ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol FAQs
Open from 19 July 2013
ISDA has prepared this list of frequently asked questions to assist in your consideration of the ISDA 2013 EMIR PORTFOLIO RECONCILIATION, DISPUTE RESOLUTION AND DISCLOSURE PROTOCOL (the Protocol).
THESE FREQUENTLY ASKED QUESTIONS DO NOT PURPORT TO BE AND SHOULD NOT BE CONSIDERED A GUIDE TO OR AN EXPLANATION OF ALL RELEVANT ISSUES OR CONSIDERATIONS IN CONNECTION WITH THE PROTOCOL. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING OR ADHERING TO THE PROTOCOL. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH ANY OF ITS DOCUMENTATION OR OTHER DOCUMENTATION MAY BE PUT.
These FAQs address questions under the following general headings:
- What does the Protocol do?
- What agreements does the Protocol cover?
- How to sign up to the Protocol.
- Specific questions on the amendment language.
The Protocol was developed by a working group of ISDA member institutions (including representatives from buy-side and sell-side institutions). Inevitably, due to the fact we are at the early stages of the implementation of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR), the working group has had to form certain decisions on questions of interpretation of EMIR.
1. What does the Protocol do?
The Protocol enables parties to amend the terms of their Protocol Covered Agreements to reflect the portfolio reconciliation and dispute resolution requirements imposed by EMIR as well as to include a disclosure waiver to help ensure parties can meet the various reporting and record keeping requirements under EMIR without breaching confidentiality restrictions that they may be under.
EMIR requires that the parties shall agree in writing arrangements for reconciling portfolios before entering into OTC derivative contracts.
The Protocol provides for two alternate methods of portfolio reconciliation:
Under “Exchange of Portfolio Data”, both parties (each, a Portfolio Data Sending Entity) send the other a data set comprising the key terms of the relevant transactions between them (the Portfolio Data). Each party compares the Portfolio Data received against its own records. If, as a result of this comparison, a party identifies a discrepancy in the data which such party determines, acting reasonably and in good faith, is material to the rights and obligations of the parties in respect of one or more relevant transactions, it notifies its counterparty of the discrepancy and the parties then consult with each other to attempt to resolve the discrepancy in a timely manner.
Under “One-way Delivery of Portfolio Data”, one party (the Portfolio Data Sending Entity) sends the Portfolio Data to the other party (the Portfolio Data Receiving Entity), who compares the Portfolio Data against its own records. If the Portfolio Data Receiving Entity identifies a discrepancy in the data which such party determines, acting reasonably and in good faith, is material to the rights and obligations of the parties in respect of one or more relevant transactions, it notifies its counterparty of the discrepancy and the parties then consult with each other to attempt to resolve the discrepancy in a timely manner. If the Portfolio Data Receiving Entity does not identify a discrepancy to the Portfolio Data Sending Entity within five joint business days, the Portfolio Data is deemed to have been affirmed.
Each entity that adheres to the Protocol elects, in its Adherence Letter, whether it is a Portfolio Data Sending Entity or a Portfolio Data Receiving Entity. After adherence, an Adhering Party can change its elected status with one or more of its counterparties by agreement.
Where both parties to a Protocol Covered Agreement are Portfolio Data Sending Entities, the Exchange of Portfolio Data method applies. Where one party to a Protocol Covered Agreement is a Portfolio Data Sending Entity and the other is a Portfolio Data Receiving Entity, the One-way Delivery of Portfolio Data method applies. Where both parties to a Protocol Covered Agreement are Portfolio Data Receiving Entities, the parties will either have to agree that one or both of them become a Portfolio Data Sending Entity or else agree an alternative portfolio reconciliation method bilaterally.
The parties can use agents or third party service providers to carry out all or any part of the portfolio reconciliation process. A party can appoint an Affiliate as its agent unilaterally by notice or a third party as agent or service provider with the agreement of its counterparty.
EMIR specifies the minimum frequency at which the parties should reconcile portfolios. The Protocol allows the parties to set a schedule that meets the EMIR requirements while allowing, where possible, for staffing constraints and market activity. If the parties fail to set a schedule, or set one that does not meet the minimum frequency specified in EMIR, the Protocol imposes a schedule which does meet the EMIR requirements.
