ISDA Protocols: Turning Rockets Of Remedy Into Weapons Of Mass Data Destruction?

Since a first launch in 1998, ISDA Protocols have become the go-to solution to enable financial institutions and their counterparties to respond to regulatory requirements and market events by amending affected contracts without the need to trawl through and bilaterally renegotiate every single document.

Rocket 4, the article "ISDA Revelation: the ISDA Master Agreement and Related Arrangements" summarised the scope, benefits and protections the wider International Swaps and Derivatives Association framework provides to OTC markets. In deference to our publisher, the metaphor of a rocket was employed, with its sections from nose cone to tail each mapped to one of the key constituents of the ISDA toolset, that unite in providing its projectile power. The growing array of protocols were given the supporting but crucial role of stabilizing 'Left Tail Fin', rightly extolled as smoothing the journey through regulatory compliance by taking the strain out of redocumentation.

However, there is a sense of growing unease and concern amongst the rocket heads at D2 Legal Technology that all might not be well on the launch pad. We need to look into the engineering blueprints further to explain why....

The Basic Protocol Blueprint

In the basic form of a protocol, firms that wish to partake request to join the particular protocol 'club'. After accepting the request, ISDA include the name of the new member with their date of acceptance in one of the protocol-specific "adhering parties" webpages. Links are provided to adherence letters of each member often outlining extra detail. Any two member parties will have an implied match, which they themselves are responsible for interpreting. By the rules defined for a protocol, this pair-match clarifies and establishes the scope, and potentially form, of dated deemed changes to contractual terms. A simple enough model - one that should not be too much trouble for a capable rocket engineer..... but over recent years the blueprint has been growing in page number, and there's more to get to grips with than might meet the eye.

Layering on Protocol Complexity: Paint by Numbers or Rocket Science?

Whilst admittedly in response to increasingly intricate regulation, over the years the complexities of protocols have increased in respect of additional optionality that combines across parties in matching, and more recently bilateral exchange of referential data and optionality choices by the completion of predefined...