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ISDA has prepared this brief summary of frequently asked questions to assist in your consideration of the 2009 AEJ Protocol (the “Protocol”). THIS FREQUENTLY ASKED QUESTIONS DOES 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.
This Frequently Asked Questions webpage is divided into two sections: (i) questions relating to the submission of Adherence Letters; and (ii) questions relating to the substance of the Protocol itself.
ADHERENCE LETTER SUBMISSION
Can I change the text of the Adherence Letter?
No. The Adherence Letter must be in the same format as the form letter published in the Protocol.
Does it cost any money to adhere to the Protocol?
No.
Must I be a member of ISDA to adhere to the Protocol?
No.
When do I need to send in my Adherence Letter?
The Protocol is open from 9:00 a.m. New York time on Monday, March 9, 2009 to 5:00 p.m. New York time on Friday, March 27, 2009. A party must email its Adherence Letter to ISDA by 5:00 p.m. New York Time on March 27, 2009, or it will not be able to participate in the Protocol.
How do I send in my Adherence Letter?
All Adherence Letters must be delivered by email to aejprotocol@isda.org. In the email, you must submit both your conformed and executed copies of the Adherence Letter. You must use the form of letter for the Protocol available on the ISDA website. Click here for the form of Adherence Letter.
The Adherence Letter(s) should be on your institution’s letterhead. Nothing in the form Adherence Letter available on ISDA’s website may be changed with the exception of completing the details of your institutional name, date and signature block and specifying which of the Annexes (and in the case of Annexes 2 to 4, part (a) or part (b) thereof) you wish to apply by checking the relevant box opposite that Annex. If an Adhering Party fails to check a box relating to an Annex, it will be deemed to have elected that such Annex (or the relevant part thereof, as the case may be) is not applicable.
Please do not send your original Adherence Letter(s) by mail to ISDA.
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.
You must also submit an executed, or signed, copy of the Adherence Letter in addition to the conformed copy of the Adherence Letter. ISDA keeps the executed copy of the Adherence Letter for its files and does not share the executed copy with anyone else.
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.
What if I am an investment or asset manager – how do I complete the signature block?
If you are an investment or asset manager and act on behalf of multiple funds, you must indicate the following in the signature block: "Investment/Asset Manager, acting on behalf of the funds and accounts listed in the relevant Master Agreement between it and another Adhering Party". A separate Adherence Letter for each fund or account does not need to be submitted to ISDA. Further, no specific names of clients of the investment/asset manager will be publicly disclosed on the ISDA website in connection with the Protocol.
As an alternative, an investment or asset manager may list the specific funds that are adhering to the Protocol, by indicating in the signature block: “Investment/Asset Manager, acting on behalf of the funds and accounts listed below”. Please note that in this case the names of those funds will be publicly disclosed on the ISDA website.
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 that adhere before the Cut-off Date of March 27, 2009, or (if ISDA designates a Subsequent Adherence Period) the expiry of such Subsequent Adherence Period.
You can, however, bilaterally agree to amend your Covered Protocol Transactions 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.
DETAILS RELATING TO THE PROTOCOL
What does the Protocol do?
The Protocol consists of four Annexes as follows:
(a) Annex 1 – August 2008 and Other Amendments to the AEJ MCAs;
(b) Annex 2 – Additional Provisions for Use with Indian Underliers;
(c) Annex 3 – Market Disruption Event for AEJ Variance Swaps;
(d) Annex 4 – “Equity Amounts” Amendments to AEJ Variance Swaps.
An Adhering Party specifies which of the Annexes (and in the case of Annexes 2 to 4, part (a) or part (b) thereof) it wishes to apply. As between two Adhering Parties, where one has specified that less than all the Annexes (or the relevant parts thereof, as the case may be) are applicable, only those Annexes (or the relevant parts thereof, as the case may be) that both parties have specified will be applicable. The amendments set out in the Annexes (or the relevant parts thereof, as the case may be) that are applicable as between two Adhering Parties will apply to the relevant Covered Protocol Transactions that are either in effect as of the Implementation Date or that may be entered into between them on or after the Implementation Date. The amendments take effect from the Implementation Date. The Implementation Date is January 9, 2009.
1. Annex 1 – August 2008 and Other Amendments to the AEJ MCAs
1.1 Annex 1 applies to transactions documented under (i) the Revised 2005 AEJ Interdealer Master Equity Derivatives Confirmation Agreement published by ISDA on March 13, 2007 (or its predecessor, the 2005 AEJ Interdealer Master Equity Derivatives Confirmation Agreement published by ISDA on November 29, 2006, as amended by the Amendment thereto published on March 13, 2007) (the “AEJ Interdealer MCA”); (ii) the 2008 AEJ Master Equity Derivatives Confirmation Agreement published by ISDA on August 22, 2008 (the “AEJ 2008 Open Markets MCA”); or (iii) the 2007 AEJ Master Variance Swap Confirmation Agreement published by ISDA on February 12, 2007 (the “AEJ Variance Swap MCA”).
