• ISDA Publishes Variation Margin Protocol
  • August 24, 2016 | Authors: Brian Barrett; James M. Cain; Catherine M. Krupka; David T. McIndoe; Mark D. Sherrill
  • Law Firms: Sutherland Asbill & Brennan LLP - New York Office; Sutherland Asbill & Brennan LLP - Washington Office
  • On August 16, 2016, the International Swaps and Derivatives Association, Inc. (ISDA) published the ISDA 2016 Variation Margin Protocol (VM Protocol). The VM Protocol is intended as a tool to help market participants that will be subject to regulatory variation margin requirements,1 and their counterparties, bring their collateral support documentation (i.e., ISDA Credit Support Annexes (CSAs)) into compliance with various jurisdictions’ variation margin requirements for uncleared derivative transactions. These jurisdictions include the United States (i.e., the U.S. Commodity Futures Trading Commission’s and the U.S. prudential regulators’2 variation margin rules), Japan and Canada, as well as any supplemental jurisdictions (such as the European Union and Switzerland) that will be incorporated into the VM Protocol in the future.

    This Legal Alert provides a brief overview of the substance of the VM Protocol, the process for adherence thereto and the timeline for the VM Protocol and the above jurisdictions’ variation margin requirements. Note, however, that the VM Protocol is fairly complex compared to previous ISDA protocols designed to facilitate compliance with regulatory requirements in the wake of the 2008 financial crisis. Market participants are therefore encouraged to undertake a thorough review of the VM Protocol documentation available on the ISDA website.

    The VM Protocol

    Through the VM Protocol, counterparties may either modify their existing documentation or enter into new documentation, in order to comply with the requirements of the variation margin regimes designated by the parties. Specifically, the parties may either (i) enter into a new ISDA Master Agreement and CSA, or (ii) modify their existing ISDA Master Agreement and CSA. Under the former option, the parties would, assuming certain conditions are met, enter into a 2002 ISDA Master Agreement and a new CSA with many of the Paragraph 13 elections already designated. Under the latter option, the parties would have three methods by which to modify their existing ISDA Master Agreement and CSA. First, the parties may amend their existing CSA, thereby including all transactions within the same CSA and applying all of the applicable amendments to that CSA. Second, the parties may replicate their existing CSA to create a “replica” CSA and amend that replica CSA, thereby creating two separate CSAs—one for transactions entered into before the designated compliance date(s) and another for those entered into on or after the designated compliance date(s). Under this method, only the replica CSA would be amended by the terms of the VM Protocol. And third, the parties may enter into a new CSA that includes provisions and elections designated by ISDA and may either include all transactions within this CSA or split their transactions in the same manner as for the replica CSA.

    The VM Protocol establishes a structured process by which a party would exchange information with any of its counterparties and specify its preferences for certain provisions to be included in its CSA(s). Then, assuming certain conditions are met, the relevant CSA would be entered into or amended, based on both parties’ elections.

    In addition to other requirements, a party that would like to use the VM Protocol must exchange with its counterparty a “Questionnaire,” the procedures for which are established by the ISDA 2016 Variation Margin Protocol agreement. Under the Questionnaire, a party would provide certain information about itself and would select certain provisions that it would like to include in the ultimate agreement. For some of these provisions, the parties must “match”—i.e., both parties must select the same provision that they would like to include—in order for the VM Protocol to be effective between those parties. For other provisions, the VM Protocol builds in alternative options that the parties may elect to include instead of the default provision, provided that both parties have selected the same alternative option in their Questionnaires.

    Based on the parties’ elections in their Questionnaires, the VM Protocol would provide the parties with an “exhibit” that specifies or amends the terms of the parties’ Master Agreement and/or CSA, as applicable. As stated above, the VM Protocol is intended to help parties bring their CSAs into compliance with the applicable variation margin requirements. As such, ISDA has designed the VM Protocol so that parties modifying their agreements through the VM Protocol would make, typically, only those changes that would be required by the designated variation margin rules. ISDA has also built into the VM Protocol, however, some additional provisions and alternative options that, although not required by the designated variation margin rules, are intended to facilitate compliance with the variation margin rules.

    The VM Protocol also establishes the possibility for a supplemental process that would address additional jurisdictions’ variation margin rules. This supplemental process is specifically targeted to the European Union’s and Switzerland’s variation margin rules, both of which have been delayed. Through this supplemental process, parties would exchange “Supplemental Questionnaires” in a manner similar to that described above and then, assuming certain conditions are met, the VM Protocol would provide supplemental terms to amend the parties’ CSA.


    The variation margin regimes for the current jurisdictions covered by the VM Protocol have designated the compliance dates for parties regulated by those regimes as September 1, 2016, and March 1, 2017. With these impending compliance dates, a party that might be affected by these variation margin requirements should consider its efforts to bring its CSAs into compliance with the relevant regulatory regimes. The VM Protocol provides one possible option for such a party.

    The VM Protocol is available for parties to use as of August 16, 2016. Parties will also be able to access the VM Protocol on the ISDA Amend platform, which is the electronic platform that ISDA and Markit have developed to facilitate adherence to various protocols resulting from changes to the derivatives regulatory landscape. Although the VM Protocol is not yet available on the ISDA Amend platform, ISDA anticipates that it will become available in Fall 2016.

    1 The VM Protocol is designed to address certain jurisdictions’ variation margin requirements, not their initial margin requirements. Although these jurisdictions have adopted both variation margin and initial margin requirements, the VM Protocol does not address the initial margin requirements. Parties subject to the initial margin requirements will therefore need to enter into a separate Credit Support Annex (CSA) that addresses the initial margin requirements or amend their existing CSA so that it complies with the applicable initial margin requirements.

    2 The prudential regulators include the Department of the Treasury’s Office of Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the Federal Housing Finance Agency.