The portfolio reconciliation provisions are without prejudice to other processes, rights and obligations the parties may have with respect to each other. This means, for example, that not raising discrepancies with respect to a set of Portfolio Data (even where this leads to deemed affirmation in the One-way Delivery of Portfolio Data method) does not prevent a party from identifying a discrepancy at a later date or disputing a valuation.
EMIR requires that the parties have agreed detailed procedures and processes in relation to the identification, recording and monitoring of disputes in relation to the recognition or valuation of the contract and to the exchange of collateral between the counterparties and in relation to their resolution in a timely manner. The Protocol provides a method for the identification, monitoring and resolution of disputes without overriding the existing dispute resolution methods that the parties may have agreed. For example, it does not override the selection of governing law and submission to relevant courts in Section 13 of an ISDA Master Agreement and the collateral dispute mechanics that exist in the ISDA Credit Support Annex (English or New York law) and Credit Support Deed or any other process agreed between the parties (an Agreed Process).
If a party decides that an issue is serious enough to constitute a dispute (as opposed to, for example, a discrepancy that it expects to resolve easily at an operational level), it can send a dispute notice to its counterparty, identifying to both parties that this is a dispute which is required to be subject to dispute resolution requirements under EMIR. Once a dispute notice has been sent, the Protocol requires the parties to consult in good faith to resolve the dispute in a timely manner, including identifying and using any of the appropriate Agreed Process(es) or otherwise determining and applying a resolution method to the relevant dispute.
EMIR requires that the parties have a specific process in place for those disputes not resolved within 5 business days. This is reflected in Part I(4)(c) of the Protocol. Delivery of the dispute notice aids the parties in counting these 5 business days (and, for financial counterparties, the 15 business days which are part of the 15 business day/Euro 15 million dispute reporting requirement in the supporting technical standard).
As with portfolio reconciliation, the dispute resolution provisions are without prejudice to any other rights and obligations the parties may have in respect of each other under other contracts or in law. The Protocol does not prevent a party from handling a dispute in the way it considers best suits the circumstances nor does it free a party from strictly following any applicable dispute resolution process that it has previously agreed with its counterparty. The parties can still attempt to resolve disputes at an operational, relationship or other level.
The Protocol includes a confidentiality waiver to help ensure that the parties can comply with their regulatory requirements under EMIR without breaching any confidentiality restrictions that they may be under. Specifically, each party consents to the disclosure of information or the retention of information to the extent required, permitted or made in accordance with EMIR and any applicable supporting law, rule or regulation or any order or directive given by an authority under EMIR and its supporting regulation. This includes reporting to a trade repository and/or to and between a party’s head office, branches, affiliates, agents and service providers in connection with such reporting requirements. While Article 9(4) of EMIR provides trade reporting disclosure protection with respect to European entities, parties should consider whether Article 9(4) provides sufficient protection in all circumstances. The broader application of the confidentiality waiver provision should be a helpful tool to address wider confidentiality concerns. However, parties should be aware that the waiver, consents and acknowledgements set out in the Protocol are not necessarily sufficient to overcome any prohibition or impediment to disclosure under the laws of every jurisdiction. Parties should consult with their legal advisers and any other adviser they deem appropriate prior to adhering to the Protocol.
Remedies for Breach
Breach of the portfolio reconciliation or dispute resolution requirements as set out in the Protocol, or of the representation set out in the last line of the confidentiality waiver, does not constitute an event of default and does not give either party a right to terminate trades. Rights and remedies that may be available to the parties as a matter of law are preserved and each party’s obligations to meet the requirements of EMIR do, of course, remain.
2. What agreements does the Protocol cover?
The Protocol is not limited to ISDA Master Agreements. It also amends any existing written agreements governing the terms and conditions of one or more transactions in “derivatives” or “derivative contracts” (as defined in EMIR) unless the parties to such other agreements have either expressly stated that the Protocol does not apply or have documented the points covered by the Protocol in a different way. Agreements (including ISDA Master Agreements) that may be amended through the Protocol are called “Protocol Covered Agreements”.
However, where agreements are secured or guaranteed by a third party and consent or other action by such third party is required for amendments to be made to such agreements, such agreements are not Protocol Covered Agreements unless such consent or other action has been obtained. An Adhering Party whose obligations under such agreements are so secured or guaranteed undertakes to each other Adhering Party with which it has entered into such agreements that it has procured such consent or other action by the third party and will provide proof thereof upon demand by such other Adhering Party. If the third party providing such security is also an Adhering Party, the required consent is deemed to have been given.
