Buy-side seminar: Markets break out group
ISDA/FOA Addendum
Hannah Meakin, Floortje Nagelkerke and Catherine Blake
Norton Rose Fulbright LLP
30 July 2013
What is the Addendum?
• Documents relationship between Clearing Member and Client for
clearing OTC derivatives on principal to principal CCPs
– Doesn’t apply to uncleared OTC derivatives
– Concept could be used for exchange traded derivatives
• Designed as Addendum to ISDA Master or FOA futures and options
agreements
– but could be used with any master agreement
• If using an ISDA, it turns off the CSA or CSD and replaces it with a new
CSA containing prescribed para 11 or 13
– but for other master agreements, you could use another collateral schedule – make sure
it works
• Template only
– Information needs to be completed and elections made in Addendum Annex
– Any of it can be negotiated
• Works when clearing through any CCP:
– ICE Clear, CME Clearing, NASDAQ have confirmed that no amendments needed
– Fine for both omnibus and individual accounts
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How does it work with CCPs?
• Client Transaction arises between CM and Client which is identical to
transaction between CM and CCP save that:
– Subject to terms of Clearing Agreement (agreement as supplemented by Addendum)
– Collateral provisions are as agreed in Collateral Schedule
– If CM was buyer in CM/CCP transaction, it is seller in Client Transaction (and vice versa)
• CM is not obliged to clear any trade
• CM makes same modifications to Client Transaction as are made to
CM/CCP Transaction unless impossible or impracticable to make such
modifications or impossible or impracticable to maintain the modified
Client Transaction after notice period to be agreed
• Client agrees to:
– CCP’s Core Provisions (must also facilitate CM’s compliance)
– CCP’s Mandatory Provisions (these prevail if any conflict)
– Not to cause CM to breach CCP’s Rule Set and cooperate with CM’s compliance and to
execute and deliver any documents required by CCP
– CCPs set out their choice of Core and Mandatory Provisions but Client and CM could
vary these if they wanted
• Each set of cleared derivatives is treated separately if CCP defaults or
declares CM in default
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What can the Client do if the CM is deteriorating?
• Client can’t default CM (any rights in Agreement are disapplied)
• However, there are 3 possibilities:
• If CPP defaults CM, Client Transactions relating to that CCP are automatically
terminated at same time and given same value as CCP determines for CM/CPP
transactions
– Subject to CCP’s Core Provisions
• Client can ask CM to transfer Client Transactions and CM/CCP Transactions
and related collateral to a new CM
– CM is obliged provided no CCP or CM default and any Transfer Conditions
are satisfied
– In accordance with CCP’s rules
• Client can ask CM to clear an Offsetting Transaction
– CM is obliged subject to any Offsetting Conditions
– CM must then compress CM/CCP transactions
Each of the above is subject to CCP rules
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Limited recourse
• Client’s recourse against CM is limited to payment by CCP to CM
taking into account:
– Netting and set off between CM and CCP
– Amounts paid by CCP to back-up CM or Client
• If CCP defaults or defers payment, CM can make a corresponding
deduction from any payment CM owes to Client under Client
Transaction or Collateral Agreement
– CM must take reasonable steps to obtain payment
– If payment is subsequently obtained, CM must pay Client
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Some examples of the elections
• Limitation of liability switched on: CM’s Related Parties are not liable for:
– CCP
– Failure of an electronic facility, trade repository, system or platform
– Acts or omissions of Related Party to comply with CCP’s rules (save that it is liable for
losses it would otherwise have caused by its negligence, wilful default or gross
negligence)
– Consequential etc loss
• Indemnity: Client indemnifies Related Parties from losses caused by:
–
–
–
–
Client’s breach of Clearing Agreement, Collateral Agreement or CCP’s rules
Relevant Party’s breach of CCP’s rules connected to Client Transactions
Action in reliance on instructions reasonably believed to be from Client
CCP Default
• Payment Netting: same currency, same date – can be limited to certain
transactions
• Illegality/impossibility: permits CM to terminate and Client to transfer
• Disclosure: can add additional confidential information
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