Canada: Reminder: May 1st Deadline For Compliance With Business Conduct Rules Under Dodd-Frank Act

Last Updated: April 24 2013
Article by Jason Kroft, Jeff Hershenfield and Sumeet Thind

Almost two years after the passage of the Dodd-Frank Act, the overhaul of the US derivatives market is rapidly shifting into the implementation phase. While most provisions of the Dodd-Frank Act are directed at US Swap Dealers (SDs) and Major Swap Participants (MSPs), some of the Dodd-Frank rules also affect Canadian counterparties that don't deal in or speculate with swaps but use swaps merely to hedge exposures in their business or investments (End-Users). By May 1, 2013, all End-Users must have provided their SDs with certain information and representations in order to enable SDs to comply with the Commodity Futures Trading Commission’s external business conduct rules (the Business Conduct Rules).

It is important to note that SDs will only continue offering and executing swaps with End-Users who have provided such information. As such, End-Users who have not already been contacted by their SD counterparties regarding this deadline may want to consider approaching the relevant SDs to discuss this matter, as these rules may have application for Canadian End-Users that engage in derivatives transactions with US Swap Dealers.

The Business Conduct Rules

The Business Conduct Rules generally attempt to enhance protections for swap counterparties of SDs and MSPs though due diligence, disclosure, fair dealing and anti-fraud requirements. In short, the Business Conduct Rules act like a customer protection regime for counterparties of SDs and MSPs. The rules require SDs and MSPs to apply a new “know-your-counterparty” process and collect certain information about their counterparties.

Under the Business Conduct Rules, SDs and MSPs will be subject to strict and detailed business conduct standards obligating them to undertake the following actions, among other things:

  • conduct due diligence on their counterparties to verify eligibility to trade (including eligible contract participant status);
     

  • refrain from engaging in abusive market practices;
     

  • provide disclosure of material information about the swap to their counterparties;
     

  • provide a daily mid-market mark for uncleared swaps;
     

  • inform their counterparties of their right to:

    • clear a swap that is not required to be cleared;

    • select the derivatives clearing organization through which a cleared swap is cleared; and

    • request a scenario analysis and a daily mid-market mark for cleared swaps;
       

  • provide material information sufficient to allow the counterparty to assess the swap’s material risks, characteristics, incentives and conflicts of interests; and
     

  • when recommending a swap to a counterparty, make a determination as to the suitability of the swap for the counterparty based on reasonable diligence concerning the counterparty.

As a result, End-Users must complete the necessary amendments to their swap documentation and will be asked to provide certain information and additional representations before May 1, 2013 in order to enable SDs to comply with the new rules. 

ISDA August 2012 DF Protocol Agreement

A current ISDA protocol provides a standardized process for SDs to collect know-your –counterparty information and confirm that clients are allowed to execute trades.

ISDA has launched the ISDA August 2012 DF Protocol (the Protocol), which provides for certain standardized amendments to existing ISDA documentation. The Protocol is designed to facilitate compliance with the CFTC's rules by supplementing existing master agreements or other written agreements relating to swaps. The Protocol consists of the following six main components:

  1. The Protocol: The main structural document;
     

  2. Adherence Letter: Evidences a party’s agreement to be bound by the Protocol;
     

  3. Questionnaire: Allows a party to provide information about itself, make certain safe-harbour elections, and identify the counterparties with whom it is willing to apply DF Supplement provisions;
     

  4. Addendum 1: Contains additional optional reps relevant to counterparties not completed when the Protocol was first launched;
     

  5. DF Supplement: Contains representations, covenants, disclosures, acknowledgements and notifications related to the Covered Rules that counterparties may apply to their swap trading relationship; and
     

  6. DF Terms Agreement: Allows parties to apply selected provisions of DF Supplement to their trading relationship in respect of swaps, whether or not they have an existing master swap agreement.

In order to accept the terms of the Protocol, a party must: (1) sign and deliver the Adherence Letter, (2) pay an adherence fee of $500 and (3) complete the Questionnaire. Once these steps have been completed, the existing master agreements between the parties would deemed to be amended based upon the election made in the Questionnaires. Practically speaking, it will take some time to adhere and complete the Questionnaire, so End-Users should being the process as soon as possible if they have not already done so.

The Protocol procedure is not required by the CFTC's rules; rather, the Protocol is a mechanism put in place by ISDA to assist swap dealers and major swap participants in complying with their responsibilities under the CFTC's Dodd-Frank regulations. It is possible for a SD or MSP, on the one hand, and an End-User counterparty, on the other, to execute a bilateral amendment agreement that addresses the Dodd-Frank requirements instead of adopting the Protocol, and some SDs and MSPs have circulated such agreements to certain of their clients.

The deadline for compliance with the Business Conduct Rules is May 1, 2013. By this date, End-users will need to have either adhered to the Protocol or entered into a bilateral agreement by that date. The Protocol is unlike previous protocol processes that ISDA has employed and End-Users will want to carefully review the documentation associated with the protocol to understand its implications.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Jason Kroft
 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.