies provided for in the language were considered the most appropriate and proportionate in such circumstances. Rights and remedies that may be available to the parties as a matter of law are preserved.

The Protocol does not address any collateral requirements that may apply. Collateral issues will be dealt with separately once the relevant RTS are published.

Is there a closing date for adherence to the Protocol?

There is currently no cut off date for adherence, but ISDA reserves the right to designate a closing date of this protocol by giving 30 days’ notice on this site.

We note in particular that the requirement for NFC+’s to notify ESMA and the relevant competent authority and the timely confirmation obligations set out in the technical standards come into effect on 15 March 2013. This Protocol is being published in advance of that date so that those entities ready to adhere may do so and, for example, NFCs above the thresholds wishing to adhere at the same time as or shortly after notifying ESMA and the relevant competent authority have the option to do so. It should be noted, however, that adherence to this Protocol should not be seen as a precondition to the ability to continue to trade; market participants will make their own assessment as to what counterparty diligence is required in addition to or, where relevant, in the absence of their counterparty’s adherence to the Protocol.

How do I submit my Adherence Letter?

Each entity executing an Adherence Letter will access the Protocol Management section of the ISDA website at www.isda.org to enter information online that is required to generate its form of Adherence Letter. Either by directly downloading the populated Adherence Letter from the Protocol Management system or upon receipt via e-mail of the populated Adherence Letter, the entity must print, sign and upload the signed Adherence Letter as a PDF (portable document format) attachment into the Protocol Management system. Once the signed Adherence Letter has been approved and accepted by ISDA, the Protocol Participant will receive an e-mail confirmation of the Protocol Participant’s adherence to the Protocol.

The Adherence Letter(s) should be on your institution’s letterhead, which you are able to upload into the Protocol Management system during the online submission of information to generate the Adherence Letter. Nothing in the form of Adherence Letter available on ISDA’s website may be changed with the exception of completing the details of your institutional name, confirming whether you adhere to the Protocol as a party making the NFC Representation, or a party that is a NFC+ Party making the NFC Representation, or a party that does not make the NFC Representation, providing an address to which a Representing Party should deliver any Clearing Status Notice, Non-Clearing Status Notice or FC Notice (to the extent that your institution wants this address to be different to the address details specified in its ISDA Master Agreement), any DTCC Account Number or identification code(s) and completing the contact details, date and signature block.

ISDA keeps the executed copy of the Adherence Letter for its files and does not share the executed copy with anyone else. Please do not send your original Adherence Letter(s) by mail to ISDA.

What if I want to adhere but don’t want to disclose to the market generally my classification, given that ISDA publishes a conformed copy of all Adherence Letters how can I manage this?

A party that does not want to disclose its classification to the market generally could adhere to the Protocol as a Non-representing Party and then immediately notify its counterparties (who have also adhered to the Protocol) of its correct classification by sending a “change of status” notice.

In doing so, the party is required to engage bilaterally with its counterparties (although see “what about entities wishing to change their status that have a lot of counterparties, do they have to notify them individually?”) but will gain the benefit of adherence to the Protocol in efficiently incorporating the standard amendments made by the Protocol, including the mechanics to update classification status and the provisions designed to avoid such a party being in a position in which it may be in breach of its regulatory requirements, into its covered ISDA Master Agreements with all other Adhering Parties whilst not disclosing publicly its classification.

Can entities that are not ISDA members sign up to the Protocol?

Yes. The Protocol is open to any entity. ISDA members and non-ISDA members alike adhere to the Protocol in the same way.

Can entities established outside the European Union sign up to the Protocol?

Yes. The Protocol is open to any entity to adhere in the same way. At the time of publication, the RTS on extra-territoriality and any associated FAQs are not available and there was no reason to take anything other than a broad approach in relation to entities established outside the European Union. ISDA will keep this point under review as such RTS and any associated FAQs are published. See also question on third country entities under “Specific questions on the amendment language”.

What is a conformed copy?

A conformed copy of the Adherence Letter means that the name of the authorized signatory (for example, Patricia Smith) is typed rather than having Patricia Smith’s actual signature on the letter. ISDA only posts on its website the conformed copy of all Adherence Letters. A conformed copy of each Adherence Letter containing, in place of each signature, the printed or typewritten name of each signatory will be published by ISDA so that it may be viewed by all Protocol Participants.

