Robert Pickel, Esq.
International Swaps and Derivatives Association
600 Fifth Avenue, 27th Floor
New York, New York 10020

Dear Mr. Pickel:

I am writing on behalf of the Association of Financial Professionals (AFP) to alert you to our concerns related to ISDA's recently proposed amendments to the 1992 ISDA Master Agreement. The Association of Financial Professionals represents over 14,000 treasury and financial professionals from over 5,000 corporations and other organizations, many of which are significant end users of derivatives.

Two of the proposed amendments, Annex 7 and Annex 8, are problematic in that they will likely increase systemic risk and seriously damage the integrity of the markets when inappropriately applied by either end-users or dealers.

Concerns with Annex 7:
Proposed Annex 7 would expand the definition of "specified transaction" to include additional product types such as repurchase, reverse repurchase and securities lending transactions. Among other things, it would elevate technical defaults under the documentation for the additional products -- defaults that are not true indicators of deteriorating credit -- into events of default under Section 5(a)(v) that permit immediate termination of an ISDA Master Agreement. That result is fundamentally at odds with the intent of the current ISDA Master Agreement, which allows a counterparty to close out all transactions only when it is legitimately concerned with the credit of its counterparty. A more appropriate approach might be to treat defaults under non-derivative transactions the same way one would treat cross defaults under other indebtedness, that is, as subject to negotiated threshold amounts or other indications of materiality. By failing to address the credit issue, proposed Annex 7 simply gives too much discretion to both parties, thus weakening the integrity of the ISDA Master Agreement and promoting a higher degree of systemic risk.

Concerns with Annex 8:
Another concern is proposed Annex 8 which would overhaul the provisions for calculating payments due upon early termination. Some of the suggested new language (e.g., expressly permitting use of "quotations (either firm or indicative) of relevant rates, prices, yields, yield curves, volatilities, spreads or other relevant market data") may indeed make sense. However, the combined set of changes injects far too much uncertainty as to its application, especially during periods of market stress. As a consequence, Annex 8, which attempts to clarify alternative approaches for valuing swaps when terminated early, instead complicates risk management activities for both dealers and end-users. In addition, it appears to run counter to the longstanding intent of the ISDA Master Agreement to clarify the duties and responsibilities of swap counterparties so that during unexpected events, both parties understand their options for remedial actions. Having so many alternative approaches to calculating payment due upon early termination is a recipe for misunderstanding and conflict. We suggest ISDA modify this section so that counterparties agree in advance to the specific approaches, as opposed to a laundry list of choices from which one side can choose in the event of early termination.

Concerns with "Protocol" Process:
In addition to specific concerns with these amendments, we believe the "protocol" process itself through which market participants would adopt the amendments introduces unwarranted legal uncertainty. The "protocol" process unrealistically assumes parties will carefully track critical contract terms located outside the "four corners" of their derivatives documentation. We believe that as ISDA introduces the proposed amendments, it should also address our concerns with the "protocol" process.

We hope you find these comments helpful and reflect them as you further modify your amendments. Please feel free to give me a call at (203) 563-5016 should you wish to meet with the Council to discuss these matters further.

Sincerely,
 

/s/ William P. Miller, II
Independent Risk Oversight Officer
Commonfund
Chair
End-Users of Derivatives Council