ISDA 2017 OTC Equity Derivatives T+2 Settlement Cycle Protocol

Open from July 28, 2017

ISDA has prepared this list of frequently asked questions to assist in your consideration of the ISDA 2017 OTC Equity Derivatives T+2 Settlement Cycle Protocol (the “Protocol”). Capitalized terms not otherwise defined herein have the meanings ascribed to them in the Protocol documents.

THIS SUMMARY DOES NOT PURPORT TO BE AND SHOULD NOT BE CONSIDERED A GUIDE TO OR AN EXPLANATION OF ALL RELEVANT ISSUES IN CONNECTION WITH YOUR CONSIDERATION OF THE PROTOCOL OR THE RELATED DOCUMENTS. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISERS THEY DEEM APPROPRIATE AS PART OF THEIR CONSIDERATION OF THE PROTOCOL PRIOR TO 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 are grouped in four sections:

    • Protocol Adherence Process
    • Special Considerations for Investment/Asset Managers
    • What does the Protocol do?
    • What agreements does the Protocol cover?

Protocol Adherence Process

1.      What is a “protocol?”

An ISDA protocol is a multilateral contractual amendment mechanism that allows for various standardized amendments to be deemed to be made to the relevant Protocol Covered Documents between any two adhering parties. It builds on the principle that parties may agree with one or more other parties that certain terms and provisions will apply to their respective relationships (unless and until they specifically agree otherwise).

2.      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.

3.      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.

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.

4.      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.

5.      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.

6.      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.

7.      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.

8.      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 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 a Protocol Covered Document, using a single Adherence Letter, would only pay a single adherence fee for that Adherence Letter.

9.      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 Protocol Covered Documents 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.

Special Considerations for Investment/Asset Managers

10.      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 Document 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 Documents, then you and the relevant counterparty would need to enter into a bilateral agreement to amend those Protocol Covered Documents 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 Documents(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.

What does the Protocol do?

11.      What does the Protocol do?

On September 5, 2017, the regular settlement cycle for most securities transactions in shares that trade in the United States, Canada, Mexico and Peru (each, a “Covered Region”) is moving from a three “business day” settlement cycle (“T+3”) to a two “business day” settlement cycle (“T+2”) (where “business days” are as defined for this purpose in the relevant market).  Some OTC equity derivatives transactions refer to one or more Payment Dates and/or Settlement Dates in Confirmations and Master Confirmation Agreements as three Determination Days after a Valuation Reference Day (which may be subject to a Business Day Convention or other terms).  These documents may refer to 3 “business days” because as of the date of such agreements, the underlying asset was expected to have a T+3 settlement cycle for the term of the relevant transactions.

The Protocol provides a mechanism for parties to amend the relevant documentation to move the relevant Payment Dates and/or Settlement Dates to be two Determination Days (as discussed further herein) after a Valuation Reference Day (as discussed further herein) (subject to any business day terms that may move the date further).

What agreements does the Protocol cover?

12.      What is a Protocol Covered Document?

A Protocol Covered Document is any of a Protocol Covered Confirmation, a Protocol Covered Master Confirmation Agreement or Protocol Covered MCA Confirmation entered into by Adhering Parties on or prior to September 5, 2017 or, in the case of an Agent Protocol Covered Document, signed by the Agent and the counterparty or entered into by such parties prior to adherence by both the counterparty and the Agent, on behalf of the relevant Client.

13.      What is a Protocol Covered Confirmation and why is each element of the definition therefor included?

A “Protocol Covered Confirmation” is a Confirmation between two Adhering Parties,

(i) that is not entered into under a Master Confirmation Agreement (that is because the Protocol addresses  Master Confirmation Agreements and Confirmations entered into thereunder separately),

(ii) with a Protocol Covered Document Date that is prior to September 5, 2017 (that is because parties that trade OTC equity derivatives prior to the effective date of  T+2 in Covered Regions may not have known of this change at the time a Confirmation was prepared or they may have not yet updated their documentation systems, whereas trades entered into on or after the change to T+2 in Covered Regions are expected to be documented using a T+2 settlement cycle or if another mechanism is used, then that intentional choice would not be overridden by the Protocol),

