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ISDA has prepared this brief summary of frequently asked questions to assist in your consideration of the 2012 ISDA U.S. Municipal Reference Entity Supplement to the 2003 ISDA Credit Derivatives Definitions (the “2012 Muni Supplement”), the 2009 ISDA Credit Derivatives Determinations Committees and Auction Settlement Supplement to the Definitions (the “July 2009 Restructuring Supplement”) and the 2012 ISDA U.S. Municipal Reference Entity CDS Protocol (the ”Muni CDS Protocol” or the “Protocol”) and related changes to current transactions referencing U.S. Municipal Reference Entities (“Muni CDS”). 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 OR ANY RELATED DOCUMENTS. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING THE JULY 2009 RESTRUCTURING SUPPLEMENT, THE 2012 MUNI SUPPLEMENT 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 four sections: (i) questions relating to the substance of the Muni CDS Protocol, the July 2009 Restructuring Supplement and the 2012 Muni Supplement and related Confirmation questions; (ii) questions relating to the submission of Adherence Letters; (iii) questions relating to adherence by investment managers; and (iv) 100/500 Credit Derivative Initiatives and related Confirmation questions.
Structural Framework
- What are the main changes to Muni CDS transactions?
- If I signed up to the Big Bang Protocol and/or the Small Bang Protocol, do I still need to sign up to the Muni CDS Protocol?
- What do the Supplements do?
- What does the 2012 Muni Supplement do?
- What are the Credit Derivatives Determinations Committees?
- What are the auction settlement provisions?
- What are the Credit Event and Succession Event Backstop Date provisions, what do they do and why?
- Can I trigger my CDS contract if the credit event occurred more than 60 days ago, but after the date I entered into the transaction?
- What if I discover a credit event occurred - what can I do to trigger? What are the deadlines?
- What if the DC does not address the question - how long do I have to trigger bilaterally?
- What if an event occurs fewer than 60 days ago but after the Scheduled Termination Date of the transaction?
- How do I request that the DC consider a particular question?
- So, what does the Muni CDS Protocol do?
- What Transactions are covered by the Protocol?
- What Transactions are excluded from the Protocol?
- What are the overall consequences of the Protocol to an individual institution?
- Who will make the determination whether there has been a Credit Event or a Succession Event?
- When does the fallback to Physical Settlement come into effect and what are some of the implications of this?
- If we sign up for the Protocol, will we be forced to settle all defaults via the auction (assuming we own the covered CDS contract)? Or will we still have the choice to settle physically prior to the auction?
- How do I know which parties have adhered to the Protocol?
- What alternatives are there to adhering to the Protocol?
- If we do not choose to sign up for the Protocol, will we be allowed to participate in any Muni CDS auction that may be held? Would we have to sign an individual auction protocol to participate?
Confirmation Questions
- How do I confirm a prospective trade in DTCC inclusive of the Supplements?
- How do I confirm a prospective trade on paper inclusive of the Supplements?
- If firms have not signed up to the Protocol, can they continue to use DTCC to confirm their Covered Transactions?
- Can Non-Covered Transactions still be sent to DTCC for Adhering and Non-Adhering Protocol Parties?
- If a party does not adhere to the Protocol within the agreed timeframe, can this party still continue to reference the Supplement in DTCC for all their future trades?
ADHERENCE LETTER SUBMISSION
- Can I change the text of the Adherence Letter?
- Does it cost any money to adhere to the Protocol?
- When do I need to send in my Adherence Letter?
- How do I send in my Adherence Letter?
- What is a conformed copy?
- Who is an authorized signatory?
- We have more than one fund and therefore more than one DTCC account number. Will we need to submit more than one Adherence Letter?
SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS
- What if I am an investment or asset manager, not all of my discretionary management agreements permit me to amend my client’s agreements?
100/500 Credit Derivative Initiatives
- What transaction types are covered?
- What change will be made to the scheduled termination date?
- How will the coupon for 100/500 transactions be reflected?
- Is there a change to the Accrual Start date?
- For 100/500 trades, what value should firms put in the effective date field?
- Is there an envisioned change to existing Muni CDS transactions?
- What are the changes to the Settlement Methodology?
