- April 11, 2021
- Posted by: JSA
To understand the impact of the protocol, it is important to know the parties and sequence of events involved in the transmission of a trade through innovation. Take, for example, a credit derivatives trade (initial trading) that was concluded between two parties, the remaining part (usually a trader) and a transfer (usually a hedge fund). Subsequently, the transferor decides to renew the initial trade to a third party, the transfer partner (usually a distributor). The result is a trade between the purchaser and the remaining part (the new trade). The known market price for the novating of the initial trading to the assignor is agreed between the assignor and the cedant immediately after the assignor has terminated the initial trading and the purchaser reserves the new trading with the remaining portion as consideration. It seems that an innovation has been successful; But does he have it? It is the duty of the ceding party to obtain the agreement of the remaining part for innovation, which is requested and received through an exchange of e-mail messages (. B for example, Bloombergs or e-mails); the shape of which is defined on the back of the protocol. The purchaser should be copied on this exchange, but it is still the duty of the ceding party to ensure that the purchaser has received a copy of that consent; The protocol, which will come into force on 24 October 2005, contains a series of clear best practices that the three parties must follow in order to achieve a legal reorganization of a credit derivative or interest rate transaction. Instead of amending the agreement, as stipulated in the ISDA protocol, the protocol improves the agreement by defining the steps to be taken to obtain the prior written approval of the remaining party. The remaining portion will continue to send a confirmation of the innovation that must be signed by the three parties, which proves the emergence of innovation, but the non-execution of this document has no impact on the validity of the innovation itself. The purpose of the ISDA Novation protocol is to help eliminate residues in confirmations due to novated exchanges. Difficulties in treating novations have been identified as the main cause of ongoing confirmations. Should I stick to the NPII if I have complied with the NPII? It depends on the type of novation business you are doing.
If you want to do novation transactions with the new entities that stick to NPII, you have to stick to NPII. We assume that many new parties will be funds, often in a transfer position, so that parties that are often in the party`s position or remaining transfers will most likely have to comply with the NPII. What are the alternatives (if any) to participation in the 2005 Novation II protocol? Issues relating to secure transactions could be addressed by individually negotiated agreements or by the inclusion of relevant provisions of the NPII as a reference. However, in both cases, bilateral negotiations would be necessary, which could take time and therefore be costly. Early evidence indicates that the protocol has been well received by distributors (and their regulators); To date, some 47 merchants have forwarded their loyalty letters to ISDA. However, the reaction of hedge funds has been slow; Only four hedge funds reacted in the same way to ISDA. The hedge fund community seems to feel that the 6p.m time to get the agreement of the remaining party is too restrictive and that they would prefer to return orally to such consents. Only time will tell whether the protocol is successfully adopted by the majority of market participants, but one thing is certain: market participants are now aware of the legal principles of transfers through innovation.