(iii) that incorporates the Equity Definitions (that is because this Protocol is only intended to amend OTC equity derivatives transactions, which are frequently confirmed using the Equity Definitions),

(iv) that confirms the terms of a Protocol Covered Transaction (as described further in Question 16, that is because only certain transactions will relate to Covered Regions),

(v) which specifies that a Cash Settlement Payment Date or Settlement Date, as applicable, is determined as three Determination Days following a Valuation Reference Day, without regard to any Business Day Convention or provision that adjusts any such day forwards or backwards if it is not a Business Day or a Currency Business Day (that is to reflect the move from T+3 to T+2 in Covered Regions and to have the relevant OTC equity derivatives transactions settle on the basis of that timing).

14.      What is a Protocol Covered Master Confirmation Agreement and why is each element of the definition therefor included?

A “Protocol Covered Master Confirmation Agreement”is a Master Confirmation Agreement between two Adhering Parties,

(i) with a Protocol Covered Document Date that is prior to September 5, 2017 (that is because parties that entered into a Master Confirmation Agreement (an “MCA”) prior to the effective date of  T+2 in Covered Regions may not have known of this change at the time the MCA was prepared, whereas MCAs entered into on or after the change to T+2 in Covered Regions are expected to account for a T+2 settlement cycle for relevant Transactions or if another mechanism is used, then that intentional choice would not be overridden by the Protocol),

(ii) that incorporates the Equity Definitions (that is because this Protocol is only intended to amend OTC equity derivatives transactions, which are frequently confirmed using the Equity Definitions),

(iii) that confirms certain general terms of one or more Transactions that may be entered into thereunder (that is because that is the purpose of an MCA),

(iv) that by its terms would permit the parties to enter into one or more Protocol Covered Transactions thereunder or would not exclude the parties from entering into one or more Protocol Covered Transactions thereunder (as described further in Question 16, that is because an MCA may permit parties to enter into a range of Transactions and only certain transactions will relate to Covered Regions whereas other may not), and

(v) which specifies that a Cash Settlement Payment Date or Settlement Date, as applicable, for one or more Transactions to be entered into thereunder is determined as three Determination Days following a Valuation Reference Day, without regard to any Business Day Convention or provision that adjusts any such day forwards or backwards if it is not a Business Day or a Currency Business Day (that is to reflect the move from T+3 to T+2 in Covered Regions and to have the relevant OTC equity derivatives transactions settle on the basis of that timing).

15.      What is a Protocol Covered MCA Confirmation and why is each element of the definition therefor included?

A “Protocol Covered MCA Confirmation”means an MCA Confirmation (e.g., a Confirmation entered into under an MCA) between two Adhering Parties,

(i) that is entered into under a Protocol Covered Master Confirmation Agreement (that is because it is in the MCA Confirmation where a transaction will be determined to be a Protocol Covered Transaction or not),

(ii) that confirms the terms of a Protocol Covered Transaction (as described further in Question 16, that is because only certain transactions will relate to Covered Regions), and

(iii) which specifies that (a) a Cash Settlement Payment Date or Settlement Date, as applicable, is determined as three Determination Days following a Valuation Reference Day where such term is defined in a Master Confirmation Agreement or (b) a Cash Settlement Payment Date or Settlement Date, as applicable, is determined as three Determination Days following a Valuation Reference Day where such term is defined in such MCA Confirmation,  and, in any case of (a) or (b), with a Protocol Covered Document Date prior to September 5, 2017 and without regard to any Business Day Convention or provision that adjusted any such day forwards or backwards if it is not a Business Day or a Currency Business Day (that is to reflect the move from T+3 to T+2 in Covered Regions and to have the relevant OTC equity derivatives transactions settle on the basis of that timing).

