ISDA 2021 Security-based Swaps (SBS) Protocols

12 October 2021

On 15 March 2021 ISDA published the ISDA 2021 Security-based Swaps (SBS) Top-Up Protocol (the SBS Top-Up Protocol) and later, on 18 May 2021, the ISDA 2021 SBS Protocol Agreement (the SBS Protocol and together with the SBS Top-Up Protocol, the Protocols).

The Protocols were developed to help parties amend their ISDA trading relationships to comply with rules developed by the US Securities and Exchange Commission (SEC) which come into force on 1 November 2021 (Covered Rules).

The Covered Rules reflect the regulatory regime imposed on market participants by the SEC in relation to the trading of security based swaps and certain related products (SBS). These rules closely mirror the rules introduced by the Commodity Futures Trading Commission (the CFTC) from 2010 onwards. Both sets of rules stem from Title VII of Dodd-Frank1 and are both required due to the SEC having regulatory jurisdiction over SBS and its market participants while the CFTC has regulatory jurisdiction over most other “Swaps” (for which see below).

The CFTC produced most of their rules earlier than the SEC, which led to ISDA bringing out the ISDA August 2012 and March 2013 Dodd-Frank Protocols (the Dodd-Frank Protocols) to which most market participants that transact with US based counterparties or their affiliates will have already adhered (or have referenced in their documents).

The Covered Rules apply directly to dealers in SBS (SBS Dealers) and “Major SB Participants” (the SEC’s equivalent of the CFTC’s major swap participant definition: “MSBSPs”, together with SBS Dealers “Covered SBS Entities”). They relate specifically to reporting requirements, disclosure of SBS information and business conduct standards that apply to Covered SBS Entities. They also provide for risk mitigation for non-cleared SBS. The Protocols address many of the SEC’s Covered Rules and will enable Covered SBS Entities to comply by amending the terms of their agreements with other adhering parties.

What are Security-based Swaps?

SBS are defined as "Swaps" – using the wide Commodity Exchange Act definition that includes options, cash settled forwards and other specific derivatives, but generally excludes physically settled forwards or futures2 – that are based on:

  • a “narrow-based security index”3;
  • a single security or loan; or
  • the occurrence or non-occurrence of certain financial events relating to a single issuer of a security or the issuers of securities in a narrow-based security index (in other words, a credit default swap).4

Why do I need to consider these Protocols?

Covered SBS Entities are obliged to apply the Covered Rules to SBS transactions with their counterparties in the same way that swap dealers and major swap participants have been obliged to apply the CFTC’s rules to non-security based swaps. As with the CFTC’s rules, the extent to which compliance is necessary depends on the status of the parties to the transaction, and so Covered SBS Entities need to gather certain information about their SBS transaction counterparties. The Protocols are a means for them to do this.

How do the Protocols work?

At a high level, the Protocols avoid the need for parties to amend their bilateral agreements with each counterparty individually. Instead, they allow parties to amend "in-scope" documents (Protocol Covered Agreements) by incorporating a set of standardised provisions designed to achieve compliance with certain of the Covered Rules. 

Under the SBS Protocol, adhering parties need to complete one or both questionnaires (Questionnaire 1 and Questionnaire 2) in order to exchange information about each other and select the provisions to be incorporated into their Protocol Covered Agreements. These provisions are set out in two supplements: the ISDA SBS Protocol Supplement I (SBS Supplement 1) and the ISDA SBS Protocol Supplement 2 (SBS Supplement 2 and, together with SBS Supplement 1, the SBS Supplements). Each SBS Supplement covers different aspects of the Covered Rules and the division between them generally follows the equivalent division between the ISDA August 2012 Dodd-Frank Protocol and the ISDA March 2013 Dodd-Frank Protocol. 

The SBS Top-Up Protocol on the other hand, leverages previous questionnaires that the parties will have completed when adhering to the Dodd Frank Protocols and so there is no need to complete new questionnaires. Instead, the Appendix to the SBS Top-up Protocol sets out a series of amendments and additions to the provisions already incorporated into the Protocol Covered Agreements by virtue of the Dodd-Frank Protocols.

To what do the Protocols apply?

The Protocols apply to existing “Protocol Covered Agreements” which include ISDA Master Agreements and any other agreement that governs the terms and conditions of one or more SBS. 

As with most of ISDA’s previous protocols, adherence is only retrospective. The Protocols amend existing Protocol Covered Agreements, but not future ones. As such, any new agreement entered into following adherence to the relevant Protocol and under which SBS are traded, will need to include additional contractual wording to deem the relevant Protocol to apply to it.

