The International Swaps and Derivatives Association (ISDA) opened the ISDA 2023 Equity Swap – 2021 Definitions Protocol (the “Equity Swap Protocol”) on October 30, 2023.[1] The Equity Swap Protocol allows adhering parties to incorporate the 2021 ISDA Interest Rate Derivatives Definitions (the “2021 Definitions”) into equity swap documentation that currently references the 2006 ISDA Definitions (the “2006 Definitions”). The adherence period will last through mid-March 2024, with an effective date expected to be March 18, 2024. This will give adhering parties time to update and prepare their operations prior to the effective date, if necessary. Market participants will be able to adhere to the Equity Swap Protocol after its effective date.

The 2021 Definitions

ISDA released the 2021 Definitions as a replacement for the 2006 ISDA Definitions, including the 70 supplements to the 2006 Definitions published in the 15 years since the they were released. The format of the 2021 Definitions allows for the incorporation of updates into the definitions themselves without the necessity of releasing separate “supplements”. Consistent with this approach, and with a view towards incentivizing the market to use the 2021 Definitions, ISDA announced it would no longer continue updating the 2006 Definitions to reflect updates in technology, market structure, market practice or regulations.

The Equity Swap Protocol

Currently, the typical equity swap transaction relies on the 2002 ISDA Equity Derivatives Definitions (the “2002 Definitions”) for the standard equity derivative provisions, combined with the 2006 Definitions to describe the interest rate and financing terms for the financing leg of the transaction. By adhering to the Equity Swap Protocol, parties can ensure that the 2021 Definitions, rather than the 2006 Definitions, will govern terms of the financing leg of equity swap transactions.

Market participants trading equity derivatives may want to consider adherence to the Equity Swap Protocol for any of the following reasons:

As noted above, ISDA will no longer update the 2006 Definitions, whereas the 2021 Definitions will be regularly updated. As a result, parties retaining the 2006 Definitions in their equity swaps would be required to bilaterally negotiate the equity swap confirmations to reflect significant changes in market practice relating to the financing terms, which may be cumbersome and inefficient.

The 2021 Definitions contain a Floating Rate Options (FRO) matrix that includes definitions, attributes, and fallbacks for all FRO. The FRO matrix is regularly updated, allowing adhering parties to reference the latest industry standard-terminology.

Parties active in both equity and interest rate derivatives will have consistency in terms, fallback provisions and consequences across their portfolios, which may enhance internal risk management.

The Equity Swap Protocol will not affect legacy transactions, and will only operate to incorporate the 2021 Definitions into transactions with a trade date occurring on or after the effective date of the parties’ adherence to the Equity Swap Protocol or the Equity Swap Protocol’s implementation into a covered master confirmation agreement, whichever is later.

Swap dealers have already begun their outreach to the buy side to encourage end users to adhere.

[1] Available at: https://www.isda.org/protocol/isda-2023-equity-swap-2021-definitions-protocol/. ISDA has also published an FAQ relating to the Equity Swap Protocol (the “Protocol FAQ”), available at: https://www.isda.org/a/zrugE/ISDA-2023-Equity-Swap-Protocol-Initiative-FAQs-091523.pdf