ISDA has prepared this list of frequently asked questions (“FAQ”) to assist in your consideration of the ISDA 2015 Section 871(m) Protocol (the “2015 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 2015 PROTOCOL. ISDA DOES NOT PROVIDE TAX ADVICE. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING OR ADHERING TO THE 2015 PROTOCOL. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH ANY OF ITS DOCUMENTATION OR OTHER DOCUMENTATION MAY BE PUT. THIS FAQ IS NOT OFFERED AS LEGAL ADVICE OR TAX ADVICE, AND SHOULD NOT BE TAKEN AS SUCH. ISDA DISCLAIMS ALL LIABILITY TO ANY PERSON IN RESPECT OF ANYTHING DONE OR OMITTED TO BE DONE WHOLLY OR IN PART IN RELIANCE ON THE INFORMATION CONTAINED IN THIS FAQ.

These frequently asked questions are divided into the following three sections:

• WHAT DOES THE 2015 PROTOCOL DO?
• ADHERENCE PROCESS
• SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS

WHAT DOES THE 2015 PROTOCOL DO?

1. What does the 2015 Protocol Do?

The Protocol offers market participants an efficient way to amend ISDA Master Agreements to address the effects of Section 871(m) of the US Internal Revenue Code and the regulations thereunder. For parties that have adhered to the ISDA 2010 HIRE Act Protocol and/or the ISDA 2010 Short Form HIRE Act Protocol (“2010 Protocols”) or otherwise incorporated language intended to address the impact of Section 871(m) in their ISDA Master Agreements or confirmations, the 2015 Protocol replaces such provisions for all transactions entered into on or after January 1, 2017 if both parties to ISDA Master Agreements or confirmations adhere to the 2015 Protocol. If only one party adheres, the provisions of such agreements remain in effect as previously negotiated. For parties that have not adhered to a 2010 Protocol and do not currently have language intended to address the impact of Section 871(m) in their ISDA Master Agreements, the 2015 Protocol will allocate the risk of withholding tax under Section 871(m) to the long party to any transaction entered into on or after January 1, 2016. The fundamental risk allocation in the 2015 Protocol is effectively the same as the previous risk allocation under the 2010 Protocols.

2. What is Section 871(m)?

Enacted in 2010, Section 871(m) imposes withholding of up to 30% (subject to reduced rates under applicable US tax treaties) on dividend equivalent payments made or deemed made on certain swaps and equity-linked instruments (“US derivatives”) over US equities if the long party to the instrument is a non-US person, as determined under US tax principles, e.g., a counterparty organized outside of the US.

Final regulations that were issued under Section 871(m) will require withholding, unless an exception applies, on all US equity derivatives with a delta of at least 0.8 (when tested separately or in combination with other derivatives entered into in connection with each other) for:

• transactions entered into on or after January 1, 2017

US derivatives are derivatives that reference corporations that pay US source dividends, e.g., corporations organized in the US.

3. I’m organized outside of the US. Why should I care about a US tax law?

Section 871(m) requires the short party to withhold US tax on US dividend equivalent payments paid or deemed paid to a foreign long counterparty, regardless of whether the short party is a US person or a non-US person. For example, if a UK swaps dealer enters into a total return swap on or after January 1, 2017 providing long exposure on a US equity to a Cayman Islands fund, Section 871(m) will require that US withholding be applied at a rate of up to 30% on any dividend equivalent payments made over the term of the swap.

4. What is the ISDA 2015 Section 871(m) Protocol?

The 2015 Protocol is an updated version of the 2010 Protocols with changes made to address final regulations that were issued under Section 871(m) on September 17, 2015; however, the basic allocation of tax risks under Section 871(m) and the final regulations are allocated in the same manner as the previous protocols, i.e., such tax risks are allocated to the long party to the relevant US derivative.

5. I already adhered to a 2010 Protocol that addressed tax risks under Section 871(m). Why should I care about the 2015 Protocol?

The only material effect will be to turn off certain provisions that were in your 2010 Protocol that are no longer included in the 2015 Protocol; however, the tax risks under Section 871(m) and the final regulations are allocated in the same manner under the 2010 Protocols and the 2015 Protocol. For example, there were payee tax representations that were included in the 2010 Protocols that will continue to be relevant under the statutory rule under Section 871(m) for transactions entered into through 2016. However, these representations will no longer be relevant under Section 871(m) for transactions entered into on or after January 1, 2017. If you adhere to the 2015 Protocol, paragraph 1(a) of the Attachment to the 2015 Protocol will provide that the provisions of your 2010 Protocol will apply to transactions entered into prior to January 1, 2017; however, the 2010 Protocol will cease to apply and the 2015 Protocol provisions will apply instead to transactions entered into on or after January 1, 2017. Please note, however, that adhering to the 2010 protocol will have no effect if your counterparty has only adhered to the 2015 Protocol.