What is the difference between the two Protocols?

As noted above, parties will need to decide which Protocol to adhere to: the SBS Top-Up Protocol or the SBS Protocol.

The SBS Top-Up Protocol can be used by parties who have previously signed up to the Dodd-Frank Protocols in order to comply with the CFTC regime. As the parties will have already exchanged questionnaires under the Dodd-Frank Protocols, the SBS Top-up Protocol leverages these questionnaires and deems certain amendments to be made to them so that the existing Dodd-Frank provisions in the Protocol Covered Agreements can be “topped-up” so as to comply with the SEC regime (subject to amendments where the SEC’s rules depart from or exceed the existing CFTC rules (as summarised in Schedule 1 to this note)).

The SBS Protocol on the other hand acts as a standalone protocol for those parties who have not signed up to the Dodd-Frank Protocols. There is no requirement for parties to have matched questionnaires with parties (whether in hardcopy or on ISDA Amend) previously. This Protocol should also be used where a party wishes to make different elections for SBS than those made for swaps under the Dodd-Frank Protocols.

In general, given the narrower range of products caught by the SEC’s rules, we would assume that most entities being asked by their Covered SBS Entity counterparties to sign up to the Protocols will have already signed up to the Dodd-Frank Protocols. As such, we expect the SBS Top-Up Protocol to be the more popular route.

What is the difference between the SBS supplements? 

If the SBS Protocol route is taken, then the parties will need to complete matching questionnaires for each SBS Supplement. Depending on the distinct cross-border rules applicable to the particular counterparty relationship, parties may need to exchange Questionnaire 1 only or Questionnaire 2 only, or both. We would expect most Covered SBS Entities to require both questionnaires to be filled out.

The SBS Supplements include various representations, acknowledgements, notifications and agreements relating to the Covered Rules. These are set out in a series of schedules; whether or not a particular schedule is incorporated into a Protocol Covered Agreement depends on the elections made in the questionnaires.

Please see Schedule 2 of this note for further detail.

What are the questionnaires?

The questionnaires are the means by which the parties can exchange information about each other and make elections as to the particular Schedules that will be incorporated into their Protocol Covered Agreements. The table below sets out a list of the Covered Rules addressed by each questionnaire.

Questionnaire 1 for SBS Supplement I Questionnaire 2 for SBS Supplement II
  1. Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information, 80 Fed. Reg. 14563 (Feb. 11, 2015)

  2. Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, 80 Fed. Reg. 14437 (Aug. 14, 2015)

  3. Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, 81 Fed. Reg. 29959 (May 13, 2016)

  4. Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information, 81 Fed. Reg. 53545 (Aug. 12, 2016)

  5. Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers, 84 Fed. Reg. 68550 (Dec. 16, 2019)

  1. Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, 80 Fed. Reg. 14437 (Aug. 14, 2015)

  2. Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information, 80 Fed. Reg. 14563 (Feb. 11, 2015)

  3. Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information, 81 Fed. Reg. 53545 (Aug. 12, 2016)

  4. Trade Acknowledgement and Verification of Security-Based Swap Transactions, 81 Fed. Reg. 39807 (June 17, 2016)

  5. Risk Mitigation Techniques for Uncleared Security-Based Swaps, 85 Fed. Reg. 6359 (Feb. 4, 2020)

Do the Protocols satisfy all of the requirements imposed by the covered rules?

While the Protocols are designed to assist market participants in complying with the documentation requirements of the Covered Rules, the Covered Rules in their entirety are broader. The Covered Rules also stipulate various compliance measures which Covered SBS Entities may need to satisfy by a change in internal policies or additional documentation. Therefore, although the Protocols address the most obvious implications for Covered SBS Entities, they do not address all situations, products or types of counterparties and so Covered SBS Entities may need to consider whether additional measures or rules need to be implemented to ensure they are fully compliant. In turn, that may lead to additional documentation changes being requested of their clients.

How do I adhere?

For both Protocols, parties can adhere by signing an Adherence Letter, copies of which can be found on ISDA’s website.

For the SBS Protocol, in the Adherence Letter parties must state whether they are adhering as Protocol Covered Agreement Principal (PCA Principal) or Protocol Covered Agreement Agent (PCA Agent) (see below).

