Dodd-Frank is the term commonly used to refer to U.S. legislation officially named the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dodd-Frank seeks to regulate the conduct of derivative markets. It also outlines the rules concerning:
Dodd-Frank contains some rules that apply to swap dealers and market makers, and other rules that apply to their counterparties and/or end users.
The rules apply to swaps entered into with U.S. persons, and to non–U.S. persons who conduct a material number of swaps with U.S. persons.
The current definition of a U.S. person under the Act includes:
Please refer to the Dodd-Frank Act website for the complete set of definitions, and ask your own advisers for guidance on how you or your firm will be affected.
Dodd-Frank uses the term ‘swap’ to cover a broad range of derivative products. The following products are subject to Dodd-Frank rules, though the exact rules vary on a case-by-case basis.
As a Bank that provides a wide range of over-the-counter (OTC) derivatives products to U.S. counterparties, CBA has registered with the U.S. regulator as a non-U.S. Swap Dealer.
CBA’s status as a non-U.S. Swap Dealer will trigger a number of obligations. CBA will be required to:
Like most swap market participants, CBA intends to address the above requirements by:
If you are a U.S. counterparty of CBA entering into swap transactions after 30 April 2013, you will need to execute additional documentation included in the Protocol. Even if you have not already executed an ISDA Master Agreement you can still adhere to the Protocol, which facilitates compliance by allowing market participants to (i) supplement the terms of existing master agreements under which the parties may execute swaps, or (ii) enter into an agreement to apply selected Dodd-Frank compliance provisions to their trading relationship in respect of swaps.
Executing the Protocol is a three-step process that you can complete online. You will need to:
To execute documents or for further information on the ISDA DF Protocol, visit the International Swaps and Derivatives Association website and click on the open protocols section.
The cost for executing the Protocol is US$500.
For those acting under a third-party relationship (e.g Custodians), your authorised third-party agent may execute this documentation on your behalf.
In addition to the requirements outlined above, Dodd-Frank requires all counterparties to a swap to obtain a Unique Legal Entity Identifier (ULEI). This ULEI is also known as the CTFC’s Interim Compliant Identifier (CICI) and will be referred to CICI in the remainder of this site. A CICI is an internationally recognised number that identifies you as a counterparty to your swap trades. CBA is obliged to use this number on the trade reports we provide to the U.S. regulator as part of our compliance with Dodd-Frank. You can get your CICI from the Commodity Futures Trading Commission website. You will need to have a CICI to complete your Protocol questionnaire.
It is important to follow the steps above to ensure uninterrupted trading relationships between yourself, as a U.S. person, and CBA from 30 April 2013. As this is new legislation the Dodd-Frank Act will continue to evolve, we will aim to keep you updated as this happens
We strongly recommend that all parties obtain their own specialist advice (specific to their own particular circumstances) on how they will be affected by the Dodd-Frank Act.
One of the key reasons for Dodd-Frank is the introduction of clearing of all standardised eligible OTC derivatives through a centralised counterparty (or Clearing House) in order to mitigate counterparty risk.
Clearing is a process by which a third party, the Clearing House, steps in between the original counterparties (you and us) and guarantees the performance of the transaction, by requiring that we both post substantial amounts of liquid collateral.
For instance, you will agree the terms of a swap with us, and then we will both notify the clearer (or your Clearing Broker) of the terms of the trade. We will both face the Clearing House as their Legal counterparty.
The main exception to mandatory clearing is where our counterparty elects to utilize the End User Exemption. The End User Exemption can be elected by non-financial entities that are hedging or mitigating a commercial risk. In such a case the client faces Commonwealth Bank on a bilateral basis.
The most commonly used clearing houses are the LCH (London Clearing House) and CME Group (Chicago Mercantile Exchange). All counterparties intending to clear trades over a Clearing House must set up an account with a Clearing House and/or Clearing Broker, and execute the appropriate documentation before trading. Please contact your Clearing Broker or the Clearing House for the account set up process. The Counterparty has the right to nominate to the Swap Dealer which Clearing House should be used for each trade.
For cleared trades, the Clearing House will charge each party an Initial Margin, and then a Maintenance Margin where necessary. Depending on the Exchange, netting across Swaps and even across Futures positions may be recognized for margin calculations. For trades on a bilateral basis, at the moment the parties are free to agree their own margining regime, but Dodd-Frank rules will likely evolve that prescribe the margining regime for bilateral trades.
Mandatory Clearing will be phased in from 11 March 2013 with the first phase being mandatory clearing of a specific set of Credit and Rates products for Swap Dealers, Major Swap Participants and active funds.
If you have any questions, please contact your CBA Relationship Executive or send us an email at CommBankDoddFrank@cba.com.au.