Contract management and legal staff check the ISDA protocol in two cases. One is when they want to save the effort of amending master agreement terms counterparty by counterparty. The other is when the treatment of a contract depends on whether the counterparty has adhered.

Amending contracts with many counterparties at once

The ISDA Master Agreement is the standard contract for OTC derivatives. It sets the terms that apply to all trades with the same counterparty, and you sign one with each counterparty. The framework is covered in The ISDA Master Agreement and Schedule. Sometimes regulation or market conditions require changing the terms with many counterparties in the same way. If each counterparty needs its own amendment contract, the work grows with the number of counterparties.

An ISDA protocol (a "protocol" below) lets parties make this amendment in one step. ISDA prepares a document that sets out the amendment. When parties adhere to it, the trades between the parties that have adhered are amended together1. Instead of rewriting the clauses with each counterparty, a party decides whether to adhere to the document.

From adherence to amendment

Adherence to the IBOR Fallbacks Protocol is a procedure in which a party submits an adherence letter to ISDA and receives approval. If the counterparty has also adhered, the covered contracts between the two are amended as the protocol provides. For the ISDA IBOR Fallbacks Protocol, the sequence was as follows.

  1. ISDA published the protocol and began accepting adherence. Adherence opened on October 23, 20201.
  2. A party that wants to adhere enters the information the adherence letter requires on the protocol page of the ISDA website, signs the letter, and uploads it to the system2.
  3. ISDA approves the adherence letter, and the adhering party receives an email. The procedure is then complete2.
  4. If the counterparty has also adhered, the covered contracts between the two are amended together1. The protocol took effect on January 25, 20211.

Consider a hypothetical example in which Company X and Bank Q have adhered to the IBOR Fallbacks Protocol, and Company R has not. Company X has an ISDA Master Agreement with each of Bank Q and Company R.

Whether the counterparty has adhered decides the result, contract by contract.

Company X's counterparty Counterparty's adherence Contract with that counterparty
Bank Q Has adhered The covered contract is amended as the protocol provides1
Company R Has not adhered Not amended. To reach the same terms, Company X and Company R sign an individual contract

If Company X wants the same terms with Company R, the two of them sign a bilateral contract (an individual contract) to put in the fallback provisions3.

Scope and individual agreements

The table below covers the IBOR Fallbacks Protocol. It is based on the documents published as of September 30, 2021, as summarized by the Japanese Bankers Association.

Item For the IBOR Fallbacks Protocol
Who can adhere Any entity can adhere, regardless of where it is located or whether it is an ISDA member4
Unit of adherence It applies to all trades between the adhering parties at once. Adherence cannot be made trade by trade4
Covered documents ISDA Master Agreements, the ISDA CSA, and contracts listed in the Additional Documents Annex (the annex)5
Fee and deadline A one-time fee of USD 500 is paid to ISDA, either when the adherence letter is delivered or beforehand. As of September 30, 2021, no end date had been set for the adherence period6
Withdrawal A party can withdraw even after the protocol takes effect, by sending a notice to ISDA7

The contracts on the annex include derivative and collateral contracts that are not under an ISDA Master Agreement. Loans and deposits with embedded derivatives are excluded5.

The withdrawal takes effect on the last "Protocol Business Day" of the month after the month in which the notice reaches ISDA. It does not retroactively affect amendments whose implementation date falls before that date7.

Which contracts a protocol amends is set protocol by protocol. Take the protocol for stays on termination in resolution, covered in a later section. In an opinion that ISDA submitted to the Federal Reserve Board in August 2016, ISDA explained that this protocol amends contracts entered into up to the date of adherence, and the later trades under them. It does not amend new contracts entered into after adherence. For new contracts, ISDA expected that the parties would incorporate the protocol's terms by reference where needed8. For the IBOR Fallbacks Protocol too, the fallback provisions that apply to new trades were prepared separately as a supplement to the definitions (an addendum to the definitions booklet)1.

The parties can change a protocol's terms by individual agreement. Under the IBOR Fallbacks Protocol, even if both parties have adhered, they can add to or amend the changes the protocol makes by signing a bilateral contract3. One example is when the successor rate in a loan differs from the one ISDA specifies, and the parties align one with the other9.

Where protocols have been used

The table below lists situations in which many parties had to make the same amendment and protocols have been used. The row on margin rules only goes as far as the point at which a protocol was reported as planned.