16.      What are the elements of a Protocol Covered Transaction?

A Protocol Covered Transaction (i) relates to a single share, a single index, a single basket of shares, a single basket of indices or a single basket of shares and indices, (ii) has at least one Exchange which is located in a Covered Region and (iii) is not a Protocol Excluded Transaction.

17.      What are the elements of a Protocol Excluded Transaction?

A Protocol Excluded Transaction is (i) any Transaction that relates to a single index or a single basket (of shares, indices or shares and indices), where any of the Exchanges located outside of a Covered Region has a regular settlement cycle for transactions in securities that trade on that Exchange which is longer than T+2 or (ii) any Transaction that is confirmed using MarkitWire or any other service under MarkitSERV (so as to exclude trades where Markit is making its own determinations).

18.      For a Master Confirmation Agreement, the Protocol says that it “would permit the parties to enter into one or more Protocol Covered Transactions thereunder or would not exclude the parties from entering into one or more Protocol Covered Transactions thereunder.”  Since the language is “would permit” and “would not exclude,” could the Protocol amend a Transaction that is not a Protocol Covered Transaction. 

Even though a Master Confirmation Agreement only needs to permit or not exclude Protocol Covered Transactions to be a Protocol Covered Document, in the Attachment only T+2 amendments are made for the Protocol Covered Transactions.

19.      In the definition of Master Confirmation Agreement what is meant by a written agreement between two Adhering Parties that “otherwise contains terms that provide for the documentation of Transactions under certain common terms set forth in such written agreement?”

Different parties use different terminology to define documents that are often referred to as Master Confirmation Agreements.  In section (i) of the definition of that term the Protocol refers to some of those terms (Master Confirmation Agreement, Swap Master Confirmation or Portfolio Swap Agreement) but there are other naming conventions that may be used.  Thus, section (ii) of the definition of Master Confirmation Agreementserves as a catch-all provision to pick up these agreements notwithstanding the fact that they may use a different naming convention therein.

20.      What is a Determination Day and why does the Protocol define this term as any one of many other terms rather than by choosing a single term?

A “Determination Day” is any of a Clearance System Business Day, Business Day, Currency Business Day, Exchange Business Day or Scheduled Trading Day (or any combination thereof).  A document that may be a Protocol Covered Document may define a Payment Date or Settlement as “two” of any such days following a Valuation Reference Day (e.g., two Scheduled Trading Days following the Valuation Date or two Clearance System Business Day following the Valuation Date).  The Protocol is agnostic as to which type of day(s) is used in the relevant documentation if that documentation uses two of such days in the manner described in the Protocol.

21.      What is a Valuation Reference Day and why does the Protocol define this term as any one of many other terms rather than by choosing a single term?

A “Valuation Reference Day” is any Exercise Date, Averaging Date, Valuation Date, Potential Exercise Date, Knock-in Determination Day, Knock-out Determination Day or Expiration Date as each of such terms is defined in the Equity Definitions or any Observation Day or Observation Date as each of such terms is defined in any Confirmation or Master Confirmation Agreement. Since the documentation for different OTC equity derivatives trades use different terms for different trades (e.g., Exercise Date for an Option and Observation Date for a variance swap) from which the Payment Date or Settlement is determined, the Protocol defines a range of these days.

22.      How does the Protocol amend a Protocol Covered Confirmation?

The Protocol amends such a Confirmation by amending the definition of Payment Date or Settlement Date determined for a Valuation Reference Day that occurs on or after September 5, 2017 by changing any reference to “three” in such definition to “two.”

23.      How does the Protocol amend a Protocol Covered MCA Confirmation?

The Protocol amends such an MCA Confirmation by amending the definition of Payment Date or Settlement Date determined for a Valuation Reference Day that occurs on or after September 5, 2017 by changing any reference to “three” in such definition (whether set forth in such MCA Confirmation or the Master Confirmation Agreement governing such MCA Confirmation) to “two.”

