SwapsWire Delivers Support for ISDA 2005 Novation Protocol

24 October 2005: SwapsWire has confirmed that its system will allow derivatives dealers to be fully compliant with the 2005 Novation Protocol, published on September 12th, 2005 by the International Swaps and Derivatives Association, Inc. (ISDA). Twelve dealers, all of whom have agreed to adhere to the Protocol, have confirmed they aim to use SwapsWire to support their adherence by the end of this year. The twelve dealers are ABN AMRO Bank N.V., Barclays Bank, BNP Paribas, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, J.P. Morgan Chase & Co., Lehman Brothers, Merrill Lynch, Morgan Stanley, The Royal Bank of Scotland, and UBS Investment Bank. Other dealers will follow soon after. Buy-side clients are keen to use the new SwapsWire novation process, most recently London-based hedge fund BlueCrest Capital Management.

Buy-side clients frequently use deal novation as a mechanism for exiting derivative positions prior to maturity. Rather than terminating a transaction with the original party, a client may instead obtain a price from another dealer to assume the rights and obligations of the original transaction. A client acting this way is known as the Transferor, the new dealer as the Transferee, and the original dealer as the Remaining Party.

A sizeable proportion of the well-documented backlog in outstanding confirmations is related to novations. Historically, clients inconsistently obtain prior consent from the Remaining Party, yet the Remaining party typically prepares the documentation. Often the first notification the original dealer receives is a chase-up call from the Transferee looking for the novation document draft. The documentation backlog has drawn the attention of regulators in both the U.K. and U.S.A., and the Protocol is aimed at clarifying procedures and obligations related to novations to help clear up these issues.

A key aspect of the SwapsWire assignment functionality is making possible adherence to the Protocol requirement that the Transferor obtains the Remaining Party’s consent, and that the Transferee is notified promptly that consent has been obtained. Dealers and clients considering adherence concerned about the practicality of doing this will need the SwapsWire functionality. Communication and notification of consent must be accompanied by enough detailed trade information to identify the original transaction.

SwapsWire already has in operation a fully-functioning novation mechanism which is compliant with the Protocol. The system allows the Transferor to communicate a fully-defined derivative transaction with all accompanying trade detail to both the Remaining Party and the Transferee. The Remaining Party can signal their consent, and the Transferee can also confirm that they have received and are in agreement with the trade details.

Not only can SwapsWire be used to meet the consent requirements set out in the Protocol, but the process used also effects a fully ISDA-compliant legal novation confirmation in electronic format, eliminating the need for the three parties to separately generate and match novation documentation.

Dealers using SwapsWire for novations will be killing two birds with one stone – they will have an easy way of being able to adhere to the new Protocol, and they will be greatly simplifying the currently complex novation confirmation process.

SwapsWire supports a wide range of OTC Derivative products including interest rate, credit and equity derivatives.

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