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.