Who is an authorized signatory?

An authorized signatory to the Adherence Letter is an individual who has the legal authority to bind the adhering institution.

We have more than one fund and therefore more than one DTCC account number. Will we need to submit more than one Adherence Letter?

No. You can list numerous DTCC numbers on one adherence letter.

SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS

What if I am an investment or asset manager, and not all of my discretionary management agreements permit me to amend my client’s agreements?

If you are an investment or asset manager and act on behalf of multiple funds, you have the following options:

• If you have authority to adhere on behalf of all of your clients you may do so by indicating the following in the signature block: “Investment/Asset Manager, acting on behalf of the funds and accounts listed in the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) and another Adhering Party [and acting on behalf of the funds and accounts listed in the appendix to this Adherence Letter in relation to the relevant Agreement (or other agreement which deems an Agreement to have been created) between such fund or account and another Adhering Party]”.

If you wish to adhere in this way, you must ensure that you have the authority to do so from all clients on whose behalf you enter into transactions covered by the Protocol

• If you do not have authority from all of your funds, you can adhere on behalf of those funds whose permission you have by indicating the following in the signature block:

“[Name of Investment/Asset Manager], acting on behalf of the funds and accounts specifically identified in the appendix to this Adherence Letter in relation to the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) and another Adhering Party.”

The appendix to your Adherence Letter can either name the clients or funds, or identify them with a unique identifier which will be known and recognized by all other Adhering Parties with which the relevant funds or clients have entered into transactions. The appendix to your letter will be posted on the ISDA website with your Adherence Letter either listing the funds or if you have more than ten funds, we will add a link to a pdf document listing these funds. Any ISDA Master Agreements which you enter into on behalf of funds that are not listed in your adherence letter(s) will not be covered by the Protocol. If you wish to implement the changes contained in the Protocol in those ISDA Master Agreements, then you and the relevant counterparty would need to enter into a bilateral agreement to amend those ISDA Master Agreements to include those changes.

• You cannot adhere to the Protocol on behalf of any fund that you cannot identify. If you do not have authority from all of your funds and you are not able to disclose your clients whether by name or a unique identifier, you will need to enter into bilateral amendment agreements with each relevant counterparty listing the funds whose ISDA Master Agreement(s) with that counterparty will be amended by incorporating the amendments made by the Protocol.

• If you add a fund to an umbrella master agreement after the date you adhere to the Protocol on behalf of your clients (whether that fund was an existing client on or a client acquired after the Implementation Date) that fund will be added to that umbrella master agreement as amended by the Protocol.

Can I change the text of the Adherence Letter?

No. The Adherence Letter must be in the same format as the form of letter published in the Protocol and generated by the Protocol Management webpage.

Are there any costs to adhere to the Protocol?

Yes. Each party adhering to the Protocol must submit a one-time fee of U.S. $500 to ISDA at or before the submission of its Adherence Letter. Each individual legal entity is considered a separate Adhering Party for this purpose and would need to pay the adherence fee, except that an agent that adheres on behalf of one or more underlying principals for whom it has entered into an ISDA Master Agreement, using a single Adherence Letter, would only pay a single adherence fee for that Adherence Letter. Where multiple legal entities within a group structure have separate ISDA Master Agreements, each legal entity would need to adhere to the Protocol and pay the adherence fee unless an agency adherence can be used as described above. If an entity adheres as agent on behalf of other entities, this should be reflected in the signature block and the underlying entities should be listed in the Appendix to the Adherence Letter.

Can I revoke my participation in the Protocol?

No. Once an Adherence Letter has been accepted by ISDA, an Adhering Party is bound by all amendments with other parties that have already adhered to the Protocol or, subject to the discussion below, that adhere before a designation of the Annual Revocation Date.

