On April 18, 2013, as part of its Dodd-Frank Documentation Initiative, ISDA published a sample letter designed to help swap dealers (SDs) document their independence from non-ERISA ‘special entities’ (which includes certain US federal, state and local government agencies, employee benefit plans subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA), governmental plans, and endowments) with which they enter into swaps.
Swaps with Special Entities
Under the final Dodd-Frank external business conduct (EBC) rules which come into effect on 1 May 2013, SDs must ensure that they are independent of special entities in their swap dealings, or face heightened advisory responsibilities. The letter enables SDs to take advantage of certain safe harbors and so satisfy EBC swap due diligence document requirements by both making representation to, and relying on representations from, special entity swap counterparties. Generally, an SD or MSP may only rely on these representations if it has no information that would cause a reasonable person to question their accuracy.
ISDA Safe Harbour Letter
While the EBC rules also apply to MSPs that enter into swaps with special entities, ISDA did not address MSPs in the letter, which requires an SD to represents that it:
- is not acting in the best interests of the counterparty in entering into the swap;
- is acting in its capacity as a counterparty and is not undertaking to assess the suitability of any swap;
- has not expressed an opinion as to whether the counterparty should enter into the swap.
For its part, the special entity counterparty represents that:
- it will not rely on any recommendations from the SD in entering into the swap;
- it will exercise independent judgment in evaluating the recommendations of the SD with regard to any swap;
- the SD has not expressed an opinion as to whether the counterparty should enter into the swap;
- it will rely on advice from a qualified independent representative.
The CFTC has already deferred the original compliance date of 31 December 2012 and a further extension seems unlikely. Parties that have already entered into the August 2012 Dodd-Frank Protocol Supplement Schedule 4 need not be concerned, since it contains representations that already qualify the SD for the same safe harbor. However, SDs looking to trade with special entities which have not adhered to the August 2012 DF Protocol after 1 May 2013 will need a Plan B such as that provided by the ISDA letter.