On December 15, 2009, the CME Group Inc. (the "CME") commenced the clearance and settlement of certain types of credit default swaps ("CDS"), including a number of Markit CDX indices and liquid single-name CDS. The CME clearing initiative is designed to meet industry commitments to provide access to central clearing for CDS transactions for both buy-side and sell-side participants and to address systemic issues relating to enhancing risk management, trade processing and transparency in the CDS market.
Fried, Frank, Harris, Shriver & Jacobson LLP served as counsel to a working group comprised of the CME and leading market participants from both the managed fund and dealer communities (the "Working Group") to develop the form of legal documentation to be used in connection with clearing CDS transactions on the CME.
The CME's approach to clearing CDS transactions, including the applicable CME Rules, leverages relevant over-the-counter market conventions, such as the 2003 ISDA Credit Derivatives Definitions and the 2009 ISDA Credit Derivatives Determinations Committees, Auction Settlement and Restructuring Supplement, each as published by ISDA, and applies certain key features of the regulatory framework for the listed derivatives (futures and options on futures) market, such as intermediation by CME clearing member firms who are registered futures commission merchants subject to net capital and liquidity requirements, segregation of customer margin funds, and the portability of customer transactions.
Buy-side customers may document CME-cleared CDS transactions through utilizing their existing Futures Customer Agreement with a CME clearing member firm by executing an addendum to such agreement developed by the Working Group, referred to as the CME-Cleared Over-the-Counter Derivatives Addendum (the "Addendum"). Among other things, the Addendum includes representations and warranties by both parties applicable to CME-cleared CDS transactions, as well as detailed mechanics relating to trade portability and valuation in the event of a termination initiated by either a customer or a CME clearing member. CME clearing members and buy-side customers may also negotiate bilateral terms applicable to cleared CDS transactions and confirm such terms in the agreed form of Addendum. Please click here (www.friedfrank.com/siteFiles/Publications/A196A022A2DBEBEAFC3632D4DE887309.pdf) for a copy of the published Addendum.
In addition to the Addendum, the Working Group prepared a form of give-up agreement, referred to as the CME-Cleared Over-the-Counter Derivatives Give-Up Agreement (the "Give-Up Agreement"). The Give-Up Agreement is a triparty agreement among the CME clearing member, the customer and the executing party (i.e., the swap dealer counterparty), and addresses mechanics involving the agreement by a customer and the executing party on the relevant terms for give-up to, and clearance and settlement by, the CME through the customer's account with the CME clearing member.
The Give-Up Agreement leverages the Recommended Common Principles for Relationships Between Customer and Executing Broker and CME Clearing Member, as published by ISDA, but also contains certain timelines for each party's performance which may be amended through bilateral negotiation. The Give-Up Agreement addresses, among other things, the circumstances in which a trade may be accepted or rejected for clearing, as well as in which a trade may constitute a bilateral non-cleared transaction between the customer and the executing party. Please click here (www.friedfrank.com/siteFiles/Publications/7F07A2E7D423B82515B23DEA65FC6726.pdf) for a copy of the published Give-Up Agreement and please click here (www.friedfrank.com/siteFiles/Publications/55C9C2CCD3306CF0BE37211B4C6A07B5.pdf) for a summary of the timelines.
We plan to conduct a training session on the Addendum and the Give-Up Agreement for clients early in the New Year.
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