financial institution recovery and resolution

US federal banking regulations that go into effect next year require certain major financial institutions to ensure that their qualified financial contracts (QFCs), such as swaps and repurchase agreements, are subject to temporary or permanent limitations on counterparties’ legal abilities to exercise default rights in the event that the financial institution becomes subject to a resolution regime as a result of financial distress, such as that which may result from capital or liquidity problems.

In lieu of requiring each QFC to be amended on a bilateral basis to comply with the new federal regulations, covered financial institutions are allowed a regulatory “safe harbor,” allowing counterparties to QFCs to adhere to a uniform protocol that would have the effect of amending each QFC. Such protocols would override QFC participants’ usual contractual rights to exercise default rights as a result of a bankruptcy or insolvency event and would also override the exceptions to the US Bankruptcy Code’s and Federal Deposit Insurance Act’s automatic stays.  This summer, the International Swaps and Derivatives Association (ISDA) introduced the ISDA 2018 U.S. Resolution Stay Protocol (the US Stay Protocol), and in the coming months, swap participants, including funds and commercial end users, may be asked by their bank counterparties to adhere to this protocol via the ISDA website.  Click here to read our full bulletin on this significant development.

On 28 November 2016 the European Commission (the Commission) issued a proposal (the Proposal) for a Regulation on a framework for the recovery and resolution of central counterparties (CCPs).

According to the Commission’s factsheet issued at the same time as the Proposal, CCPs increase stability in financial markets and are critical in helping reduce risks in the wider economy.  The recovery and resolution framework put forward in the Proposal will reduce the risk of a CCP failing, ensure the continuation of a failing CCP’s critical functions and provide national resolution authorities with tools for the resolution of a failing CCP.  This will help maintain financial stability, reduce the risk of contagion to other parts of the financial markets and prevent the cost of any resolution being borne by taxpayers.

Continue Reading (Financial) Safety First – proposal for an EU Regulation on the recovery and resolution of CCPs

In October 2016, the Financial Stability Board (FSB) set out how it would assess the implementation of the key attributes of effective resolution regimes for financial institutions in the banking sector.  The FSB’s methodology should help when assessing a jurisdiction’s compliance with the FSB’s “Key Attributes”, promote consistent assessment across jurisdictions, and provide guidance to jurisdictions when adopting or amending national resolution regimes to implement the Key Attributes across financial sectors.   Continue Reading Post-crisis reform: FSB publishes Key Attributes Assessment Methodology for the Banking Sector