An Adhering Party may, at any time during the period from October 1 to October 31 of a calendar year, deliver to ISDA a notice specifying the Annual Revocation Date as its cut-off date in respect of amendments with future Adhering Parties. The effect of such a letter will be to withdraw adherence for future Adhering Parties as of December 31 in that calendar year. Although amendments already made will not be revoked, any subsequent adherence by new Adhering Parties after the designated Annual Revocation Date will not bind the party that has submitted a Revocation Notice.

You can, however, bilaterally agree to amend your Covered Master Agreement with your counterparty (the other Adhering Party) and any such subsequent amendments will supersede those made by the Protocol to the extent that they are inconsistent.

Do I have to sign up before March 15, 2013, the date on which, in particular, the timely confirmation obligations come into effect?

No. This Protocol is being published in advance of March 15, 2013 so that those entities ready to adhere may do so and, for example, NFCs above the threshold wishing to adhere at the same time or shortly after notifying ESMA and the relevant competent authority have the option to do so. It should be noted, however, that the Protocol is an “evergreen” protocol, for which there is no scheduled cut-off date for adherence.

Adherence to this Protocol should not be seen as a precondition to the ability to continue to trade and market participants will make their own assessment as to what counterparty diligence is required in addition to or, where relevant, in the absence of their counterparty’s adherence to the Protocol.

As a third country entity, can I sign up to the protocol and give a representation before the RTS on extraterritoriality are published, when I don’t know if the obligations under EMIR will apply to me, or, after clarification is obtained, if I conclude that I am not subject to such obligations?

Yes. The representations are intended to be as to the status of such party only and do not constitute a representation or agreement that such party is subject to any obligations under EMIR and, in particular, do not constitute a representation or agreement that any particular transaction is subject to the clearing obligation pursuant to EMIR.

How can I represent that I am not subject to the clearing obligation since this is also dependent on my counterparty’s classification?

The purpose of limb (2) of the NFC Representation is only to establish that the NFC is below the clearing threshold on the basis of the interpretation set out in the introduction to this list of frequently asked questions. The purpose of limb (2) of the NFC Representation is not to determine whether any particular transaction is subject to the clearing obligation and whether any transaction that limb (2) of the NFC Representation is given in respect of is actually subject to the clearing obligation (which would be dependent at least on the NFC’s counterparty’s classification, the nature of the transaction and any exemptions) is irrelevant. It is for this reason that the second sentence in limb (2) of the NFC Representation is included so that all the factors that are relevant for the determination of whether a transaction is subject to the clearing obligation are assumed to be fulfilled or ignored for the purposes of the representation only.

It is expected that limb (2) of the NFC Representation could only be given by a NFC (or entity that would classify as a NFC if it were established in the European Union) that is below the clearing threshold.

For a NFC that is itself above the clearing threshold, it would be difficult to give this limb of the representation (and it would, therefore, need to be disapplied in such entity’s adherence letter or, where the clearing threshold was crossed after its adherence, by delivering a change of status notice). In those circumstances, all the entity represents is that it is a NFC.

Why is the representation repeated at all times, isn’t the only important time when an entity actually enters into a transaction?

If party’s status changes subsequent to a transaction being entered into, there could be regulatory consequences even if the NFC Representation as to status was correct at the time the transaction was entered into. For example, certain of the risk mitigation techniques for uncleared transactions could start to apply at the higher standard applicable to NFC+s. Consequently, it was agreed that the representation would be repeating to give a degree of comfort that status information was kept up to date.

Does/should the Protocol extend to EEA entities?

EMIR includes the reference “(Text with EEA relevance)” indicating that is it considered to fall within the scope of the Agreement on the European Economic Area (the EEA Agreement) and therefore intended to extend to the EEA. However, at the time of finalising the Protocol for publication, it had not been adopted by EEA Joint Committee Decision. As such, it was not considered appropriate to simply replace references in the Protocol to “the European Union” with "the EEA". Prior to effective adoption by relevant EEA states in accordance with the EEA Agreement, the Protocol and representation should still work effectively for all EEA entities, who would either be “a [non-financial/financial] counterparty (as such term is defined in EMIR)” or “an entity established outside the European Union that… would constitute a [non-financial/financial] counterparty (as such term is defined in EMIR) if it were established in the European Union”.

What about AIFs that currently classify themselves as NFCs but whose status may change to FCs when their managers are authorised under the AIFMD?