- When will 100/500 start trading from a market perspective?
- Will this apply to all Muni CDS Transaction Types?
- Can Muni CDS still be traded on the old terms?
- If firms have not signed up to the Protocol, can they still trade 100/500 trades?
Confirmation Questions
- Can these transaction types still be confirmed electronically?
- What types of confirmations can I use to confirm my transactions?
- What are the updated FpML values for the new Transaction Types?
- When DTCC rejects 100/500 trades due to incorrect information, will those trades make it into the system and be available for modification?
- Upon rollout of the 100/500 contract will I need to submit the ISIN to DTCC?
STRUCTURAL FRAMEWORK
What are the main changes to Muni CDS transactions?
Market standard transactions referencing U.S. Municipal Reference Entities are currently documented using the 2003 ISDA Credit Derivatives Definitions (the “Definitions”) and the Additional Provisions for Credit Derivative Transactions - U.S. Municipal Entity as Reference Entity (September 17, 2004).
With effect from April 3, 2012, it is anticipated that market standard Muni CDS transactions will no longer incorporate the September 17, 2004 Additional Provisions, but instead will incorporate the Definitions and (a) the 2009 ISDA Credit Derivatives Determinations Committees and Auction Settlement Supplement to the Definitions and (b) the 2012 Muni Supplement (together, the “Supplements”). If parties entering into a Muni CDS transaction incorporating the Definitions wish to settle the transaction by reference to a CDS Auction, the parties should incorporate both Supplements and elect 'Auction Settlement'. This will be done automatically for certain types of Muni CDS transactions.
Parties to existing credit derivative transactions which incorporate the Definitions can amend those existing transactions to incorporate the Supplements and apply Auction Settlement by adhering to the Muni CDS Protocol as described below.If I signed up to the Big Bang Protocol and/or the Small Bang Protocol, do I still need to sign up to the Muni CDS Protocol?
Parties that signed up to the Big Bang Protocol or Small Bang Protocol are NOT automatically adhered to the Muni CDS Protocol. A party that adhered to the Big Bang Protocol and/or the Small Bang Protocol and now wishes to make the changes discussed below would therefore need to adhere to the Muni CDS Protocol.
What do the Supplements do?
The July 2009 Restructuring Supplement achieves three main things:
- Submits the relevant transaction to the jurisdiction of the relevant ISDA Credit Derivatives Determinations Committee (the "DC") and incorporates the resolutions of the DC into the Definitions;
- Adds Auction Settlement provisions; and
- Creates Credit Event and Succession Event Backstop Dates.
What does the 2012 Muni Supplement do?
The 2012 Muni Supplement makes specific amendments to the Definitions (as amended by the July 2009 Restructuring Supplement) for purposes of Muni CDS transactions. As well as the substance of the provisions from the Additional Provisions for Credit Derivative Transactions - U.S. Municipal Entity as Reference Entity (September 17, 2004), the 2012 Muni Supplement includes a definition of “Double-Barrel Obligation Liability”, clarifying amendments to the “Not Subordinated” and Accreting Obligation definitions and amendments to make Restructuring an automatically-triggered Credit Event (provided neither Mod R not Mod Mod R are applicable).
What are the Credit Derivatives Determinations Committees?
Each DC is formed of 8 global dealers, 2 regional dealers, 5 non-dealer ISDA members, 1 non-voting dealers (for the first year, there will be 2 non-voting dealers), 1 non-voting regional dealer per region, and 1 non-voting non-dealer member. The DC for the Americas will resolve issues relating to Muni CDS pertaining to, among other things, Credit Events, CDS Auctions, Succession Events, and Deliverable Obligations.
The resolutions of the DC are binding on all transactions that have incorporated the Supplements (but will not have retroactive effect to alter any transaction that has already settled).
What are the auction settlement provisions?
The July 2009 Restructuring Supplement adds auction settlement as a settlement method for credit derivative transactions. The Auction Settlement Terms for Muni CDS will be based on the CDS auction terms applicable to corporate Reference Entities. Auction specific terms for a Muni CDS Reference Entity (e.g. Auction Date, times, inside market quotation amount, Deliverable Obligations etc) would be set by the Americas DC on a case by case basis.