Situation Time What the protocol did, or what was reported
IBOR fallback provisions October 2020 to January 2021 Amends existing trades together to include fallback provisions
Stays on termination in resolution 2014 to 2017 Makes a temporary stay on termination rights effective across borders, and conforms to US rules
Amending contracts for margin rules Planned, as reported in April 2016 A protocol document to amend existing documents to meet the regulation was reported as planned for publication
CDS auctions 2009 After a credit event, lets all adhering parties settle at the same final price

IBOR fallback provisions

The ISDA IBOR Fallbacks Protocol was used to put fallback provisions into existing trades, in preparation for the end of publication of rates such as LIBOR. The FSB (Financial Stability Board) issued a press release encouraging broad and timely adherence10. The Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks also strongly encouraged financial institutions and corporations to adhere early1. The dates from the FSB's encouragement to the effective date are shown in the figure below101.

October 9,2020The FSB issues a press releaseencouraging broad and timelyadherenceOctober 23,2020Adherence opensNovember 6,2020The Japanese yen benchmarkscommittee strongly encouragesearly adherenceJanuary 25,2021The protocol takes effect
Figure 1Dates up to adherence and the effective date of the IBOR Fallbacks Protocol
Figure description

The figure is a timeline of the dates of the IBOR Fallbacks Protocol, in chronological order from the FSB's encouragement to the effective date. The spacing in the figure does not represent the length of time. The filled circles mark the opening of adherence and the effective date.

The content of the provisions is covered in Fallbacks and Spread Adjustments.

Stays on termination in resolution

When a financial institution enters resolution, a market-wide rush by counterparties to terminate trades could disrupt the market. According to the FSB, under the protocol that ISDA announced on October 11, 2014, parties agree that a temporary stay applies across borders. The stay covers the early termination rights and cross-default rights in OTC derivatives. A group of 18 G-SIBs (global systemically important banks) and other large dealer banks committed to sign by the G20 summit in Brisbane in November of that year. The FSB called on all G-SIBs and other firms with large derivatives positions to adhere by the end of 201511.

In the United States, the Federal Reserve Board published a final rule in the Federal Register on September 12, 2017. The rule required the entities it covers to include certain provisions in their uncleared qualified financial contracts (QFCs). The covered entities are US G-SIBs and their subsidiaries, and the US operations of foreign G-SIBs. Banks and other entities for which another federal banking agency issues a separate rule are excluded. One required provision limits termination rights, and restrictions on transferring the contract, to the extent US resolution law allows. Another bars termination rights that are based on the resolution of an affiliate. The rule took effect on November 13, 201712.

Instead of amending contracts counterparty by counterparty, a covered entity can also conform to the rule by adhering to the ISDA 2015 Universal Resolution Stay Protocol (the Universal Protocol). Adherence to a new protocol with nearly the same content (the U.S. Protocol) is also accepted13.

Under section 1 of the Universal Protocol, the adhering parties agree to be bound by special resolution regimes such as those of the United States. Under section 2, the adhering parties waive cross-default rights and the restrictions on transferring an affiliate's credit enhancement, apart from exceptions that protect creditors14.

Amending contracts for margin rules

The United States, the EU, Japan, and other jurisdictions put into their own rules the margin standards for uncleared OTC derivatives set by the Basel Committee on Banking Supervision and IOSCO. A law firm commentary from April 2016 reports that ISDA planned to publish a protocol document to amend existing ISDA documents to meet the regulation, along with a new CSA form17.

CDS auctions

The auction that sets a final price and settles after a credit event on a credit default swap (CDS) also uses a protocol. After a credit event, buyers and sellers that want to take part notify ISDA by a deadline and adhere to the protocol. Existing CDS contracts are then amended so that all adhering parties settle at the same final price. In April 2009, ISDA adopted a protocol under which all future CDS defaults are settled by auction18.

Contracts with counterparties that do not adhere, and checking adherence

Each party decides for itself whether to adhere to a protocol. As a result, with some counterparties the contracts have been amended by the protocol, and with others they have not, and the two kinds sit side by side.

For the IBOR Fallbacks Protocol, the adhering parties are published on the ISDA website, so you can check whether a counterparty has adhered19. If a counterparty has not adhered, a bilateral contract is needed, as in the earlier example3. The scope table's rows on who can adhere, the fee, and withdrawal apply to the IBOR Fallbacks Protocol only.

The relationship between the 2014 protocol and the Universal Protocol, and the internal procedures of a participating firm (which department decides to adhere, approvals, and handling in contract management), are not covered on this page.