The Protocol provides a mechanism for an Adhering Party to change its status. This would permit, amongst other changes, an entity such as an AIF, that signs up as a NFC (whether NFC+ or NFC-) to later notify its counterparties that it is no longer a NFC. It would do so by notifying its counterparty that it is now a Non-Representing Party (i.e. a party that gives no representation).

What about any pension scheme arrangement that constitutes a non-financial counterparty and that has the benefit of an exemption from the clearing obligation under the transitional provisions under EMIR, how can they represent that they are not subject to the clearing obligation?

The purpose of limb (2) of the NFC Representation is only to establish that the NFC is below the clearing threshold on the basis of the interpretation set out in the introduction to this list of frequently asked questions. The purpose of limb (2) of the NFC Representation is not to determine whether any particular transaction is subject to the clearing obligation and whether any transaction that limb (2) of the NFC Representation is given in respect of is actually subject to the clearing obligation (which would be dependent at least on the NFC’s counterparty’s classification, the nature of the transaction and any exemptions) is irrelevant. It is for this reason that the second sentence in limb (2) of the NFC Representation is included so that all the factors that are relevant for the determination of whether a transaction is subject to the clearing obligation are assumed to be fulfilled or ignored for the purposes of the representation only

What about entities wishing to change their status that have a lot of counterparties, do they have to notify them individually?

The Protocol provides flexibility for parties wishing to deliver or receive any change in status notice. Parties can rely on the standard notice provisions in their ISDA Master Agreement, specify in their Adherence Letter a designated address to which counterparties should send change of status notices or agree to use Markit Counterparty Manager. Only if both parties to a Covered ISDA Master Agreement agree to use Markit Counterparty Manager, and both are subscribers to that service, will that be an option. Where Markit Counterparty Manager is specified to be applicable, a Party must, if it is also subscribed to that service, deliver change of status notices via Markit Counterparty Manager. If Markit Counterparty Manager is not specified, or if it is specified but a Party is not also subscribed to that service, then a Party must deliver change of status notices to the address specified in the Adherence Letter or, if none, as specified in the Covered ISDA Master Agreement.

ISDA has published a form of Change of Status Notice that can be downloaded, completed and uploaded into Markit Counterparty Manager, see link here.

Why doesn’t my FC counterparty give any representation under this Protocol?

This Protocol is to facilitate the classification of NFC counterparties and to address the regulatory implications of entering into a Transaction on an incorrect understanding that a counterparty is a NFC-.

The distinction between financial counterparties and non-financial counterparties is considered to be more straightforward and a matter that can be ascertained through other public reference sources.

The distinction between a NFC- and a NFC+, however, is dependent upon information internal to the particular NFC entity and is, therefore, what this Protocol seeks to address.

What if a representation I give or rely on turns out to be incorrect? What are the consequences and why?

The consequences for breach of representation set out in the Protocol are intended to reflect the regulatory consequences applicable to a Transaction where that Transaction is entered into or continued on an incorrect assumption.

If the representation was incorrect when a transaction was entered into or becomes incorrect at some time during the term of the transaction, the consequences will depend upon what representation was incorrect. Only if the representation was from a party giving both limbs of the NFC Representation, including the representation that it is not subject to the clearing obligation, will there be any contractual consequences under the ISDA Master Agreement as amended by the Protocol.

The language provides that where a NFC- representation has been given and a transaction was entered into on this basis, where this representation turns out to have been incorrect at the time the transaction was entered into or at some time during the term of the transaction, the parties will use all reasonable efforts to agree changes to the terms of a transaction that should have been cleared but which was entered into on the assumption that it was not subject to the clearing obligation, to ensure that such transaction can be cleared by the deadline under EMIR or where such transaction is not subject to mandatory clearing, to agree and implement all that is necessary to put in place additional applicable risk mitigation techniques imposed by EMIR in such circumstances.