What are the Credit Event and Succession Event Backstop Date provisions, what do they do and why?
Under the July 2009 Restructuring Supplement, the Credit Event Backstop Date is 60 days prior to (i) the date on which a request to the DC regarding such Credit Event is submitted or (ii) the date on which both a Credit Event Notice and Notice of Publicly Available Information (if applicable) are effectively delivered. The Succession Event Backstop Date is 90 days prior to (i) the date on which a request to the DC regarding a Succession Event is submitted or (ii) the date on which a Succession Event Notice is effectively delivered.
Under the July 2009 Restructuring Supplement, no matter what the Trade Date or the Effective Date, a credit derivative transaction can only be triggered by a Credit Event and/or affected by a Succession Event occurring no more than 60 or 90 days, respectively, before the requests or notice described above are effective. This is the case even if the event took place before the Trade Date or the Effective Date. A Credit Event occurring more than 60 days before notice to the DC or a Succession Event occurring more than 90 days before notice to the DC will have no impact on any credit derivative transaction which incorporates the Supplement, even if such event takes place within the term (i.e. on or after the Trade Date and before the Scheduled Termination Date) of that transaction.
The purpose of these backstop dates is to achieve consistency between transactions. Under the Definitions (before amendment by the July 2009 Restructuring Supplement) if an entity entered into a credit derivative transaction on January 1 and then entered into an offsetting transaction on February 1, even where the Reference Entity, Obligations and all other terms were identical, those two transactions would not be completely back to back and the entity would not be fully hedged. This is because, if a Credit Event occurred for example on January 15, the first trade would be triggered but the second trade would be unaffected by that event (since it occurred prior to the Effective Date of that second transaction). The entity could, therefore, have found itself in a position where, as Protection Seller under the first transaction it had to pay out but was not entitled to claim any payment as Protection Buyer from the Protection Seller under the second trade.
By creating a single look back period applicable to all trades (that incorporate the July 2009 Restructuring Supplement), two offsetting transactions will have identical terms and allow entities to hedge their positions fully even if they cannot be entered into and be effective on the same date. This also facilitates the compression of CDS transactions.
Can I trigger my CDS contract if the credit event occurred more than 60 days ago, but after the date I entered into the transaction?
No. If the event occurred more than 60 days ago, it cannot be used to trigger a CDS contract. Please note that for certain Protocol Covered Transactions, the Credit Event Backstop provision will only be effective from June 20, 2012 (please see below).
What if I discover a credit event occurred - what can I do to trigger? What are the deadlines?
If a party believes that a credit event has occurred, it can "stop the clock" by requesting that the DC determine whether that credit event occurred. The party's request to the DC must include Publicly Available Information relating to the event. Alternatively, the party could send a Credit Event Notice and Notice of Publicly Available Information directly to its counterparty (as for current Muni CDS transactions). The request to the DC or the Credit Event Notice and Notice of Publicly Available Information would need to be effective not more than 60 days after the event.
What if the DC does not address the question - how long do I have to trigger bilaterally?
The answer here depends on whether the DC originally accepts the question or not. If the DC accepts the question but later resolves not to determine the question, then the time limits for delivering a Credit Event Notice and Notice of Publicly Available Information are tolled while the DC is deliberating (i.e. any days during which the DC is considering the question will not be counted when calculating whether the relevant 60 day time limit has expired). ISDA will publish on its website whether a DC has resolved to decide a Credit Event or Succession Event question.
If the DC does not accept the question, then the time limit will not toll. Under the DC rules, if no member of the DC accepts the question by 5:00 p.m. local time two business days after the request is notified to the DC members, then the question will be deemed to have been dismissed. Any time limits under the CDS contract will continue to run during those 48 hours.
What if an event occurs fewer than 60 days ago but after the Scheduled Termination Date of the transaction?
As with a Muni CDS transaction on current market standard terms, if an event occurs after the Scheduled Termination Date of a transaction, then it cannot be used to trigger that transaction.
How do I request that the DC consider a particular question?
