The Derivatives Process

Dodd Frank regulations enacted in 2010 effective in 2014 requires borrowers entering into derivative transactions meet certain requirements.

Generally speaking the corporate entity must be entering into the hedge to reduce business related risk and all owners must qualify.

Hedging entity-corporate: Must have total assets of at least $10 million or, have net worth of at least $1 million.

Hedging entity-Individual: These are usually guarantors and must have discretionary invested assets of $5 million or more and are entering into the swap in the conduct of its business. Discretionary invested assets exclude the real estate being financed with the swap.

Before entering into a swap borrowers will be required to provide basic contact information to the hedge provider as part of banking regulations.
If the hedge is to be a swap most of the documentation will already be prepared in the loan documentation.
If the hedge is a cap the KYC information will need to be prepared for the competing bank(s).
Typically the bank documentation will not include the authorization for the borrower to trade a swap. This document is called the Trading Authorization or Incumbency Certificate. This will require the signature of the person authorized to trade as well as the signature of an officer authorizing the trader.
If there is only one person in the entity the single authorizing signature will need to be notarized. Harbor Derivatives provides a template for the authorization and will walk the borrower through the process.
Harbor Derivatives provides guidance and assistance in preparing these documents often in coordination with the borrower’s attorney. This service is included in the services provided at no additional charge.

Prior to trading the hedge provider will require signed executed ISDA documentation. ISDA stands for International Swaps and Derivatives Association.
ISDA Master is a boiler plate document laying out the relationship between the counterparty hedge provider (bank) and the counterparty borrower. Review of this document is usually limited to make sure the names and addresses are correct.
ISDA Schedule compliments the ISDA Master and contains refinements to standard ISDA terms customized by the needs and policies of the bank. This document should be carefully examine and negotiated.
CSA, Credit Support Annex. This document is usually entered into financial institutions but and be used by corporate counterparties (borrowers) to identify assets to be posted by each counter party when a note or mortgage is not the underlying collateral.
Harbor Derivatives reviews and negotiates terms of ISDA agreements with the service being part of general services provided.