1.2 The purpose of Annex 1 is as follows:
- to effect the amendments set out in the Amendment to Revised 2005 AEJ Interdealer Master Equity Derivatives Confirmation Agreement and 2007 AEJ Master Variance Swap Confirmation Agreement published by ISDA on August 11, 2008; and
- to make technical clean-up amendments to “Option Cash Settlement Amount” and “Futures Price Valuation” in the AEJ Interdealer MCA and the AEJ 2008 Open Markets MCA and to update the references in the AEJ Interdealer MCA and the AEJ Variance Swap MCA from the 2000 ISDA Definitions to the 2006 ISDA Definitions. Please click here for a spreadsheet giving examples of the calculation of the Option Cash Settlement Amount under the different Settlement Types.
2. Annex 2 – Additional Provisions for Use with Indian Underliers
2.1 Annex 2 applies to ODI Transactions that are documented under the AEJ Interdealer MCA or the AEJ Variance Swap MCA. Annex 2 also applies to other ODI Transactions that are not documented under the AEJ Interdealer MCA or the AEJ Variance Swap MCA so long as such ODI Transactions are documented by a Confirmation under a Governing ISDA Master Agreement. Note that such other ODI Transactions may be equity derivative transactions or other types of transactions (e.g. bond-linked transactions).
2.2 The purpose of Annex 2 is to incorporate the revised Additional Provisions for Use with Indian Underliers published by ISDA on November 28, 2008, and where applicable, to supersede the original Additional Provisions for Use with Indian Underliers published by ISDA on June 6, 2005.
2.3 Paragraph (a) of Annex 2 makes specific amendments to the relevant provisions of the AEJ Interdealer MCA and the AEJ Variance Swap MCA.
2.4 Paragraph (b) of Annex 2 makes general amendments to Confirmations between the Adhering Parties – as ISDA would not be privy to the actual terms of such Confirmations, Adhering Parties should ensure that the general amendments set out in paragraph (b) of Annex 2 are appropriate and sufficient for this purpose.
3. Annex 3 – Market Disruption Event for AEJ Variance Swaps
3.1 Annex 3 applies to single stock cash-settled share variance swaps and single exchange cash-settled index variance swaps involving securities traded on an Exchange located in HK, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Taiwan, Thailand and Vietnam that are either documented under the AEJ Variance Swap MCA or documented by a Confirmation under a Governing ISDA Master Agreement and that incorporates the 2002 ISDA Equity Derivatives Definitions (the “Equity Definitions”).
3.2 The purpose of Annex 3 is to make changes to the definitions of “Market Disruption Event” in line with the Market Practice Statement issued by ISDA on January 8, 2009. Please click here for the Market Practice Statement. At this point, as a number of firms had concerns about the broader application of the revised definitions beyond variance swaps, the revised definitions will apply only to variance swaps, and not the broader range of transactions covered by the Market Practice Statement. Nevertheless, ISDA strongly encourages all participants to continue to apply the guidance set out in the Market Practice Statement to the broader range of transactions.
3.3 Paragraph (a) of Annex 3 makes specific amendments to the relevant provisions of the AEJ Variance Swap MCA.
3.4 Paragraph (b) of Annex 3 makes general amendments to Confirmations between the Adhering Parties – as ISDA would not be privy to the actual terms of such Confirmations, Adhering Parties should ensure that the general amendments set out in paragraph (b) of Annex 3 are appropriate and sufficient for this purpose.
3.5 In drafting the Market Disruption Event definitions, ISDA has started from the definition of “Market Disruption Event” found in the AEJ Variance Swap MCA, with amendments being made to reflect the Market Practice Statement.
3.6 For index variance swaps, it will be a Market Disruption Event if the relevant event which affects the component securities of the relevant Index affects securities which comprise 20% or more of the Index level. Note that it will be a Market Disruption Event so long as the affected securities in aggregate across the relevant observation period comprise 20% or more of the Index level. In other words, it is not necessary that sufficient securities must be affected at a single point in time during the relevant observation period. E.g. say 5 stocks together constitute 20% of the Index level. All 5 stocks hit Bid-up during the Share Observation Period. However, they hit at different points in time during the Share Observation Period and all did not stay continuously Bid-up. There was thus no single point in time during the Share Observation Period when all 5 stocks were Bid-up. Nevertheless, this will be a Market Disruption Event.
3.7 The thinking behind MDE Observation Period, Share Observation Period and Index Observation Period is as follows:
- The definition of “MDE Observation Period” reflects that in the Equity Definitions. If no time is specified in the Confirmation, the Equity Definitions provides for a fallback of the “Scheduled Closing Time”.
- Let’s say the Exchange normally closes at 4 p.m. but announces that it will close instead at 3:15 p.m. on a particular day. If the Exchange announces this after 2:15 p.m. on that day, then it will be an Early Closure and Market Disruption Event due to Early Closure. Trading Disruption and Exchange Disruption become irrelevant. If the Exchange announces this by 2:15 p.m. on that day, then it will not be an Early Closure and Trading Disruption and Exchange Disruption then become relevant considerations.
