Participants in the Australian over-the-counter
(OTC) derivatives markets should consider
reviewing their OTC derivatives documentation, following the
release earlier today of the FIA-ISDA
Addendum for Cleared Derivatives Transactions by the
International Swaps and Derivatives Association, Inc.
(ISDA) and the US Futures Industry Association
The Addendum is designed to document the relationship between a
clearing member and its customer for the purposes of clearing OTC
derivatives transactions, where the clearing member is a registered
futures commission merchant under US law.
The publication is in anticipation of a substantial increase in
clearing volumes for OTC derivatives transactions, as rules made
under the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) come into force requiring OTC
derivatives to be cleared through central counterparties
How does the Addendum work?
Where a market participant engages with a registered futures
commission merchant under a futures customer agreement, the
Addendum is designed to supersede that agreement only in the case
of cleared OTC derivatives. This documentation structure is
characteristic of the "futures clearing" model that is
typical in the US.
Among other provisions, the Addendum contains representations
reflecting the US regulatory regime applicable to cleared OTC
derivatives, procedures for clearing members to close-out and
liquidate transactions following a "Close-out Event" or
"Tax Liquidation Event" and tax provisions relating to
cleared OTC derivatives. The Addendum contemplates that the parties
may wish to customise certain of the provisions.
The FIA and ISDA have recognised that certain provisions of the
Addendum may need to be altered in light of future regulatory
The move to central clearing under the Dodd-Frank Act is part of
the US's agenda for implementing its G-20 commitment that
"all standardized over-the-counter derivatives contracts
should be traded on exchanges or electronic trading platforms,
where appropriate, and centrally cleared, by the end of
Australia is proposing to implement its own G-20 commitment by
new regulatory framework for OTC derivatives via amendments to
the Corporations Act before the end of 2012. Under the changes, the
Australian Government will have, amongst other measures, the power
to impose mandatory clearing in relation to designated OTC
New central clearing measures will also be brought into law in
other jurisdictions, including the EU, as other G-20 nations seek
to implement their G-20 commitment.
In light of these developments, many participants in the
Australian OTC derivatives markets may be reviewing their OTC
derivatives documentation in anticipation of moving to central
clearing via CCPs. In particular, Australian participants who deal
with US futures commission merchants may choose to use the Addendum
as a basis for negotiating elements of the suite of new
documentation they may be required to settle as part of their move
to central clearing.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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