June 17, 2019

On June 10, 2019, the International Swaps and Derivatives Association, Inc. (“ISDA”) published updated FAQs for the ISDA 2018 U.S. Resolution Stay Protocol (the “US Protocol”). The primary purpose of this update is to provide new guidance relating to how agents (including investment managers acting in such capacity for their funds) may adhere to the US Protocol on behalf of their principals (i.e., their clients, including funds). In particular, the updated FAQs provide that an agent may only adhere to the US Protocol, as agent, to effectively remediate “Agent Protocol Covered Agreements”, meaning those swaps and other qualified financial contracts (“QFCs”) that were executed by the agent on behalf of the principal.

To mitigate the burden of complying with this updated process, the updated FAQs provide that an agent can remediate QFCs that were entered into directly by their principals by adhering to the US Protocol on behalf of each such principal individually using the Single Entity Adherence Letter. Alternatively, any QFC that was executed directly by a principal (including a fund, or its GP) can be remediated via the US Protocol if the principal adheres directly to the US Protocol.

The updated FAQs reflect concerns raised by a number of major banking groups that they will be unable to track compliance in respect of QFCs that were directly entered into by funds where those funds are not individually identified in the adherence process. While our impression is that such concerns are not unanimously shared among the dealer community, it is likely that some banking groups will require their counterparties to comply with the process described in the updated FAQs.

Seward Observations

Investment Managers should review their QFCs and their adherence to the US Protocol to determine whether any action is necessary. Given the potentially significant burden presented by the updated FAQs, our view is that most investment managers who have already adhered to the US Protocol as agent, but have QFCs entered into directly by their funds, should contact their counterparties and, if necessary, elect to adhere to the US Protocol for their funds individually by using the Single Entity Adherence Letter. ISDA offers a tiered fee arrangement for fund complexes that will require 25 or more adherence letters, providing some limited cost relief. As the compliance date for the US Protocol for private funds and many other entities is July 1, 2019, investment managers should take any necessary action as soon as possible.

If you have any questions regarding the updated FAQs, please contact Miki Navazio (212-574-1404), Craig Hickernell (212-574-1399), Lauri Goodwyn (212-574-1249), Dan Bresler (212-574-1203) or an attorney in the Investment Management Group at Seward & Kissel LLP.