The provisions in the Protocol text only apply to transactions that are subject to EMIR so if two Adhering Parties have a portfolio of trades under a master agreement that includes trades that are subject to EMIR and trades that are not, adherence only imposes the Protocol requirements on the trades subject to EMIR. The parties may, of course, bilaterally agree to use the same processes for the non-EMIR trades if they agree that this is appropriate.
3. How to sign up to the Protocol
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 the Protocol by giving 30 days’ notice on this site.
We note in particular that the requirement for parties to comply with the portfolio reconciliation and dispute resolution obligations set out in the technical standards come into effect on 15 September 2013. The Protocol is being published in advance of that date so as to allow parties time to review and adhere.
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 adherent will receive an e-mail confirmation of the Protocol adherent’s adherence to the Protocol.
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 Portfolio Data Sending Entity or Portfolio Data Receiving Entity, specifying the relevant place(s) for the purposes of the definition of Local Business Day (the Protocol provides a fall back, if no place(s) are specified), stating the full legal name of any Affiliate that is acting as your agent (optional), specifying if you adhere as a party that is able to use a third party service provider (optional), providing contact details to which your counterparty may deliver Portfolio Data, discrepancy notices and Dispute Notices (optional, to the extent that your institution wants these contact details to be different to those specified in Protocol Covered Agreement), providing any 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.
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 were not finalised 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 developed. See also questions 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.
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 (each referred to here as a “client”), you may sign the Adherence Letter using one of the options below. If the elections in section 1 of the Adherence Letter vary between your clients, you should use the first method and adhere separately for each client individually or adhere for each group of clients with identical elections named/identified in the Adherence Letter. Alternatively, if you have the required authority, you may adhere with the same elections for all clients and then bilaterally agree any relevant variations with your counterparties.
If you have authority to adhere on behalf of all of your clients but do not wish to identify them on the Adherence Letter, you may do so by selecting “Investment/Asset Manager/or other agent on behalf of a fund/multiple funds/or other principal” from the dropdown under “Adherence Type” and naming the Investment/Asset Manager/Agent. Standard language “acting on behalf of the funds, accounts or other principals listed in the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) and another Adhering Party” will be provided for you.
If you do not have authority from all your clients (or do have authority from all your clients and wish to identify them), you can adhere on behalf of those clients whose permission you have by selecting “Investment/Asset Manager/or other agent on behalf of some but not all funds/or other principal it represents” and naming the Investment/Asset Manager/Agent. Standard language “acting on behalf of the funds, accounts or other principals 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 it (as agent) on behalf of such fund, account or other principal and another Adhering Party” will be provided for you. You must then list the fund name(s) by either naming each in the field provided (“Name of Fund”) or selecting “Add more than 10 funds” and downloading a list of these funds.
The appendix to your Adherence Letter can either name the clients, or identify them with a unique identifier which will be known and recognized by all other Adhering Parties with which the relevant clients have entered into transactions. The appendix to your letter will be posted on the ISDA website with your Adherence Letter listing the clients or, if you have more than ten clients, we will add a link to a document listing these clients.
If you are using the second method above, any Protocol Covered Agreements which you enter into on behalf of clients 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 Protocol Covered Agreements, then you and the relevant counterparty would need to enter into a bilateral agreement to amend those Protocol Covered Agreements to include those changes.
If (a) you do not have authority from any of your clients or (b) you have authority from some clients only but you are not able to disclose such clients whether by name or a unique identifier, you cannot adhere to the Protocol on behalf of any such clients. In this case, you will need to enter into a bilateral amendment agreement with each relevant counterparty listing the clients whose Protocol Covered Agreement(s) with that counterparty will be amended by incorporating the amendments made by the Protocol.
If you wish to adhere on behalf of clients, 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 add a client to an umbrella master agreement after the date you adhere to the Protocol on behalf of your clients (whether that client was an existing client on, or a client acquired after, the Implementation Date) that client will be added to that umbrella master agreement as amended by the Protocol, unless otherwise agreed.
