Financial Institutions Alert: Collateral Segregation for Uncleared Swaps - Proposed Industry Provisions

Anticipating upcoming regulatory requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") regarding margin segregation for uncleared swaps, earlier today the International Swaps and Derivatives Association Inc. ("ISDA") published sample terms and provisions (the "Segregation Provisions") that market participants may use in negotiating collateral segregation agreements with their counterparties. The Segregation Provisions also come in response to recommendations made by several industry associations addressing the risks taken by market participants when they post collateral in excess of the credit exposure borne by the other party ("Excess Collateral") in the event that the other party becomes insolvent. Not long ago many market participants painfully experienced the reality of those risks in the context of the Lehman Brothers bankruptcy.

The purpose of the Segregation Provisions is to provide market participants with a menu of suggested provisions that they can incorporate in their collateral segregation arrangements and further customize to their specific needs.

This Alert describes the underlying regulatory requirements under Dodd-Frank, discusses recent industry initiatives regarding collateral segregation, and provides a brief summary of the Segregation Provisions.