An overview of the ISDA 2023 Equity Swap – 2021 Definitions Protocol

Why has ISDA launched the Protocol?

Equity swaps entered into under an ISDA Master Agreement primarily rely on the 2002 ISDA Equity Derivatives Definitions as the basis for standardised equity related definitions and provisions. Additionally, parties commonly incorporate ISDA’s interest rate derivatives definitions to describe the interest rate cashflows in equity swaps. To date, the interest rate derivatives definitions referenced in equity swap documentation have been the 2006 ISDA Definitions (the 2006 Definitions).

Since the 2006 Definitions were published, there have been numerous changes in market structure, regulations, technology, and market practice. ISDA published numerous supplements over time to address those changes and developments, which led to the 2006 Definitions becoming unwieldy and difficult to use. Furthermore, at the end of 2021, ISDA stopped supporting the 2006 Definitions and, consequently, these are no longer being updated. As a result, the 2006 Definitions will continue to be more and more outdated as time goes by. The 2021 Definitions address the shortcomings of the 2006 Definitions and are being regularly updated. These have now largely superseded the 2006 Definitions. In light of the above, reasons to transition newly executed equity swaps onto the 2021 Definitions are now compelling.

What does the Protocol do?

The Protocol enables parties to certain equity swap documents (the Protocol Covered Documents) to amend the terms of each such document to incorporate the 2021 Definitions, in place of the 2006 Definitions, as set out in the attachment to the Protocol (the Attachment). In particular, the Attachment provides for the following amendments:

• Each Protocol Covered Document is amended to incorporate the 2021 Definitions, as amended from time to time, provided that for any equity swaps transaction under a master confirmation agreement covered by the Protocol, the version of the 2021 Definitions that will apply will be that in effect as at the date when the transaction is entered into.
• References to floating rate options, as defined in the 2006 Definitions, are updated to the corresponding floating rate options in the 2021 Definitions. For these purposes, the Attachment contains a table mapping out the floating rate options in both sets of definitions. Not all floating rate options in the 2006 Definitions were carried across to the 2021 Definitions and, consequently, parties could have a floating rate option hardwired in their equity swaps documentation which does not appear in the mapping table set out in the Attachment.  In these rare instances, the equity swap documentation will still be updated to the 2021 Definitions but will have an obsolete floating rate option which will need to be amended bilaterally.  
• Certain definitions are updated to align them with the corresponding defined terms or provisions in the 2021 Definitions. For instance, references to “Banking Day” are amended to “Business Day”, or references to “Fixed Rate Payer” and “Floating Rate Payer” are amended to “Fixed Amount Payer” and “Floating Amount Payer”, respectively.  In addition to listing certain specific amendments, the Attachment contains catch all language to capture references to terms in the 2006 Definitions for which there is an equivalent term in the 2021 Definitions. 
• Additional fields relating to compounding and averaging of overnight rates and index provisions are included in Protocol Covered Documents.  

The Attachment further clarifies that: 

1. legacy transactions are not amended by the Protocol (as explained further below), and 
2. bespoke provisions and bespoke amendments to the 2006 Definitions that may have been hardwired into Protocol Covered Documents are preserved and not amended by the Protocol.

What documents does the Protocol amend?

The amendments described above only apply to Protocol Covered Documents, which include any equity swap master confirmation agreement (including the template equity swap transaction supplements contained therein) (each, an MCA) that:

1. is governed by an ISDA Master Agreement or one of the French law French Banking Federation master agreements listed in the Protocol,
2. is entered into between two adhering parties, and
3. is entered into prior to the Protocol Effective Date (as defined below) (or later, if the adherence date of any of the parties is after the Protocol Effective Date).  This would capture MCAs entered into between two adhering parties after the date they have adhered to the Protocol but before the Protocol Effective Date.

Notwithstanding the foregoing, Protocol Covered Documents exclude:

• Legacy transactions entered into under a Protocol Covered Document. This means that an MCA will only be a Protocol Covered Document with respect to any transaction entered into on or after the Protocol Effective Date, but all transactions entered into before the Protocol Effective Date are excluded. 
• Transactions with respect to which optional early termination, mandatory early termination or any of the cash settlement provisions set out in the 2006 Definitions is specified to be applicable.  The cash settlement methods, for instance, have varied significantly in the 2021 Definitions and, as a result, in order for the new methods to apply certain elections would need to be made by the parties.  As a result, transactions to which these provisions apply are excluded and, consequently, not amended by the Protocol even if the MCA is otherwise a Protocol Covered Document. 
• Any MCA which expressly excludes the application of the Protocol.

What next?

Pre-adherence to the Protocol opened on 16th October 2023, until 29th October, for those sell-side institutions who committed to adhering during a pre-adherence window, with the aim encouraging broad industry adherence once the Protocol is officially launched. General adherence opened on 30th October.  However, the Protocol will not take effect until 18th March 2024 (the Protocol Effective Date), giving parties time to implement changes, perform internal systems’ updates and get operationally ready before the Protocol Effective Date.  Adherence to the Protocol will remain open after the Protocol Effective Date, in which case, it would take effect from the date on which the later of the two adhering parties adheres to the Protocol.