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Dodd Frank 30 Day Countdown: Day 28

Insight Robin Powers Robin Powers · June 18, 2011

FIA and ISDA Publishes Documentation for Cleared Swaps in an effort to add structure to OTC market pending full implementation of Dodd-Frank Act and similar regulation in foreign jurisdictions.

In anticipation of the clearing requirements in Dodd-Frank, each of the major clearing houses published proprietary agreements with the intent to best fit OTC swaps clearing into its portfolio of offerings.  However, with multiple clearing houses each with its own required documentation, OTC market participants were undoubtedly spending considerable time and money understanding and negotiating on many fronts.

In an attempt to counter the confusion, the Futures Industry Association (FIA) and the International Swaps and Derivatives Association, Inc. (ISDA) gathered a working committee of both buy and sell side firms in order to create a template that can be used universally by those in the cleared swaps markets.   

The publication of the FIA-ISDA Cleared Derivatives Execution Agreement, announced yesterday, includes the procedures for submitting a bilateral trade for clearing. The agreement also sets out the time requirements for parties to affirm trades and the obligations of parties when a trade is not accepted for clearing.  FIA and ISDA have stated that the agreement in its current form is meant to be used by the market while the final Dodd-Frank rules are still in flux, and that it will likely be updated thereafter.  The announcing release from ISDA also stresses the final template is not biased to any particular clearing house and was created with input from a range of both buy side and sell side participants.   

While the use of the FIA-ISDA Cleared Derivatives Execution Agreement is not required, its effects may be far-reaching.  If this model is adopted during the period before the Dodd-Frank rules are finalized, and perhaps even beyond, the transition to central clearing may be accomplished with less than expected cost and effort.  However, whether in fact the agreement garners broad acceptance in the market remains to be seen.

-Stephanie Kane co-authored this post