6. What effect will adhering to the 2015 Protocol have on me if:a) I did not adhere to a 2010 Protocol, but incorporated the provisions of a 2010 Protocol in my ISDA Master Agreement?

• If you adhere to the 2015 Protocol, paragraph 1(a) of the Attachment will provide that the 2010 Protocol provisions incorporated in your agreement will continue to apply to transactions entered into prior to January 1, 2017; however, the 2015 Protocol provisions will replace the 2010 Protocol provisions and apply instead to transactions entered into on or after January 1, 2017.b) I did not adhere to a 2010 Protocol or incorporate the provisions of a 2010 Protocol in my ISDA Master Agreement, but did incorporate those provisions in a Master Confirmation Agreement (“MCA”)?

 

• If you adhere to the 2015 Protocol, paragraph 1(a) of the Attachment will provide that the 2010 Protocol provisions incorporated in each confirmation under the MCA will continue to apply for transactions entered into prior to January 1, 2017; however, the 2015 Protocol will replace the 2010 Protocol provisions for transactions entered into on or after January 1, 2017. For any transactions that are not documented under the MCA, the 2015 Protocol provisions will begin to apply to transactions entered into on or after January 1, 2016c) I did not adhere to a 2010 Protocol, but incorporated other provisions that address the allocation of taxes between the parties under Section 871(m) in my ISDA Master Agreement?
• If you adhere to the 2015 Protocol, paragraph 1(a) of the Attachment will provide that the provisions that you incorporated in your agreement intending to address the impact of Section 871(m) will continue to apply to transactions entered into prior to January 1, 2017; however, the 2015 Protocol provisions will replace these provisions and apply to transactions entered into on or after January 1, 2017.d) I did not adhere to or incorporate the provisions of a 2010 Protocol and I do not otherwise have any provisions that reference or are intended to address Section 871(m) in my ISDA Master Agreement or MCA?
• If you adhere to the 2015 Protocol, paragraph 1(a) of the Attachment will provide that the 2015 Protocol provisions will apply to transactions entered into on or after January 1, 2016.e) I executed a new ISDA Master Agreement after the date I adhered to the Protocol?
• If you have already adhered to the 2015 Protocol, the 2015 Protocol provisions will apply to any new ISDA Master Agreement executed with another Adhering Party effective on the date that the ISDA Master Agreement is executed.

ADHERENCE PROCESS

7. Is there a closing date for adherence to the 2015 Protocol?

There is currently no cut-off date for adherence, but ISDA reserves the right to designate a cut-off date for the 2015 Protocol by giving 30 days’ notice on this site.

8. 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 2015 Protocol adherent will receive an e-mail confirmation of the adherent’s adherence to the 2015 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.

9. Can entities that are not ISDA members sign up to the 2015 Protocol?

Yes. The 2015 Protocol is open to any entity. ISDA members and non-ISDA members adhere to the 2015 Protocol in the same way.

10. 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 the printed or typewritten name of each signatory in place of each signature will be published by ISDA so that it may be viewed by all Protocol adherent

11. Who is an authorized signatory?

An authroized signatory to the Adherence Letter is an individual who has the legal authority to bind the Adhering Party.

12. 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 2015 Protocol and generated by the Protocol Management webpage.

13. Are there any costs to adhere to the 2015 Protocol?

Yes. Each party adhering to the 2015 Protocol must submit a one-time fee of US $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 Investment/Asset Manager/Agent that adheres on behalf of one or more underlying funds or principals for whom it has entered into a Covered Master Agreement, using a single Adherence Letter, would only pay a single adherence fee for that 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 should submit 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.

14. Can I revoke my participation in the 2015 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 2015 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 Agreement with your counterparty (the other Adhering Party) and any such subsequent amendments will supersede those made by the 2015 Protocol to the extent that they are inconsistent.

SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS

15. 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 2015 Protocol. If you wish to implement the changes contained in the 2015 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 2015 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 2015 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 2015 Protocol.

If you add a client to an umbrella master agreement after the date you adhere to the 2015 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 2015 Protocol, unless otherwise agreed.