ISDA’s website contains a specific link and form for submitting requests to the DC Secretary. There is also information about requests that have already been received together with information about the status of such requests. You should ensure that your question is not already listed before submitting your request. The DC Secretary (ISDA) will publish on its website the request that is forwarded to the DC for resolution.
So, what does the Muni CDS Protocol do?
The Supplements apply to transactions going forward, provided that they incorporate the Supplements. ISDA has published the Muni CDS Protocol to enable market participants to eliminate distinctions in their book between transactions entered into before April 3, 2012 and those entered into on or after that date. Market participants, by adhering to the Protocol, agree to amend their existing Muni CDS transactions with all other adhering parties to implement the amendments incorporated by the Supplements.
The Supplements are made applicable to all Protocol Covered Transactions (see below) except that the Auction Settlement method will not apply to "Covered Non-Auction Transactions" (see below).
The DC provisions of the Supplements are effective in respect of all previously existing Protocol Covered Transactions from April 3, 2012.
The Auction Settlement provisions are effective in respect of all previously existing Protocol Covered Transactions except Covered Non-Auction Transactions from April 3, 2012.
The Credit Event and Succession Event backstop date provisions do not take full effect for previously existing Protocol Covered Transactions until June 20, 2012. Until that date, the Credit Event and Succession Event backstop dates are deemed to be the Effective Date of each Protocol Covered Transaction (i.e. until June 20, 2012, previously existing trades are in the same position as under the current Definitions). This hardening period allows parties to such transactions time to notify the DC of any event which has occurred and which is relevant to their transaction even if such event occurred more than 60/90 days ago. This avoids any such party immediately losing their rights in respect of such event in respect of legacy trades on signing the Muni CDS Protocol.
What Transactions are covered by the Protocol?
The Protocol will cover a broad range of Muni CDS transactions, including:
- MCDX transactions;
- Covered Swaption Transactions (single name and portfolio); and
- Covered Non-Swaption Transactions (e.g. Single name, Nth to default, Recovery Lock, Bespoke Portfolio Transactions).
In addition to these transactions, the Protocol will also cover the following Muni CDS transactions, referred to as Covered Non-Auction Transactions: Reference Obligation only, Fixed Recovery and Party Specified Non-Auction Transactions. Covered Non-Auction Transactions will incorporate the Supplements (i.e., including the provisions relating to DC determinations) but will not specify Auction Settlement.
The types of Protocol Covered Transactions mentioned above fall into three categories: previously existing (or legacy) transactions; future transactions, and novated transactions.
For any previously existing transaction to be covered by the Protocol, it must be between two Adhering Parties to the Protocol and the Trade Date of such transaction must be before April 3, 2012, the Scheduled Termination Date must be on or after April 3, 2012, and an Event Determination Date or Early Termination Date must not have occurred prior to April 3, 2012.
In addition, similarly to the Big and Small Bang Protocols, the Muni CDS Protocol covers future credit derivative transactions that are entered into between two Adhering Parties to the Muni CDS Protocol on or after April 3, 2012 but before July 3, 2012. This allows parties that are still trading on older documents during this period to benefit from the changes in the Muni CDS Protocol. However, updated trading documentation in the form of an updated version of the ISDA Credit Derivatives Physical Settlement Matrix, updated MCDX standard terms and an updated form of single-name swaption documentation will all be available on April 3, 2012, so parties can also trade using the new documentation if they wish. If the parties confirm their transaction with updated documentation, the Muni CDS Protocol does not apply.
Similarly, the Muni CDS Protocol covers novations of any credit derivative transaction of the types described above that are entered into after April 3, 2012 but before July 3, 2012, where the transferee and remaining party to the novation are Adhering Parties, and the underlying transaction that is being novated would have been a Protocol Covered Transaction if the parties thereto had been Adhering Parties to the Muni CDS Protocol.
The legacy transactions, future transactions and novated transactions described above are each Protocol Covered Transactions.
What Transactions are excluded from the Protocol?
No Muni CDS transactions are automatically excluded from the Protocol, but two Adhering Parties can bilaterally agree that any particular Muni CDS transaction should not be a Protocol Covered Transaction and should not be amended by the Protocol. This agreement can be recorded in the Confirmation or in a separate side agreement.