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. Adhering Parties should review the documents to be amended (i.e., the ISDA Master Agreements or Other Agreements) to identify the entity that signed the documents, and the capacity in which such entity signed the documents, to determine which entity submits the Adherence Letter. For example, if a parent company/agent has signed the agreement on behalf of all entities within the group, then only the parent company/agent needs to adhere. However, if each group entity has its own agreement in place which it has itself executed as principal, then each such entity would need to adhere.
Each individual legal entity is considered a separate Adhering Party for this purpose and would need to pay the adherence fee, except that an Investment/Asset Manager/Agent that adheres on behalf of one or more underlying funds or principals for whom it has entered into an ISDA Master Agreement or Other Agreement, using a single Adherence Letter, would only pay a single adherence fee for that 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.
4. Specific questions on the amendment language
Does/should the Protocol extend to EEA entities?
EMIR includes the reference “(Text with EEA relevance)” indicating that it is 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, EMIR had not been adopted by EEA Joint Committee Decision. It was therefore 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 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”. Parties should thus consult with their legal advisers and any other adviser they deem appropriate as to this point.
Do I have to sign up before 15 September 2013, the date on which, in particular, the portfolio reconciliation and dispute resolution obligations come into effect?
We anticipate that parties will want to adhere before the requirements for parties to comply with the portfolio reconciliation and dispute resolution obligations come into effect on 15 September 2013 so have published this Protocol in advance to allow parties time to review and adhere. Early adherence will help ensure parties have time to identify counterparty adherents, bilaterally negotiate with non-adherents and establish the operational and other internal policies and procedures that underpin the Protocol. We urge parties to adhere well before the deadline to reduce the risk of processing delays, either of the Adherence Letter or by counterparties. The Protocol itself is an “evergreen” protocol, for which there is no scheduled cut-off date for adherence.
If my counterparty and I adhere now, is the amendment to our agreement effective now and do we have to follow the portfolio reconciliation and dispute resolution methodology before EMIR imposes the relevant obligations on 15 September 2013?
The amendment to the agreement is effective on the Implementation Date, as defined in the Protocol, being the date of acceptance by ISDA, as agent, of an Adherence Letter from the later of such two Adhering Parties to adhere.
However, the portfolio reconciliation and dispute resolution provisions in the Protocol only apply to trades subject to related provisions of EMIR, so the parties will not be obliged to perform the relevant methodology prior to 15 September 2013.
Does adhering to the Protocol satisfy my regulatory obligations under EMIR in respect of portfolio reconciliation and dispute resolution?
The Protocol is to assist the parties in meeting their regulatory obligations but the parties must, of course, perform the required actions in order to satisfy their obligations. While great care was taken by the working group to draft the Protocol so as to be compliant with EMIR and many of the key legal questions remaining from the legislation were looked into in some depth, ISDA is not able to certify that the language satisfies any given party’s regulatory obligations. Each party should satisfy itself that the language, the further actions the language refers to and such party’s policies and procedures, taken together, satisfy such party’s regulatory obligations under EMIR and in respect of its national regulator.
Most of my trades are out of scope of EMIR but I do have some within scope trades. Should I adhere and, if I do, will I have to follow the portfolio reconciliation and dispute resolution provisions in respect of all trades or just the trades that are within scope of EMIR?
As the portfolio reconciliation and dispute resolution provisions in the Protocol only apply to trades subject to related provisions of EMIR, you will only have to follow the portfolio reconciliation and dispute resolution provisions in respect of the trades that are within scope of EMIR. However, if you and your counterparty want to apply these provisions to all trades (such as deciding to apply the portfolio reconciliation process to your entire portfolio) you could agree to do so.
I am a European entity (a financial counterparty or non-financial counterparty) facing only third country entities, should I adhere?
You are subject to EMIR and so you should adhere if you want to use the Protocol to help you meet your EMIR requirements.
I am a third country entity facing a (European) financial counterparty or non-financial counterparty, should I adhere?
Even if you are not directly subject to EMIR, your counterparty will be subject to EMIR so will either need you to adhere to the Protocol or to agree language on a bilateral basis which covers the same subject matter.
I am a third country entity. If I and my counterparty, which is also a third country entity, both adhere, do we have to follow the portfolio reconciliation and dispute resolution methodology for trades between us which would otherwise not be subject to EMIR?