Under the SBS Top-Up Protocol, parties must fill in the details of their previous adherence to the Dodd-Frank Protocols (including the adherence ID, instructions for which are found on ISDA's website). This will determine the capacity in which the letter should be signed, whether as PCA Principal or PCA Agent, as adherence to the SBS Top-Up Protocol must match the earlier Dodd-Frank Protocol adherences.

A printed and signed version of the relevant Adherence Letter should then in either case be returned to ISDA as a PDF via email or uploaded on their website. Signed Adherence Letters will not be accepted by post.

Following the signing of the Adherence Letter, in relation to the SBS Protocol (but not the SBS Top-Up Protocol), parties will need to exchange information and elections in the form of the questionnaires. These can be exchanged in hard copy or through the use of the on-line ISDA Amend platform, similar to submitting the questionnaires for the Dodd-Frank Protocols.

There is no cut-off date for adherence to the Protocols. Further instructions on how to adhere can be found on the ISDA website.

What is a PCA Principal and a PCA Agent? 

A PCA Principal is a party who is, or may become, a principal to one or more SBS under a Protocol Covered Agreement.

The PCA Agent is a party who has executed a Protocol Covered Agreement for or on behalf of one or more PCA Principals.

The method of adherence to the SBS Protocol should follow the method by which the underlying Protocol Covered Agreement was signed. If signed by a PCA Agent, for example an investment manager under an umbrella document, adherence to the Protocols should be done by the PCA Agent. If the Protocol Covered Agreement was signed by the PCA Principal itself, adherence should be in the PCA Principal’s name. For the SBS Top-Up Protocol, this should also match how the Dodd-Frank Protocols were adhered to.

If adhering through a PCA Agent, there are two routes. A PCA Agent can adhere on behalf of all entities for which it is agent, or it can list specific underlying principals. These principals will be named or referenced in the relevant questionnaire.

Note that the SBS Protocol does not have the newer ISDA protocol option (sometimes known as "Option 2") to adhere to protocols through an agent that did not sign the underlying covered agreement on the PCA Principal’s behalf.

Either the PCA Principal or the PCA Agent can complete the questionnaires in ISDA Amend to supplement the Protocol Covered Agreements.

Are the Protocols obligatory? 

No. There is no obligation for market participants to adhere to either Protocol. That said, Covered SBS Entities must find a way to comply with the Covered Rules. The Protocols are one means of agreeing the terms on which the parties intend to comply. An alternative is for a party to bilaterally negotiate and agree procedures for complying with these requires with parties directly, a process that could be both lengthy and costly.

What if a counterparty has not adhered to the Protocols?

The Protocols are a vehicle by which the parties agree to make amendments to their existing bilateral agreements. If one party adheres to a Protocol but the other party does not, there can be no agreement to amend the underlying bilateral agreement. If a counterparty chooses not to adhere to the Protocols or bilaterally amend their agreements, the other party may choose, or be forced, to restrict or cease trading in SBS with such counterparty.

Is it possible to incorporate the text of the protocol into covered agreements without adhering? 

Yes, as with other ISDA protocols it is possible to incorporate the text of either Protocol into Protocol Covered Agreements by reference. We expect some buy-side entities to take this route, though note that for the SBS Protocol, the questionnaires will still need to be exchanged.

For Protocol Covered Agreements entered into after the date of adherence, the deemed incorporation route will have to be followed, though the deemed incorporation can refer back to questionnaires already hosted on ISDA Amend.

Can investment managers adhere on behalf of the funds they manage?

Yes, see the section on PCA Principals and PCA Agents above.

Are there any costs involved?

Each Adhering Party must pay a one-off adherence fee of $500 to ISDA on, or before, submission of the Adherence Letter. An investment manager adhering on behalf of multiple funds under one Adherence Letter is only required to pay the fee once, and corporates or funds groups that may need to make multiple adherences can benefit from capped rates, depending on the number of entities to adhere. ISDA Amend does not currently charge any fees.


This article was co-authored by Deborah Fashakin, a paralegal in the derivatives and trading team.  


1 The Dodd-Frank Wall Street Reform and Consumer Protection Act 2010

2 Section 1(a)(47) Commodities Exchange Act 1934, as amended.

3 Broadly (as there are various exceptions and additions) this is an index that has (i) 9 or fewer component securities; (ii) one component that makes up more than 30% of the weighting of the index; (iii) 5 components that make up more than 60% of the weighting of the index; or (iv) a lowest weighted component whose value of its average daily trading volume is less than USD50m.

4 Section 3(a)(68) of the Securities Exchange Act 1934, as amended.