CFTC Extends Deadline to Comply with Certain Trading Documentation Requirements Under Dodd-Frank for Corporate End-Users of Foreign Exchange Derivatives

In late June 2013, the Commodity and Futures Trading Commission (CFTC) issued a no-action letter extending the period for certain corporate end-users of foreign exchange (FX) derivative transactions to comply with the trading documentation requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

As discussed in a February 2013 WSGR Alert, Dodd-Frank requires swap dealers (SDs) and major swap participants (MSPs) to establish and follow written policies and procedures reasonably designed to ensure that they execute written swap trading relationship documentation with corporate end-users of FX swaps "prior to or contemporaneously with" entering into an FX swap transaction with such corporate end-users (Trading Documentation Rule). The swap trading relationship documentation must include all terms governing the trading relationship between the swap dealer and the FX corporate end-user, including terms such as payment obligations, events of default, netting, termination events, and calculation of obligations upon termination. Corporate end-users who trade with SDs or MSPs can meet this documentation requirement by having an International Swaps and Derivatives Association (ISDA) Master Agreement (or similar documentation) in place with their swap counterparties. In addition, corporate end-users without an ISDA Master Agreement in place with their swap counterparties can use the ISDA March 2013 DF Protocol (Protocol 2.0) to enter into a "deemed" ISDA Master Agreement—without an associated schedule—with their swap counterparty.

The Trading Documentation Rule was scheduled to take effect for all swap dealers and major swap participants on July 1, 2013. However, in a no-action letter issued June 27, 2013, the CFTC announced that it will not take enforcement action against an SD or MSP for failure to execute swap trading relationship documentation with a corporate end-user in compliance with the Trading Documentation Rule until December 31, 2013, provided that the following conditions are met:

  • the SD or MSP has established and is maintaining the written policies and procedures required under the Trading Documentation Rule;
  • the only swaps that were in effect between the SD or MSP and the corporate end-user as of June 27, 2013, were (i) FX transactions that are swaps1 or (ii) physically settled FX forwards and swap agreements that have been exempted from the definition of "swap" by the U.S. Treasury Department2 (Covered Transactions);
  • as long as the no-action relief is in effect, an SD or MSP may only enter into Covered Transactions with the corporate end-user; and
  • the Covered Transactions are not governed by relationship documentation that is, or is substantially similar to, an ISDA Master Agreement.

In sum, corporate end-users who do not have ISDA Master Agreements (or substantially similar documentation) in place may continue to trade with SDs and MSPs until December 31, 2013, as long as they only trade products that constitute Covered Transactions.

Corporate end-users who have not yet satisfied the Trading Documentation Rule have two primary options for achieving compliance: (i) negotiating ISDA Master Agreements with their counterparties or (ii) entering into a deemed ISDA 2002 Master Agreement (Deemed ISDA) with their counterparties through adherence to Protocol 2.0. Protocol 2.0 is a mechanism designed to make it easier for market participants to supplement the terms of their existing swap trading relationships in order to comply with the various requirements of Dodd-Frank. Among other things, Protocol 2.0 enables corporate end-users to enter into a Deemed ISDA to govern their uncleared swaps. The Deemed ISDA includes certain basic terms required to satisfy the Trading Documentation Rule. While entry into a Deemed ISDA is sufficient to comply with the Trading Documentation Rule, many end-users prefer to enter into negotiated ISDA Master Agreements in order to enjoy the benefits of customizing the contract to their needs.

As a next step, corporate end-users who do not have an ISDA Master Agreement in place and have not completed Protocol 2.0 should assess their options for compliance with the Trading Documentation Rule.

1 FX transactions that are swaps include foreign currency options and non-deliverable forwards involving foreign exchange but do not include cross-currency swaps.

2 Transactions that solely involve (A) an exchange of two different currencies on a specific date at a fixed rate that is agreed upon on the inception of the contract covering the exchange; and a (B) reverse exchange of the two currencies involved in (A) at a later date and at a fixed rate that is agreed upon on the inception of the contract covering the exchange have been exempted from the definition of "swap" by the U.S. Treasury Department.