No. Even if you both adhere, the portfolio reconciliation and dispute resolution provisions in the Protocol only apply to trades subject to related provisions of EMIR so you will not have to apply the Protocol methodology to trades which are not subject to EMIR. However, if you and your counterparty want to apply these provisions to all trades (such as deciding to apply the portfolio reconciliation process to your entire portfolio) you could agree to do so.
Where the entities have signed the Protocol and the entities themselves are not subject to EMIR would they be forced to comply with the obligations in the Protocol?
The obligations in the Protocol don’t apply unless at least one party is actually subject to EMIR. The portfolio reconciliation and dispute resolution provisions in the PDD Protocol only apply to trades which are subject to the EMIR portfolio reconciliation and dispute resolution requirements (such as where at least one of the parties is a EU financial counterparty or non-financial counterparty and the trade is an uncleared “OTC derivative contract” (as defined in EMIR)). If the EMIR portfolio reconciliation and dispute resolution requirements do not apply, the parties are not obliged to perform the portfolio reconciliation and dispute resolution procedures set out in the PDD Protocol.
Parties may, of course, bilaterally agree to use the processes if they agree that this is appropriate.
I am party to an agreement which is secured or guaranteed by a third party and I want that agreement to be amended by this Protocol. If I adhere without first getting consent from the third party, will my agreement be a Protocol Covered Agreement and so amended by the Protocol?
The agreement will not be a Protocol Covered Agreement if:
(1) any consent, approval, agreement, authorization or other action of such third party is expressly required (under the terms of such agreement or such third party credit support document), to amend or otherwise modify such agreement;
(2) such agreement or such third party credit support document includes express terms to the effect that any amendment or modification of such agreement without the consent, approval, agreement, authorization or other action of any such third party would void, impair or otherwise adversely affect existing or future obligations owed under such third party credit support document; or
(3) such agreement, if amended or modified in accordance with this Protocol without the consent, approval, agreement, authorization or other action of any such third party would void, impair or otherwise adversely affect existing or future obligations owed under such third party credit support document,
unless such consent, approval, agreement, authorization or other action (a) has been obtained or (b) is deemed to have been given, under paragraph 2(d) of this Protocol, by such third party adhering to this Protocol.
I understand that I should state in the Adherence Letter the city and country applicable to me for the purposes of determining “Local Business Day” but I want different Local Business Days to apply to me in respect of certain counterparties, how do I achieve this?
You could adhere stating the one (or more) locations most applicable to you in the context of portfolio reconciliation and dispute resolution and then separately agree with your adhering counterparties which Local Business Days should apply.
Can I adhere to only part of the Protocol?
No. You can adhere to all, but not part, of the Protocol. ISDA will produce a bilateral version of the attachment in due course which you could use for bilateral negotiations with your counterparties.
If my counterparty and I both sign up as a Portfolio Data Receiving Entity, do we have to then bilaterally negotiate a separate agreement or amendment? If so, what is the benefit to adherence?
Where both parties to a Protocol Covered Agreement are Portfolio Data Receiving Entities, the parties will either have to agree that one or both of them become a Portfolio Data Sending Entity or else agree an alternative portfolio reconciliation method bilaterally (which, in any event, will have to include at least one party sending data and the other receiving data and performing a reconciliation).
The benefit to adherence is that the parties can apply the portfolio reconciliation by one or both parties changing its status to being a Portfolio Data Sending Entity, a simpler process than bilaterally negotiating an agreement that covers the same points. In addition, (i) adherence will give you the benefit of the dispute resolution and confidentiality waiver sections of the Protocol irrespective of whether you adhere as a Portfolio Data Sending Entity or Portfolio Data Receiving Entity; and (ii) one or more of your counterparties may adhere as a Portfolio Data Sending Entity so, in respect of these counterparties, the portfolio reconciliation provisions will apply with you and your counterparty using the One-way Delivery of Portfolio Data method.
What do I do if I want to change between Portfolio Data Sending Entity and Portfolio Data Receiving Entity status in the future?
You can change status by written agreement with your counterparty under Part I(2)(a) of the Protocol. Unless you have previously agreed to the contrary with your counterparty, such agreement could be by an exchange of emails or a simple letter signed by both parties, there is no need to amend and restate your Protocol Covered Agreement. You should of course fully consider any change to operational or other process that may be required by such change of status.
I want to be a Portfolio Data Sending Entity in respect of some of my counterparties and a Portfolio Data Receiving Entity in respect of others, how do I achieve this?