What are the overall consequences of the Protocol to an individual institution?
It is not possible for ISDA to confirm what all the consequences of the Protocol would be for an individual institution since its application will depend upon the type of contracts that a particular institution has and their specific provisions. Nor can ISDA give legal advice in this respect to its members. Members must consult with their own legal advisers to the extent that they have specific questions about the application of the documents and their consequences for their particular institution.
Who will make the determination whether there has been a Credit Event or a Succession Event?
The DC will decide whether there has been an event and the relevant information will be posted on the ISDA website.
When does the fallback to Physical Settlement come into effect and what are some of the implications of this?
This happens if the DC decides not to hold an Auction. The DC could decide against holding auction in cases where a name is not very liquid and it would be very difficult to hold an auction. For instance, if a name does not have any Deliverable Obligations, there would not be an auction, as you need Deliverable Obligations on which to bid to establish the auction price.
If we sign up for the Protocol, will we be forced to settle all defaults via the auction (assuming we own the covered CDS contract)? Or will we still have the choice to settle physically prior to the auction?
As for previous corporate CDS auctions, parties can obtain the same economic outcome as physical settlement by submitting a Physical Settlement Request into the auction. If the DC decides to hold an auction, parties will not have the option to physically settle prior to the auction, unless agreed bilaterally with the counterparty.
How do I know which parties have adhered to the Protocol?
The names and DTCC IDs, where provided, of Adhering Parties will be posted on ISDA’s website throughout each day of the adherence period, within a few business hours of ISDA’s receipt of a party’s Adherence Letters. A list can be exported to Excel “Adhering Parties DTCC Account Number” from the Muni CDS Protocol webpage.
What alternatives are there to adhering to the Protocol?
The changes that the Protocol makes could be made by way of individually negotiated agreements.
If we do not choose to sign up for the Protocol, will we be allowed to participate in any Muni CDS auction that may be held? Would we have to sign an individual auction protocol to participate?
If a party does not sign up to the Protocol, then that party's transactions will have to be settled in accordance with the terms originally agreed with its counterparty (i.e. cash or physical settlement, as agreed) unless they otherwise mutually agree. Of course it is open to the parties at any time to bilaterally agree that they will amend their transaction to cash settle at the Final Price determined by the auction but their trade will not automatically be subject to Auction Settlement and they will not be able to participate in the auction.
Confirmation Questions
How do I confirm a prospective trade in DTCC inclusive of the Supplements?
ISDA and Markit will publish updated standard documentation for single name Muni CDS and MCDX transactions respectively, that will incorporate the Supplements. These documents will be available for use electronically to confirm Muni CDS transactions in DTCC. In addition, the Supplements will be incorporated into the DTCC Operating Procedures. It will automatically apply to any trade with a Trade Date or Novation Trade Date on or after April 3, 2012. If parties are entering into a Covered Transaction to which the parties do not wish to apply the 2012 Muni CDS Supplement, they will need to confirm the trade on paper
How do I confirm a prospective trade on paper inclusive of the Supplements?
ISDA and Markit will publish updated standard documentation for single name Muni CDS and MCDX transactions respectively, that will incorporate the Supplements. In addition, the Protocol covers prospective trades with a Trade Date on or before July 3, 2011 to allow time for industry standard documentation to be updated with the appropriate changes. As a result, it is not necessary to unilaterally update paper Confirmations for future Protocol Covered Transactions between Adhering parties.
If firms have not signed up to the Protocol, can they continue to use DTCC to confirm their Covered Transactions?
Yes, they can continue to use DTCC; the Supplements apply to new trades even if a party has not adhered their historic trades. However, parties should be aware that DTCC will include all trades in the TIW for Credit Event and Succession Event processing determinations made by the DC regardless of whether a party has adhered.
Can Non-Covered Transactions still be sent to DTCC for Adhering and Non-Adhering Protocol Parties?
Yes, non-covered transactions still go to DTCC.
If a party does not adhere to the Protocol within the agreed timeframe, can this party still continue to reference the Supplements in DTCC for all their future trades?
