ISDA publishes ISDA 2023 Equity Swap – 2021 Definitions Protocol

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By Jonathan Haines, James Coiley, Daniel Franks, James Knight, Kirsty McAllister-Jones and Kerion Ball

What has happened?

On 2 October 2023, ISDA published the ISDA 2023 Equity Swap – 2021 Definitions Protocol. Market participants can use the Protocol to amend existing equity swap documentation that references the ISDA 2006 Definitions so that all future transactions reference the 2021 ISDA Interest Rate Derivatives Definitions instead. 

The Protocol opens for adherence on 30 October 2023, but the amendments will not take effect until 18 March 2024 (the effective date). ISDA is encouraging market participants to adhere before the effective date, so that the switch from the 2006 to the 2021 Definitions is effected in a coordinated and synchronised manner. A number of sell-side institutions have committed to adhering during a “pre-adherence” window running from 16 October to 29 October 2023, to encourage broad industry participation.

Market participants will still be able to adhere to the Protocol after 18 March 2024, but the amendments will only affect transactions that are entered into after both counterparties have adhered.

Why is the Protocol needed?

Equity swaps entered into under an ISDA Master Agreement typically incorporate standardised equity swap-specific provisions by referencing the 2002 ISDA Equity Definitions. In order to document interest rate cashflows, the parties also usually reference one of ISDA’s sets of interest rate definitions. Historically, this has been the 2006 Definitions, but these have now largely been superseded by the 2021 Definitions – for example, the 2006 Definitions have not been updated since October 2021, while the 2021 Definitions have been updated every quarter. 

What are the amendments?

When two equity swap counterparties adhere to the Protocol, they amend their existing in-scope contracts so that future transactions entered into thereunder reference the 2021 Definitions instead of the 2006 Defintions. 

A number of consequential changes are also needed. These include:

  • replacing references to any 2006 floating rate option with the 2021 floating rate option that references the same rate;
  • updating certain 2006 terms to corresponding 2021 terms – for example, references to “Fixed Rate Payer” and “Floating Rate Payer” are changed to “Fixed Amount Payer and “Floating Amount Payer”, respectively; and
  • inserting additional fields, such as those relating to compounding and averaging overnight rates, into transaction supplements where necessary. The new fields are set out in an Annex to the Protocol, and match the corresponding line items in the confirmation templates that form part of the 2021 Definitions.

Unlike some of ISDA’s recent Protocols, which offer considerable optionality, adhering parties are not required to make any elections under the Protocol.

ISDA has also developed and published an amendment agreement that parties can use to effect these changes bilaterally, but using the Protocol allows adhering parties to amend multiple contracts with multiple counterparties at the same time and in the same way. This makes it a more efficient process, particularly for entities that have a number of trading relationships in place.

Which contracts are in scope?

The Protocol amends all master confirmation agreements and general terms confirmations (which includes the standard form master confirmation agreements available on ISDA’s website), including any related transaction supplements, that:

  • are entered into by two adhering entities;
  • are subject to an ISDA Master Agreement or one of the French law French Banking Federation master agreements listed in the Protocol;
  • incorporate the 2002 ISDA Equity Definitions and the ISDA 2006 Definitions; 
  • include provisions relating to a “Floating Amount” or floating interest amount; and
  • confirm the terms of one or more equity swap transactions.

The changes made by the Protocol only apply to transactions entered into under the amended documentation after 18 March 2024 (or, if later, the day on which the second counterparty adheres to the Protocol). 

Transactions entered into before Protocol adherence are not affected.  Similarly, transactions which provide for cash settlement under the 2006 Definitions (including where cash settlement applies as a result of the incorporation of optional or mandatory early termination provisions), are carved out from the Protocol’s scope. This is because the 2006 cash settlement provisions were materially upgraded in the 2021 Definitions and amending those provisions in existing equity transactions that reference the 2006 Definitions could materially affect their terms.

How can market participants adhere?

The Protocol opens for general adherence after the pre-adherence period, on 30 October 2023. As with all ISDA Protocols, market participants can adhere electronically, through ISDA’s Protocols page.