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    FCA Welcomes ISDA Protocol on Narrowly Tailored Credit Events

    September 19, 2019

    FCA published an update to its initial joint statement with the U.S. SEC and CFTC on opportunistic strategies in the credit derivatives markets. These opportunistic strategies include, but are not limited to, "manufactured credit events" or "narrowly tailored credit events." FCA also welcomed the recently published proposed protocol by ISDA that is designed to address certain issues related to narrowly tailored credit events.

    The proposed ISDA protocol will allow market participants to amend their legacy credit derivatives transactions to incorporate the Narrowly Tailored Credit Event Supplement to the 2014 ISDA Credit Derivatives Definitions. The protocol contains two amendments to the 2014 ISDA Credit Derivatives Definitions. One relates to the Failure to Pay definition and the other to the Outstanding Principal Balance definition. The ISDA 2019 narrowly tailored credit events protocol is relevant to all market participants that trade over-the-counter non-cleared credit derivatives that incorporate the 2014 ISDA Credit Derivatives Definitions. For firms that solely have cleared trades, adherence to the protocol is not required. The anticipated implementation date of the protocol is January 13, 2020. Central counterparties will also incorporate the supplement into cleared trades on the implementation date. The cut-off date for adherence to this protocol is October 14, 2019.

    FCA announced that it welcomes these efforts and expects firms to consider how such opportunistic strategies may impact their businesses and to take appropriate action to mitigate market, reputation, and other risks arising from these types of strategies. With regard to the proposed ISDA protocol, firms should consider how adherence to the proposed ISDA protocol may help them mitigate these risks. Firms should also consider the risks to which they may be exposing themselves by trading with counter-parties who do not adhere to the proposed ISDA protocol. The proposed ISDA protocol will not address many of the concerns identified in the joint statement, such as opportunistic strategies that do not involve narrowly tailored credit events. However, FCA looks forward to further industry efforts to improve the functioning of the credit derivative markets and welcomes continuing engagement with market participants. 

    On June 24, 2019, the Chairmen of the U.S. SEC and CFTC, along with the Chief Executive of FCA, had released a joint statement on opportunistic strategies in the credit derivatives markets. The joint statement outlined mutual concerns about the pursuit of these strategies and the adverse impact they may have on the integrity, confidence, and reputation of the credit derivatives markets as well as markets more generally. 

     

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    Keywords: International, Europe, UK, Banking, Securities, Credit Risk, OTC Derivatives, Legacy Swaps, ISDA Protocol, Narrowly Tailored Credit Events, ISDA, FCA

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