If the parties are unable to agree the necessary changes within the applicable timeframe, it will be an Additional Termination Event and either party can designate an Early Termination Date in respect of the relevant transaction with the party that did not give the incorrect representation being entitled to determine the amount payable following such an Early Termination Date (or, if for some reason, both parties gave an incorrect representation in respect of the relevant transaction, with the amount payable following such an Early Termination Date being determined on a mid-market basis). In either case, the amount determined as payable follwing such Early Termination Date will be determined on the basis of the original transaction and sas if the party that gave the incorrect representation had not become a NFC+. This Additional Termination Event is to ensure that neither party finds itself in a position in which it is party to a transaction that does not comply with the regulatory requirements of EMIR.

This Additional Termination Event will not arise, however, where the relevant transaction is subject to the mandatory clearing obligation, the parties have taken action to ensure that the transaction is cleared by the deadline under EMIR but the transaction is not cleared by that deadline for reasons set out in any execution or give-up agreement between the parties. In those circumstances, the consequences of the transaction not being cleared by the deadline will be those set out in the execution or give-up agreement.

The language does not provide for any amendments to be made to transactions nor for any Additional Termination Event where a party has notified its counterparty that it is a NFC+ and this later turns out to be incorrect. This is because there is no obligation to “de-clear” transactions in such circumstances and because it is assumed that the transaction would have been entered into on terms suitable for clearing if such transaction was subject to the mandatory clearing obligation or on terms that included the higher risk mitigation techniques applicable to non-cleared transactions with NFC+ counterparties. The parties may have over complied with their regulatory requirement under EMIR but no change in the commercial bargain struck needs to be made to meet such regulatory requirements.

The language further clarifies that neither giving an incorrect representation (whether a NFC+ or a NFC- representation) nor failure to negotiate in good faith and a commercially reasonable manner to implement the changes required where an incorrect NFC- representation has been given will be an Event of Default under the ISDA Master Agreement. The rationale behind this is that the specific remedies provided for in the language were considered the most appropriate and proportionate in such circumstances. Rights and remedies that may be available to the parties as a matter of law are preserved.

The breach of NFC Representation provisions contain a concept of a “Balancing Payment Amount” and a “Balancing Risk Mitigation Payment Amount”. What are these and what are they intended to cover?

The Balancing Payment Amount is applicable where a transaction has been entered into, and priced, on the assumption that it is not subject to mandatory clearing because at least one party represented that it was a NFC not subject to the clearing obligation (a NFC-). If that assumption was incorrect, the parties need to agree changes to the terms of the transaction to enable that transaction to be cleared. This includes agreeing to any change in the pricing of such a transaction – the Balancing Payment Amount. This pricing assessment would take into account all usual factors and elements that the relevant institution considers when pricing a transaction.

The Balancing Risk Mitigation Payment Amount is applicable where a transaction is entered into on the assumption that it does not attract the higher standard of and additional risk mitigation techniques because at least one party represented that it was a NFC- Where that representation was incorrect, despite the fact that the transaction is of a type not subject to mandatory clearing, the higher standard of and additional risk mitigation techniques will apply and the Balancing Risk Mitigation Payment Amount is intended to capture any difference between the pricing of the transaction before such risk mitigation techniques applies and the pricing of the transaction now subject to such higher standard of and additional risk mitigation techniques. Again, this pricing assessment would take into account all usual factors and elements that the relevant institution considers when pricing a transaction

It is important to note that both the Balancing Payment Amount and the Balancing Risk Mitigation Payment Amount are elements that must be agreed between the parties and cannot simply be unilaterally imposed. If the parties are unable to agree any such amount, then the fallback to an Additional Termination Event would apply.

The breach of NFC Representation Provisions reference a Relevant NFC Non-Clearable Transaction Risk Mitigation Deadline Date. What is this?

The purpose of the Relevant NFC Non-Clearable Transaction Risk Mitigation Deadline Date is to provide a cut off by when the parties must agree any amendments or modifications to the terms of or process in relation to transactions that are subject to the risk mitigation techniques for uncleared transactions necessary to reflect the change in status of a party from a NFC- to a NFC+. There is no express reference to the time frame in which parties must do this under EMIR. On that basis the working group agreed on a minimum period of six Business Days from the date the parties become aware that limb (2) of the NFC Representation was incorrect or such later date as may be set as a transitional period in these circumstances by official guidance from ESMA or the Commission.