Federal Reserve Board Proposes Rule to Stay Contractual Requirements for GSIBs
Commentary by Steven Lofchie and Nihal Patel
The Board of Governors of the Federal Reserve System (the "FRB") proposed a rule that would subject certain systemically important bank entities to restrictions regarding the terms of their non-cleared qualified financial contracts ("QFCs"). The proposal requires these global systemically important banking organizations ("GSIBs") to amend contracts for common financial transactions to prevent the immediate cancellation of the contracts if the firm enters bankruptcy or a resolution process.
Under the proposal, GSIBs, their subsidiaries, and the U.S. operations of foreign GSIBs (in each case, "covered entities"):
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would be required to ensure that QFCs limit any default rights and restrictions on the transfer of the QFCs to the same extent that such rights and restrictions would be limited under Dodd-Frank and the Federal Deposit Insurance Act; and
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would be prohibited (generally) from becoming parties to QFCs that would allow a QFC counterparty to exercise default rights against the covered entity based on that entity's entry into a resolution proceeding under Dodd-Frank, the Federal Deposit Insurance Act, or any other resolution proceeding of an affiliate of the covered entity.
The proposal also would amend some of the FRB's capital and liquidity rule definitions.
According to the FRB's press release, the Office of the Comptroller of the Currency is expected to issue a "substantively identical" proposal that would apply to national banks and federal savings associations that are GSIB subsidiaries.
Comments on the FRB's proposal are due by August 5, 2016.
Commentary
If implemented, the FRB's proposal would require yet another set of contractual revisions. It's a wonder that anyone has enough time to negotiate new trades, given the number of hours required to amend existing contracts under rules that have been adopted by various regulators to date.
Commentary
Notably, the FRB's proposal specifies that a covered entity must comply with the proposed rule if its QFCs are amended by the "current ISDA 2015 Universal Resolution Stay Protocol, including the Securities Financing Transaction Annex and the Other Agreements Annex, as well subsequent, immaterial amendments to the Protocol." A useful analysis of the ISDA protocol, and how its terms compare to those of the FRB, appears on pages 48-53 of the FRB's proposal.