Notes

  1. Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks, "ISDA IBOR フォールバック・プロトコルの批准について" (On adherence to the ISDA IBOR Fallbacks Protocol, our translation; in Japanese; November 6, 2020), the main text and notes 1 to 3. Note 2 describes the protocol, note 1 the supplement, and note 3 the effective date. ↩ ↩2 ↩3 ↩4 ↩5 ↩6 ↩7 ↩8

  2. Japanese Bankers Association, "ISDA マスター契約にもとづき取引されるデリバティブに関するQ&A" (Q&A on derivatives traded under the ISDA Master Agreement, our translation; in Japanese; October 8, 2021), Q5 (page 3). ↩ ↩2

  3. Japanese Bankers Association, "ISDA マスター契約にもとづき取引されるデリバティブに関するQ&A" (Q&A on derivatives traded under the ISDA Master Agreement, our translation; in Japanese; October 8, 2021), Q8 (page 4). ↩ ↩2 ↩3

  4. Japanese Bankers Association, "ISDA マスター契約にもとづき取引されるデリバティブに関するQ&A" (Q&A on derivatives traded under the ISDA Master Agreement, our translation; in Japanese; October 8, 2021), Q4 (page 3). "As of September 30, 2021" in the table is because the disclaimer of the same document (page 6) states that the Q&A was prepared on the basis of documents published as of September 30, 2021. ↩ ↩2

  5. Japanese Bankers Association, "ISDA マスター契約にもとづき取引されるデリバティブに関するQ&A" (Q&A on derivatives traded under the ISDA Master Agreement, our translation; in Japanese; October 8, 2021), Q3 (pages 2 to 3), "the agreements covered by the protocol," and Q11 (page 5). ↩ ↩2

  6. Japanese Bankers Association, "ISDA マスター契約にもとづき取引されるデリバティブに関するQ&A" (Q&A on derivatives traded under the ISDA Master Agreement, our translation; in Japanese; October 8, 2021), Q7 (page 4). ↩

  7. Japanese Bankers Association, "ISDA マスター契約にもとづき取引されるデリバティブに関するQ&A" (Q&A on derivatives traded under the ISDA Master Agreement, our translation; in Japanese; October 8, 2021), Q9 (page 4). ↩ ↩2

  8. Board of Governors of the Federal Reserve System, 82 Federal Register 42882 (September 12, 2017), footnote 212 (page 42909). It quotes an opinion of ISDA's general counsel dated August 5, 2016, on the 2015 Universal Resolution Stay Protocol. ↩

  9. Japanese Bankers Association, "ISDA マスター契約にもとづき取引されるデリバティブに関するQ&A" (Q&A on derivatives traded under the ISDA Master Agreement, our translation; in Japanese; October 8, 2021), Q10 (page 5). ↩

  10. Bank of Japan, "FSBが「ISDA IBORフォールバック・プロトコルへの広範かつ適時の批准を推奨」と題するプレス・リリースを公表" (The FSB publishes a press release titled "FSB encourages broad and timely adherence to the ISDA IBOR Fallbacks Protocol," our translation; in Japanese; October 12, 2020), the main text. The FSB press release was published on October 9. ↩ ↩2

  11. Financial Stability Board, "FSB welcomes industry initiative to remove cross-border close-out risk" (October 11, 2014, Ref no: 62/2014), the first and second paragraphs. ↩

  12. Board of Governors of the Federal Reserve System, 82 Federal Register 42882 (September 12, 2017), SUMMARY and DATES (both on page 42882). ↩

  13. Board of Governors of the Federal Reserve System, 82 Federal Register 42882 (September 12, 2017), page 42889 (the overview of the "Industry-developed protocol") and "5. Industry-Developed Protocol" on page 42890. ↩

  14. Board of Governors of the Federal Reserve System, 82 Federal Register 42882 (September 12, 2017), page 42908, "Compliance with the Universal and U.S. Protocols." ↩

  15. Board of Governors of the Federal Reserve System, 82 Federal Register 42882 (September 12, 2017), page 42890, "5. Industry-Developed Protocol." ↩

  16. Board of Governors of the Federal Reserve System, 82 Federal Register 42882 (September 12, 2017), footnote 214 (page 42909). ↩

  17. Haynes and Boone, LLP, "ISDA Publishes 2016 Credit Support Annex for Variation Margin" (April 19, 2016), "Background" on page 1, and the third paragraph on page 2. ↩

  18. Federal Reserve Bank of New York, "Credit Default Swap Auctions" (Staff Report no. 372, May 2009), page 3 (page 5 of the PDF), and note 4 on page 2 (page 4 of the PDF). ↩

  19. Japanese Bankers Association, "ISDA マスター契約にもとづき取引されるデリバティブに関するQ&A" (Q&A on derivatives traded under the ISDA Master Agreement, our translation; in Japanese; October 8, 2021), Q6 (page 3). ↩