- The definition of “Scheduled Closing Time” in the Equity Definitions has been amended for this purpose to make clear that the Scheduled Closing Time will be 3:15 p.m. if it is announced by 2:15 p.m. The MDE Observation Period will then be from 2:15 p.m. to 3:15 p.m. (instead of 3 p.m. to 4 p.m.).
- Similarly, the definitions of “Share Observation Period” and “Index Observation Period” provide that this will be from 2:45 p.m. to 3:15 p.m.
- Note also that the definitions of MDE Observation Period, Share Observation Period and Index Observation Period are designed to cater for cases where parties specifically choose a time earlier than the Scheduled Closing Time as the relevant Valuation Time. E.g., if parties had elected 3:45 p.m. as the Valuation Time, then the MDE Observation Period will be from 2:45 p.m. to 3:45 p.m. whereas the Share Observation Period or Index Observation Period will be from 3:30 p.m. to 4 p.m. In this case, the relevant period to observe for purposes of Bid-up or Offer-down will only be from 3:30 p.m. to 3:45 p.m. If parties had elected 3 p.m. as the Valuation Time, then the MDE Observation Period will be from 2 p.m. to 3 p.m. As there is no overlap with the Share Observation Period/Index Observation Period, there will be no relevant period to observe at all for purposes of Bid-up or Offer-down in this case.
4. Annex 4 – “Equity Amounts” Amendments to AEJ Variance Swaps
4.1 Annex 4 applies to cash-settled share variance swaps and cash-settled index variance swaps that are either documented under the AEJ Variance Swap MCA or documented by a Confirmation under a Governing ISDA Master Agreement and that incorporates the Equity Definitions.
4.2 The purpose of Annex 4 is to make changes in line with the market call convened by ISDA on 12 January 2009 regarding the impact of announced changes in exchange trading days. Please click here for the summary of the market call.
4.3 Paragraph (a) of Annex 4 makes specific amendments to the relevant provisions of the AEJ Variance Swap MCA.
4.4 Paragraph (b) of Annex 4 makes general amendments to Confirmations between the Adhering Parties – as ISDA would not be privy to the actual terms of such Confirmations, Adhering Parties should ensure that the general amendments set out in paragraph (b) of Annex 4 are appropriate and sufficient for this purpose.
4.5 A day during the Observation Period will be treated as a Scheduled Trading Day if it is known at any time before that day that each Exchange and each Related Exchange are scheduled to be open for trading for their respective regular trading sessions on that day. Conversely, a day during the Observation Period will not be treated as a Scheduled Trading Day if it is known at any time before that day that an Exchange or Related Exchange is not scheduled to be open for trading for its regular trading session on that day. Thus, for the purpose of determining Observation Days, it is not relevant to consider the status of such day as of the Trade Date.
4.6 If the day specified as the Valuation Date turns out (pursuant to the above) not to be a Scheduled Trading Day, the Valuation Date will roll forward (pursuant to Section 6.2 of the Equity Definitions) to the next following Scheduled Trading Day. The Observation Days will include the new day that will be the Valuation Date and exclude the day originally specified as the Valuation Date. E.g. say March 12 was specified as the Valuation Date and the Exchange announces on March 9 that the Exchange will not open on March 12. March 12 will no longer be treated as a Scheduled Trading Day – March 12 becomes the “Scheduled Valuation Date” (as per the amended definition of “Scheduled Valuation Date” under “Observation End Date”). Since March 12 is no longer a Scheduled Trading Day, the Valuation Date rolls forward to March 13. “Observation Days” will include March 13 and exclude March 12.
4.7 The FRV formula has been amended so that the numerator uses “N” or the actual number of Observation Days, and the denominator uses “ExpectedN” or the expected number of Observation Days as of the Trade Date.
What alternatives are there to adhering to the Protocol?
The changes that the Protocol makes to Covered Protocol Transactions could be made by way of individually negotiated agreements.
Parties could include wording along the following lines to incorporate the amendments made by the Protocol into that agreement:
“The parties to this [agreement] (the “Agreement”) agree that the amendments set out in Annexes [1 / 2 part (a) / 2 part (b) / 3 part (a) / 3 part (b) / 4 part (a) / 4 part (b) [inclusive]] to the 2009 ISDA AEJ Derivatives Protocol (the “2009 AEJ Protocol”) published by ISDA on March 9, 2009 and available on the ISDA website (www.isda.org) shall be made to this Agreement and shall apply to any Covered Protocol Transaction (as defined in the 2009 AEJ Protocol) under this Agreement which is in effect between them as of the Implementation Date or which may be entered into between them on or after the Implementation Date. [The Implementation Date shall be the date this Agreement is entered into regardless of the definition of such term in the Protocol.]”
Please note that this wording is merely suggested wording and we would strongly recommend that you consult with your counsel to confirm that it is appropriate to the particular circumstances and provisions of your agreement.
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