Don’t wait until the last minute to adhere to the ISDA March 2013 DF Protocol (“DF Protocol 2.0”)!
End-users who trade non-spot FX transactions and do not have an existing master agreement in place with their swap dealers must adhere to DF Protocol 2.0 (or an equivalent swap trading agreement) before December 31, 2013. Failure to adhere to DF Protocol 2.0, or enter into an equivalent master agreement by December 31, 2013, could significantly impact corporate FX trading.
Historically, corporate end-users often traded FX transactions without any master agreement, and dealers generally provided favorable terms for the credit risk associated with the transactions. The financial crisis and the Dodd-Frank Act changed much of this practice. The financial crisis caused dealers to reconsider their credit risk policies and procedures for swap trading. Furthermore, on September 11, 2012, the CFTC issued final rules regarding, among other things, swap trading relationship documentation (the “Swap Documentation Rules”) that require swap dealers and their counterparties to have a master agreement in place for trading swaps. The Swap Documentation Rules apply not only to FX transactions that are “swaps” (which include nondeliverable FX forwards and foreign currency options) but also to physically settled FX forwards and swaps that have been exempted from the definition of “swap” by the Treasury Department. The Swap Documentation Rules do not apply to spot FX trades. The compliance date for the Swap Documentation Rules was July 1, 2013.
Due to the historical practice of entering into FX transactions without any trading documentation and the time involved in negotiating new master agreements, on June 27, 2013, the CFTC published time-limited no-action relief regarding certain documentation requirements for swap dealers with FX counterparties (the “FX Documentation Relief”). For counterparties that trade non-spot FX transactions and don’t have existing master agreements in place with swap dealers, the FX Documentation Relief extended the compliance date for the swap trading relationship documentation requirements of the Swap Documentation Rules until December 31, 2013. After December 31, 2013, swap dealers may not be able to trade swaps with counterparties that have not adhered to DF Protocol 2.0 (or an equivalent master agreement). As a result, end-users may be limited to spot FX trades, which could adversely impact their hedging and risk management strategies.
Now is the time for end-users to either adhere to DF Protocol 2.0 or negotiate new master agreements to continue to trade non-spot FX transactions in 2014.
Please contact one of the authors or your regular McGuireWoods lawyer if you have any questions regarding corporate FX trading or the CFTC’s Swap Documentation Rules.