Yes, under the updated documentation the Supplement will apply to future Muni CDS transactions regardless of Protocol adherence. DTCC will automatically apply them to all covered trades going forward. Note that in DTCC there is no way to exclude them on a counterparty or trade level.
ADHERENCE LETTER SUBMISSION
Adherence Letter Submission Process
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.
When do I need to send in my Adherence Letter?
The Protocol is open for adherence from Monday March 5, 2012 until 5:00pm New York time on Monday April 2 2012. An entity must email its Adherence Letter to ISDA by 5:00pm New York time on Monday April 2 or it will not be able to adhere to the Protocol.
ISDA has the discretion to extend the adherence period or to re-open the Protocol for adherence at a later date but currently has no plans to do so.
How do I send in my Adherence Letter?
All Adherence Letters must be delivered by email to MuniCDSProtocol@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 form of adherence letter.
The Adherence Letter(s) should be on your institution’s letterhead. 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, date and signature block.
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.
We have more than one fund and therefore more than one DTCC account number. Will we need to submit more than one Adherence Letter?
No. You can list numerous DTCC numbers on one adherence letter.
SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS
What if I am an investment or asset manager, 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, you have the following options:
- If you have authority to adhere on behalf of all of your clients you may do so by indicating the following in the signature block:“Investment/Asset Manager, acting on behalf of the clients, investors, funds, accounts and/or other principals listed in the relevant Governing Master Agreement (or other agreement which deems a Governing Master Agreement to have been created) entered into between it (as Agent) and another March 2012 Adhering Party on or prior to May 22, 2012”.If you wish to adhere in this way, you must ensure that you have the authority to do so from all clients on whose behalf you enter into credit derivative transactions covered by the Protocol.
- If you do not have authority from all of your funds, you can adhere on behalf of those funds whose permission you have by indicating the following in the signature block:
“Investment/Asset Manager, acting on behalf of the funds and accounts identified in [the] attachment [1] 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) and another Adhering Party [and [acting on behalf of the funds and accounts identified in attachment 2 to this Adherence Letter] in relation to the relevant Agreement (or other agreement which deems an Agreement to have been created) between such fund or account and another Adhering Party]”.
The attachment to your Adherence Letter can either name the clients or funds, or identify them with a unique identifier which will be known and recognized by all other Adhering Parties with which the relevant funds or clients have entered into Protocol Covered Transactions. The attachment to your letter will be posted on the ISDA website with your Adherence Letter.
Any credit derivative transactions which you enter into on behalf of funds that are not listed in your adherence letter(s) will not be covered by the Protocol and you and the relevant counterparty will have to enter into a bilateral amendment agreement as discussed in 3 below if you wish to implement the changes.
- If you do not have the authority to adhere to the Protocol as Agent on behalf of certain Clients but wish to adhere on behalf of all other Clients, you may indicate the following in the signature block:“Investment/Asset Manager, acting on behalf of the clients, investors, funds, accounts and/or other principals listed in the relevant Governing Master Agreement (or other agreement which deems a Governing Master Agreement to have been created) entered into between it (as Agent) and another March 2012 Adhering Party on or prior to May 22, 2012, unless the relevant March 2012 Adhering Parties agree prior to the Implementation Date that a particular client, investor, fund, account or other principal is not a March 2012 Adhering Party for purposes of the Protocol”.It is the agent’s responsibility to record properly any bilateral agreement to exclude a Client from the scope of the Protocol.
- If you cannot use any of the options above, you cannot adhere to the Protocol and your option in these circumstances is to enter into bilateral amendment agreements with each relevant counterparty listing the funds whose Transaction(s) with that counterparty will be amended by incorporating the amendments made by the Protocol.
- To the extent that you add a fund to an umbrella master agreement after the Implementation Date of the Protocol (whether such a client was an existing client on or a client acquired after the Implementation Date) that client would not be covered by your adherence to the Protocol and any CDS transactions you enter into on behalf of that client would not be Protocol Covered Transactions. Your option in these circumstances is to bilaterally agree that the Protocol should be incorporated into all CDS transactions that would otherwise be Protocol Covered Transactions (had the fund adhered to the protocol). This could be done when you add the client to the umbrella master agreement.