You should adhere as either a Portfolio Data Sending Entity or a Portfolio Data Receiving Entity and then contact each counterparty with which you want to take the alternate status in order to change status by written agreement under Part I(2)(a) of the Protocol.
I want to change my status with multiple counterparties, do I have to contact each counterparty individually?
Yes. It would be difficult for the protocol process to allow adherence in different capacities for different counterparties and much or all of the efficiency gained by use of a protocol would be lost.
How do I know how frequently I have to reconcile portfolios?
Article 13(3) of the relevant technical standard (Commission Delegated Regulation (EU) No 149/2013) sets out the frequencies of reconciliation.
Can I agree a reconciliation schedule with my counterparty?
Yes, you can agree a reconciliation schedule with each counterparty, provided that the agreed schedule meets the minimum requirements of EMIR.
If my counterparty and I fail to agree a portfolio reconciliation schedule (or if the agreed schedule is not as frequent as required by EMIR), what schedule does the Protocol impose and what is the first date on which we have to reconcile portfolios?
Absent other agreement, the imposed schedule is that you must reconcile on the last Joint Business Day in the relevant period (this is to ensure you reconcile at least as frequently as the minimum standard set by EMIR). For example, if EMIR imposes weekly reconciliation and assuming at least one of the parties is subject to the portfolio reconciliation requirements from Sunday 15 September 2013 (and that all the days in the following week are Local Business Days for both parties), the date imposed by the Protocol on which the parties would have to reconcile portfolios would be Friday 20 September: the last Joint Business Day within the one week period 15 September to 21 September. You and your counterparty are free to agree a reconciliation date that occurs at any time during that week, Friday 20 September is simply the date on which you have to reconcile if you have not agreed to reconcile on an earlier date. It is anticipated that parties will wish to agree earlier reconciliation in order to avoid excessive operational burden on certain days.
If the Implementation Date in respect of you and a counterparty is after the date on which you were subject to the portfolio reconciliation requirement, the Protocol language imposes a date of the last Joint Business Day in the period starting on the Implementation Date. You are, as above, free to agree an earlier reconciliation date.
If I do not think there are any discrepancies in the Portfolio Data I receive from my counterparty, does the Protocol require that I have to affirm this to them every time?
No. You only have to notify your counterparty if you have identified one or more discrepancies which you determine to be material to the rights and obligations of the parties in respect of one or more Relevant Transaction(s).
What does “material to the rights and obligations of the parties” mean?
It is anticipated that a reconciliation may identify a number of differences (“discrepancies”) and that not all of these will be seen by the parties as being significant enough to merit a bilateral attempt at resolution. For example, you might determine that a small difference between your and your counterparty’s valuation of a transaction actually results from taking data reference points a few hours apart or from the parties using slightly different valuation mechanics or reference sources. The language allows you to apply discretion in reviewing the results of the reconciliation and only contact your counterparty where you believe a discrepancy is material to the rights and obligations of the parties under the relevant transactions.
What does “attempt to resolve … in a timely fashion” mean in the portfolio reconciliation provisions? Does it mean I have to reach an agreement with my counterparty and how many days do we have to resolve the point?
“Resolve” does not mean “agree” in all cases. One aim of the portfolio reconciliation requirement in EMIR is to help ensure misunderstandings between the parties as to the key trade terms are promptly identified and resolved. Certain differences, such as a typographical error in a name, rate or notional amount, should be relatively easy for the parties to investigate and agree on the correct record. Other differences, such as a difference in valuations might not be something the parties can “agree” as the valuation arises from a difference in underlying methodology or reference.
EMIR does not set hard deadlines for resolution. “In a timely fashion” indicates that the parties should take a pro-active approach to resolve the discrepancy and should not neglect a material difference.
I will be a Portfolio Data Receiving Entity. If I fail to notify my counterparty of a discrepancy within the deadline in Part 1(1)(a)(iv) I am deemed to have affirmed the Portfolio Data. Does this (i) prevent me from notifying the discrepancy to my counterparty the next time we reconcile; (ii) mean I have agreed to a valuation for the purposes of our existing collateral agreement; or (iii) prevent me from raising a dispute?
No. See Part I(6) which states that the Protocol is without prejudice to other rights the parties may have under contract or in law.