24.      How does the Protocol amend a Protocol Covered Master Confirmation Agreement?

The Protocol amends such a Master Confirmation Agreement by amending the definition of Payment Date or Settlement Date determined for a Valuation Reference Day that occurs on or after September 5, 2017 for a Protocol Covered Transaction by changing any reference to “three” in such definition (whether set forth in such MCA Confirmation or the Master Confirmation Agreement governing such Master Confirmation) to “two” unless otherwise specified in the MCA Confirmation.  Since this amendment only occurs for a Protocol Covered Transaction, the definition of Payment Date or Settlement Date in the Master Confirmation Agreement for other Transactions shall not be amended.

25.      What does it mean that the Protocol amends a Payment Date or Settlement Date “without regard to any Business Day Convention or provision therein that adjusts any such day forwards or backwards if it is not a Business Day or a Currency Business Day,” as included in the Attachment to the Protocol?

Documentation for OTC equity derivatives trades may refer to a Payment Date by reference to T+3 but then may modify that date for business days.  For example, a Payment Date may be defined in a Protocol Covered Document as “Three Scheduled Trading Days following the Valuation Date (or, if such day is not a Currency Business Day, the following Currency Business Day).”  The Protocol addresses the fact that T+3 is changing to T+2 in certain regions.  Once the Payment Date or Settlement Date is amended to T+2, it leaves any business day adjustments intact.  So, for the example provided in this answer, the Protocol would amend the Payment Date to be “Two Scheduled Trading Days following the Valuation Date (or, if such day is not a Currency Business Day, the following Currency Business Day).”

26.      Why doesn’t the Protocol define Protocol Covered Documents by reference to the products that may be traded thereunder (e.g., Equity Options)?

The Protocol sets forth terms and conditions that limit its application to certain Transactions and agreements, but so long as those terms and conditions are met, the Protocol does not limit its application by product type.  One of those terms is that Transactions reference a single share, index or certain type of basket.  Therefore, the Protocol would not apply to a Transaction that references two such underliers (e.g., a correlation swap that relates to two indices) unless that Transaction were confirmed as a single Basket of such underliers.  If parties wish to apply the amendments of the Protocol to documents where it would not otherwise apply, they could enter into bilateral amendments.

27.      Why doesn’t the Protocol amend documentation that defines Payment Dates or Settlement Dates, as applicable, as one Settlement Cycle following a Valuation Reference Day?

Once the Settlement Cycle for certain underliers changes from T+3 to T+2, the definition of Settlement Cycle will account for this.  For example, the Settlement Cycle for a trade on a US share with a Payment Date or Settlement Date defined by reference to a Valuation Reference Day of July 28, 2017 would be determined using T+3, whereas if that same trade had a future Valuation Reference Day of October 10, 2017, the Settlement Cycle used to determine the related Payment Date or Settlement Date would be T+2.

28.      Does the Protocol amend every possible way in which Payment Dates or Settlement Dates, as applicable, and Valuation Reference Days are defined in relation to each other to reflect T+2?

No.  There are various ways in which such dates can be defined in OTC documentation.  However, the only one that had a clear consensus as to how to amend that documentation amongst ISDA members is the one addressed by the Protocol.  That is, where a Payment Date or Settlement Date is defined as three Determination Days after a Valuation Reference Day, without regard to business day adjustments. 

For example, OTC documentation may define a Payment Date or Settlement Date as a fixed date and define the related Valuation Reference Day as three Determination Days prior to that Payment Date or Settlement Date.  There was no majority view amongst ISDA members as to how to amend that documentation.  Those ISDA members also noted that defining a Valuation Reference Day in this manner is not common.  Some of those ISDA members indicated that in their OTC documentation they may sometimes define a Valuation Reference Day as a fixed date and also define the related Payment Date or Settlement Date as a fixed date. The Protocol would not amend this Transaction, even though the related trade may be one that parties would want to amend (e.g., if it were on a US share and there were 3 Determination Days between the Valuation Reference Day and the related Payment Date or Settlement Date).  In any of the above examples or in other OTC documentation scenarios where the Protocol does not amend the documentation, if the parties wish to make amendments to the relevant documentation they would need to be do so bilaterally.