In addition to the changes implemented by the Supplement and Protocol discussed in the first part of these FAQs, there are certain other CDS market changes in standard terms that are taking place. These are not implemented by the documents discussed above but the following section contains a number of frequently asked questions concerning these changes
100/500 Credit Derivative Initiatives
The derivatives industry has agreed to a new Muni CDS contract which aims to further standardize a number of variables (the “Standard Muni” Transaction). This transaction is also referred to as a 100/500 contract.
What transaction types are covered?
The 100/500 initiative will apply to single name Muni CDS transactions.
What change will be made to the scheduled termination date?
The Scheduled Termination Date will always match a quarterly roll date. The Quarterly roll dates will always be March 20, June 20, September 20 and December 20 (adjusted). For clarification, the Scheduled Termination Date is still an unadjusted date (accrual ends on and includes the unadjusted quarterly roll date even though the final payment is made on the adjusted roll date).
How will the coupon for 100/500 transactions be reflected?
Coupons will still be reflected as a percentage per annum, thus 1% or 5% and should be confirmed as the respective 100/500 coupon.
Is there a change to the Accrual Start date?
Rather than starting on the Effective Date, accrual will begin on and include the last Quarterly Date (March 20, June 20, September 20 or December 20) on or preceding the Trade Date plus one calendar day. Similar to Indices, the Accrual Start date will be an adjusted date. There are full coupons and no short or long stubs. All settlements will be full coupons.
For 100/500 trades, what value should firms put in the effective date field?
It is suggested that firms continue to book and submit Trade Date + 1 as their effective dates to DTCC. DTCC will ignore this value for accrual purposes.
Is there an envisioned change to existing Muni CDS transactions?
Existing Muni CDS transactions will not be updated to 100/500 terms as part of this transition. A legacy Muni CDS transaction also would not change to an updated Standard Muni transaction upon Novation.
What are the changes to the Settlement Methodology?
100/500 trades will be subject to Auction Methodology, with a Fallback Settlement Method of Physical Settlement. The Supplements (discussed above) apply to these trades, whether confirmed on paper or in DTCC, and will be incorporated into the DTCC Operating Procedures as well as the Matrix.
When will 100/500 start trading from a market perspective?
April 3 is anticipated to be the first day of trading for single names on the new Standard Muni terms.
Will this apply to all Muni CDS Transaction Types?
Yes it will. The following three new “Standard” Transaction Types will be added to the ISDA Credit Derivatives Physical Settlement Matrix - STANDARD U.S. MUNICIPAL FULL FAITH AND CREDIT; STANDARD U.S. MUNICIPAL GENERAL FUND; and STANDARD U.S. MUNICIPAL REVENUE.
Can Muni CDS still be traded on the old terms?
Yes, there may be some residual trading, but the 100/500 will be primary trading method for Muni CDS transactions.
If firms have not signed up to the Protocol, can they still trade 100/500 trades?
Yes, they can still trade 100/500 trades, but those trades will be subject to the Supplements - which is a standard inclusion in DTCC and the Matrix.
Confirmation Questions
Can these transaction types still be confirmed electronically?
Yes. DTCC will support these changes.
What types of confirmations can I use to confirm my transactions?
Matrix: ISDA will publish an updated Matrix that includes three new Transaction Types: STANDARD U.S. MUNICIPAL FULL FAITH AND CREDIT; STANDARD U.S. MUNICIPAL GENERAL FUND; and STANDARD U.S. MUNICIPAL REVENUE. This is the preferred means of confirming a 100/500 trade.
Paper Confirmations: if firms are unable to confirm in DTCC, the trade will need to be confirmed on a Matrix Confirmation.
What are the updated FpML values for the new Transaction Types?
The FpML values will be:
- StandardUSMunicipalFullFaithAndCredit
- StandardUSMunicipalGeneralFund
- StandardUSMunicipalRevenue
When DTCC rejects 100/500 trades due to incorrect information, will those trades make it into the system and be available for modification?
Yes. Those trades will go into a rejected status.
Upon rollout of the 100/500 contract will I need to submit the ISIN to DTCC?
Yes, upon rollout you will continue to submit trades to DTCC the same as today with the ISIN or the 9 digit pair clip.
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