I currently outsource portfolio reconciliation to a service provider, does adherence to the Protocol override my existing arrangements or mean I have to change my existing arrangements?
No. However, you should consider whether your existing arrangements are sufficient in the context of EMIR and the extent to which you wish to use your existing arrangements to satisfy the methodology set out in the Protocol.
Can I outsource portfolio reconciliation to a third party service provider (as defined in the Protocol) if I adhere to the Protocol?
Yes, with the agreement of your counterparty. Such agreement may pre-date the Implementation Date under the Protocol and may (though this should be checked) already exist through the service agreements the parties signed with the third party service provider.
If I fail to deliver data or perform a reconciliation on time, what penalties should I be aware of?
Failure by a party to take any required action or to otherwise comply with Part I, will not constitute an event of default or give either party a right to terminate transactions but the rights and remedies that may be available to the parties as a matter of law are preserved. Failure to comply with Title II of EMIR does not of itself affect the validity of transactions that are subject to EMIR but it may expose the relevant party to potential regulatory sanction under EMIR.
Do I have to specify contact details for delivery of Portfolio Data and discrepancy notices in my Adherence Letter?
No. This is entirely optional and, if you do specify contact details, your counterparties are not obliged to use them.
Do I have to specify contact details for dispute notices in my Adherence Letter?
No. This is entirely optional and, if you do specify contact details, your counterparties are not obliged to use them.
Does a Dispute Notice have to be in any particular form?
No but it must set out in reasonable detail the issue in dispute (including, without limitation, the Relevant Transaction(s) to which the issue relates) and state that it is a Dispute Notice for the purposes of Part I(4) of the Protocol. For example, you could use the following sentence: “This [notice] constitutes a Dispute Notice for the purposes of Part I(4) of the attachment to the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol published by the International Swaps and Derivatives Association, Inc. on 19 July 2013 (the “Protocol”) and each Protocol Covered Agreement (as defined in the Protocol) which relate to the subject matter described herein” at the beginning of the notice before adding the details of the dispute.
What is the difference between a “discrepancy” and a “dispute”?
The following distinction may help potential adherents in considering the Protocol. Neither the Protocol nor EMIR defines these terms. The Protocol contains significant flexibility (such as in Part I(6)) to allow each party to apply the process that best suits the particular situation it faces. EMIR and its supporting regulation is subject to interpretation and, as noted above, the parties should take professional advice.
- A “discrepancy” is any difference identified by the portfolio reconciliation process. The Protocol does not require a party to notify its counterparty of any discrepancy identified through the portfolio reconciliation process unless such discrepancy is material to the rights and obligations of the parties under the relevant transactions.
- A “dispute” may include a material discrepancy which, despite attempts, has not been resolved at an operational (or, perhaps, a relationship) level such that one or both of the parties is, potentially, considering a more formal procedure.
Does adherence to the Protocol override my existing portfolio reconciliation and dispute resolution processes which I have agreed with my counterparties?
No. Part I(6) states that the Protocol is without prejudice to other rights the parties may have under contract or in law.
Does the inclusion of the confidentiality waiver mean I can assume I am free to disregard any existing confidentiality requirements I am under?
No. While the language is likely to be useful and may be sufficient in one or more jurisdictions or in respect of one or more counterparty types, parties should be aware that the consents and acknowledgements set out in the Protocol are not necessarily sufficient to overcome any prohibition or impediment to disclosure under the laws of every jurisdiction. Parties should consult with their legal advisers and any other adviser they deem appropriate prior to adhering to the Protocol.
What is the relationship between this Protocol and the ISDA 2013 EMIR Reporting Protocol that was published in May this year?
The attachment to the Reporting Protocol is very similar to the confidentiality waiver in this Protocol but, while the Reporting Protocol purports to cover disclosure globally, the confidentiality waiver in this Protocol only relates to EMIR.
Can I use ISDA Amend for any of the elections made in respect of the Protocol?
Not currently. As of the time of publication, ISDA Amend is not available for use in respect of this Protocol. ISDA Amend functionality is being considered for this Protocol and ISDA will notify the market as to a timeline for availability, if that becomes available. We urge parties in the interim to provide the necessary information as otherwise provided in the Protocol. As with all ISDA Protocols with ISDA Amend availability, use of ISDA Amend is subject to the agreement of both counterparties to each relevant Protocol Covered Agreement.